Question 1

To fix the foreign currency price of domestic currency below the free market equilibrium rate, a government must:

Accepted Answer

A)  sell both its own currency and foreign exchange. 
B)  buy its own currency and sell foreign exchange. 
C)  buy both its own currency and foreign exchange. 
D)  sell its own currency and buy foreign exchange. 
E)  revalue its own currency.

Question 2

According to the equation of exchange, if the money supply is $800 million, real GDP is $3,000 million, and nominal GDP is $4,000 million, then the velocity of money is equal to:

Accepted Answer

A)  3.5. 
B)  1.7. 
C)  10.3. 
D)  5. 
E)  2.

Question 3

Suppose a bond sells for $2,000 and pays $200 per year in interest. What will happen to the current interest rate if the price of the bond changes to $1,800?

Accepted Answer

A)  It decreases by 10 percentage points. 
B)  It increases by 10 percentage points. 
C)  It remains unchanged. 
D)  It increases by 1 percentage point. 
E)  It decreases by 1 percentage point.

Question 4

An outward shift of the money demand function indicates an increase in the market rate of interest and hence a decrease in the level of investment in the economy.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is assumed to be constant in the quantity theory of money?

Accepted Answer

A)  The money supply 
B)  Real GDP 
C)  The price level 
D)  The velocity of money 
E)  Nominal GDP

Question 6

An individual who holds some of her wealth in the form of money in order to pay rent and buy groceries is illustrating the transactions demand for money.

Accepted Answer

A) True 
 B)False

Question 7

Suppose you hold $5,000 in cash when the interest rate on bonds is 4 percent. Other things equal, as the bond interest rate declines to 3 percent, you will want to hold more money because the opportunity cost of holding money has decreased.

Accepted Answer

A) True 
 B)False

Question 8

The supply curve of U.S. dollars in the foreign exchange market is:

Accepted Answer

A)  downward-sloping because it is negatively related to U.S. exports. 
B)  downward-sloping because it is negatively related to U.S. imports. 
C)  upward-sloping because it is positively related to U.S. exports. 
D)  upward-sloping because it is positively related to U.S. imports. 
E)  horizontal because it is unrelated to foreign demand for U.S. goods and services.

Question 9

Which of the following is true of the federal funds rate?

Accepted Answer

A)  It is the interest rate that one bank charges another for overnight lending. 
B)  It is the interest rate that the Federal Reserve Bank charges commercial banks for borrowing money. 
C)  It is the interest rate you earn in your saving account. 
D)  It is the interest rate the bank charges business firms for borrowing money. 
E)  It is the interest rate that a domestic bank charges a foreign bank for borrowing money.

Question 10

What is the current market price of a bond that pays $200 per year indefinitely and has a current yield of 16 percent?

Accepted Answer

A)  $800 
B)  $1250 
C)  $3,200 
D)  $8,000 
E)  $12,500

Question 11

When the foreign exchange value of the Mexican peso is above its equilibrium rate, the peso will:

Accepted Answer

A)  tend to be revalued. 
B)  tend to increase in value over other currencies. 
C)  be high demand in the foreign exchange market. 
D)  tend to depreciate. 
E)  tend to appreciate.

Question 12

Which of the following is the official policy-making body of the Federal Reserve System?

Accepted Answer

A)  Federal Advisory Council 
B)  The U.S. Treasury 
C)  The Federal Open Market Committee 
D)  The Board of Governors 
E)  The Federal Reserve district banks

Question 13

An increase in the money supply will lead to an increase in equilibrium real GDP only if:

Accepted Answer

A)  the aggregate demand curve is horizontal. 
B)  the aggregate supply curve is vertical. 
C)  the investment function is horizontal. 
D)  the aggregate supply curve is not vertical. 
E)  the investment function is upward-sloping.

Question 14

Suppose that the nominal money supply equals $2 billion and nominal GDP is $16 billion. Then, according to the equation of exchange, the velocity of money equals 8.

Accepted Answer

A) True 
 B)False

Question 15

The table given below shows the assets and liabilities of the National Bank. Assume that this is the only bank in the economy.?
 
-Refer to Table 13.2. If the reserve requirement is 10 percent, how much can the whole banking system expand the money supply?

Accepted Answer

A)  $21,500 
B)  $54,500 
C)  $11,800 
D)  $16,050 
E)  $5,450

Question 16

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso.?Figure 13.2
 
-Refer to Figure 13.2. Given a target exchange rate of MXP 11 = $1 with S₁ the relevant supply curve and a decline in Mexican demand for U.S. dollars from D₁ to D₂ the Fed intervenes in the foreign exchange market by:

Accepted Answer

A)  selling Q₃ amount of pesos. 
B)  selling Q₃ amount of U.S. dollars. 
C)  buying (Q₂ - Q₁) amount of pesos. 
D)  buying (Q₁ - Q₃) amount of U.S. dollars. 
E)  buying (Q₂ - Q₃) amount of U.S dollars.

Question 17

Scenario 13.1?Assume the following conditions hold.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent.
a.At all banks, excess reserves are zero.
b.The deposit expansion multiplier is 3.
c.The investment spending function is as illustrated in the figure below.
 
-Refer to Scenario 13.1. What is the change in excess reserves following the open market operation by the Fed?

Accepted Answer

A)  −$3 billion 
B)  −$0.67 billion 
C)  +$0.67 billion 
D)  +$3 billion 
E)  +$5 billion

Question 18

The money supply function reflects a positive relationship between the interest rate and the quantity of money supplied.

Accepted Answer

A) True 
 B)False

Question 19

Each district bank of the Fed comprises of nine board of directors of which three are appointed by the:

Accepted Answer

A)  Federal Reserve System member banks. 
B)  President. 
C)  Attorney General. 
D)  Board of Governors of the Fed. 
E)  Congress.

Question 20

A leftward shift in the money demand function would result from:

Accepted Answer

A)  a decrease in the money supply. 
B)  a decrease in the price level. 
C)  an increase in real income. 
D)  a decrease in the interest rate. 
E)  an increase in the interest rate

Exam 13: Monetary Policy

To fix the foreign currency price of domestic currency below the free market equilibrium rate, a government must:

According to the equation of exchange, if the money supply is $800 million, real GDP is $3,000 million, and nominal GDP is $4,000 million, then the velocity of money is equal to:

Suppose a bond sells for $2,000 and pays $200 per year in interest. What will happen to the current interest rate if the price of the bond changes to $1,800?

An outward shift of the money demand function indicates an increase in the market rate of interest and hence a decrease in the level of investment in the economy.

Which of the following is assumed to be constant in the quantity theory of money?

An individual who holds some of her wealth in the form of money in order to pay rent and buy groceries is illustrating the transactions demand for money.

Suppose you hold $5,000 in cash when the interest rate on bonds is 4 percent. Other things equal, as the bond interest rate declines to 3 percent, you will want to hold more money because the opportunity cost of holding money has decreased.

The supply curve of U.S. dollars in the foreign exchange market is:

Which of the following is true of the federal funds rate?

What is the current market price of a bond that pays $200 per year indefinitely and has a current yield of 16 percent?

When the foreign exchange value of the Mexican peso is above its equilibrium rate, the peso will:

Which of the following is the official policy-making body of the Federal Reserve System?

An increase in the money supply will lead to an increase in equilibrium real GDP only if:

Suppose that the nominal money supply equals $2 billion and nominal GDP is $16 billion. Then, according to the equation of exchange, the velocity of money equals 8.

The table given below shows the assets and liabilities of the National Bank. Assume that this is the only bank in the economy.? -Refer to Table 13.2. If the reserve requirement is 10 percent, how much can the whole banking system expand the money supply?

The money supply function reflects a positive relationship between the interest rate and the quantity of money supplied.

Each district bank of the Fed comprises of nine board of directors of which three are appointed by the:

A leftward shift in the money demand function would result from: