Question 1

Which of the following is a reason that the Fed does not traditionally attempt to limit asset price bubbles?

Accepted Answer

A) The Fed's policies cannot be targeted at only one sector of the economy. 
B) Price changes for one asset or one industry cannot have a substantial impact on the entire economy. 
C) The FDIC rather than the Fed is responsible for recognizing bad lending practices. 
D) all of the above

Question 2

How will an increase in the efficiency of the payments mechanism effect velocity?

Accepted Answer

A) It will decrease. 
B) It will increase. 
C) It will remain constant. 
D) Velocity is unrelated to payments.

Question 3

As we approached the end of the millennium, many economic crackpots advised citizens to hold large quantities of cash in anticipation of Y2K disasters.What effect would this have had on velocity if many people had been foolish enough to follow this advice?

Accepted Answer

A) It would have decreased. 
B) It would have increased. 
C) It would have remained constant. 
D) Velocity is unrelated to cash balances.

Question 4

The equation of exchange is written as

Accepted Answer

A) M × V = P × Y. 
B) M × P = V × Y. 
C) M × Y = P × V. 
D) M × Y = Y × P.

Question 5

Which of the following will tend to increase velocity?

Accepted Answer

A) a decrease in the number of payments 
B) a decrease in inflation 
C) an increase in interest rates 
D) an increase in the money supply 
E) All of the above.

Question 6

Many economists believe that stabilization policy should be limited in scope until

Accepted Answer

A) Keynesians and monetarists agree on policy. 
B) inflation is brought under control. 
C) the economy is operating near capacity. 
D) forecasting becomes more reliable.

Question 7

Government spending affects aggregate demand directly, and tax changes affect aggregate demand indirectly.Therefore, changes in

Accepted Answer

A) taxes are ineffective in changing aggregate demand. 
B) government spending affect aggregate demand more quickly than changes in taxes. 
C) taxes are virtually useless as a stabilization tool. 
D) government spending should be used with great caution.

Question 8

How does the shape of the aggregate supply curve affect macroeconomic analysis and policy making?
 Illustrate your answer with the appropriate graphs.

Accepted Answer

The answer of How does the shape of the aggregate...

Question 9

Whether prices or real GDP exhibit the greater response to increased aggregate demand depends on the degree of capacity utilization in the economy.

Accepted Answer

A) True 
 B)False

Question 10

If investment spending is relatively insensitive to changes in the interest rate, then the most effective expansionary policy would be

Accepted Answer

A) a reduction in required reserves. 
B) Fed purchases of government securities. 
C) a personal income tax increase. 
D) a personal income tax cut.

Question 11

If you believe that velocity is constant and that the aggregate supply curve is horizontal, then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of the

Accepted Answer

A) price level and real output. 
B) price level. 
C) price level and no change in real output. 
D) real output.

Question 12

For both Keynesians and monetarists to predict accurately the effects of a change in the money supply on the price level, they need to add ____ to their analysis.

Accepted Answer

A) aggregate demand 
B) nominal GDP 
C) real GDP 
D) aggregate supply 
E) government spending

Question 13

How rapidly does the economy's self-correcting mechanism work?
Most economists agree that it

Accepted Answer

A) works quickly and reliably. 
B) works slowly and not very reliably. 
C) works reliably, but not very quickly. 
D) does not work at all.

Question 14

Are forecasts of economic activity accurate enough to permit "fine-tuning" of the economy?

Accepted Answer

A) No, forecasting is so inaccurate that it should be abandoned. 
B) No, forecasts are not accurate enough for this. 
C) Yes, forecasts are accurate and reliable enough for this. 
D) Yes, at least most of the time.

Question 15

What is the shape of the AS in the short run and the long run?

Accepted Answer

A) AS is relatively flat in both the short and long run. 
B) AS is relatively flat in the short run, but steeper in the long run. 
C) AS is relatively steep in both the short and long run. 
D) AS is relatively steep in the short run, but flatter in the long run.

Question 16

The reason that velocity increases when interest rates rise is

Accepted Answer

A) the Fed encourages banks to turn money in faster for recycling, which causes money to move faster. 
B) the opportunity cost of saving increases, so people hold smaller cash balances. 
C) home mortgage payments increase, so people write larger checks that reduces their checking account balances. 
D) the opportunity cost of holding money increases, so average money balances decrease.

Question 17

Which of the following is correct?

Accepted Answer

A) Policy lags are normally much shorter for fiscal policy than for monetary policy. 
B) Congress usually makes major fiscal policy changes in a fairly short period of time. 
C) Expenditure lags are much longer for investment, the main way in which monetary policy affects aggregate demand. 
D) Monetary policy affects aggregate demand more quickly than fiscal policy, such as tax or government spending changes.

Question 18

The efficiency of the payments' mechanism affects

Accepted Answer

A) the speed with which money can be exchanged for other assets. 
B) how quickly individual loan applications will be approved. 
C) how slowly individuals deplete their cash balances. 
D) the speed with which financial institutions can process checks and other funds.

Question 19

The "Taylor rule" is an example of a fixed rule for making monetary policy.

Accepted Answer