Question 1

The demand for money curve shows that there is an inverse relationship between the quantity of money demanded and the:

Accepted Answer

A)  quantity of money supplied. 
B)  gross domestic product (GDP). 
C)  price level. 
D)  interest rate.

Question 2

Starting from a position of macroeconomic equilibrium at below the full-employment level of real GDP,an increase in the money supply will:

Accepted Answer

A)  raise interest rates, prices, and reduce real GDP. 
B)  raise interest rates, lower prices, and leave real GDP unchanged. 
C)  raise interest rates, lower prices, and leave real GDP unchanged 
D)  lower interest rates, raise prices, and increase real GDP

Question 3

In a two-asset economy with money and T-bills,the quantity of money that people will want to hold,other things being equal,can be expected to:

Accepted Answer

A)  increase as the real GDP interest rate increases. 
B)  decrease as the real GDP interest rate increases. 
C)  decrease as real GDP increases. 
D)  none of the above.

Question 4

If at the prevailing interest rate the quantity of money demanded is $2 trillion,and the supply of money is $1.5 trillion,then which of the following is true?

Accepted Answer

A)  There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
B)  There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
C)  There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
D)  There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market.

Question 5

The transmission mechanism is the effect of changes in monetary policy on the stock market.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following explains why the demand for money curve has an inverse relationship between the interest rates and the quantity of money demanded?

Accepted Answer

A)  As the interest rate rises, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
B)  As the interest rate rises, people find it advantageous to borrow money, which increases the quantity of money demanded. 
C)  As the interest rate falls, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
D)  As the interest rate rises, the demand for money curve shifts outward to the right.

Question 7

The velocity of money is:

Accepted Answer

A)  money supply divided by prices. 
B)  spending divided by output. 
C)  required monetary reserves divided by income. 
D)  GDP divided by the money supply.

Question 8

As the interest rate decreases,the quantity of money people will hold:

Accepted Answer

A)  decreases. 
B)  increases. 
C)  stays the same. 
D)  rises and then falls. 
E)  falls and then rises.

Question 9

The monetary rule is the view of the:

Accepted Answer

A)  Keynesians that monetary policy is most important. 
B)  Monetarists that monetary policy is most important. 
C)  Classical economists that monetary policy is most important. 
D)  Monetarists that the Fed should expand the money supply at a constant rate.

Question 10

The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to:

Accepted Answer

A)  fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
B)  fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP. 
C)  rise, cutting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
D)  rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
E)  rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

Question 11

Classical economists believe that an increase in the money supply will lead to:

Accepted Answer

A) only c and d. 
B) all of the following. 
C) an increase in the price level. 
D) an increase in nominal GDP. 
E) an increase in real GDP.

Question 12

Exhibit 20-6 Money, investment and product markets
 
-In Exhibit 20-6,if the Fed believes the economy is at AD₃,how might it engineer a decline in the price level?

Accepted Answer

A)  By decreasing the money supply, the interest rate falls, investment rises, and aggregate demand falls, causing the price level to fall. 
B)  By decreasing the money supply, the interest rate rises, investment rises, and aggregate demand rises, causing the price level to fall. 
C)  By decreasing the money supply, the interest rate rises, investment falls, and aggregate demand falls, causing the price level to fall. 
D)  By increasing the money supply, the interest rate rises, investment rises, and aggregate demand falls, causing the price level to fall. 
E)  By increasing the money supply, the interest rate rises, investment falls, and aggregate demand rises, causing the price level to fall.

Question 13

The Keynesian viewpoint is that the investment curve is highly responsive to the changes in the rate of interest.

Accepted Answer

A) True 
 B)False

Question 14

The Monetarist transmission mechanism through which monetary policy affects the price level,real GDP,and employment depends on the:

Accepted Answer

A)  indirect impact of changes on the interest rate. 
B)  indirect impact of changes on profit expectations. 
C)  direct impact of changes in fiscal policy on aggregate demand. 
D)  direct impact of changes in the money supply on aggregate demand.

Question 15

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion.If the Fed raises the discount rate,which of the following is most likely to be the new money market equilibrium?

Accepted Answer

A)  An interest rate of 6 percent and a quantity of $1.5 trillion. 
B)  An interest rate of 5 percent and a quantity of $2 trillion. 
C)  An interest rate of 4 percent and a quantity of $2.5 trillion. 
D)  None of the above.

Question 16

Exhibit 20-2 Money market demand and supply curves
 
-Beginning from an equilibrium at E₁ in Exhibit 20-2,an increase in the money supply from $400 billion to $600 billion causes people to:

Accepted Answer

A)  sell bonds and drive the price of bonds down. 
B)  buy bonds and drive the price of bonds up. 
C)  buy bonds and drive the price of bonds down. 
D)  sell bonds and drive the price of bonds up.

Question 17

Exhibit 20-5 Money, Investment and product markets
 
-In Exhibit 20-5,a shift in aggregate demand from AD₁ to AD₂:

Accepted Answer

A)  cannot raise real GDP because the economy is at full employment. 
B)  cannot raise real GDP because the aggregate supply curve is upward sloping at GDP₂. 
C)  will raise real GDP because the economy is operating below the full-employment level. 
D)  will cause the interest rate to increase from i₂ to i₁. 
E)  will raise real GDP but will also significantly raise the price level.

Question 18

Speculative demand for money is a:

Accepted Answer

A)  positive function of prices. 
B)  inverse function of prices. 
C)  positive function of interest rates. 
D)  inverse function of interest rates. 
E)  function of unexpected needs.

Question 19

According to Keynesian economists,which of the following is not a consequence of increasing the money supply?

Accepted Answer

A)  A lower interest rate. 
B)  Greater investment. 
C)  Lower real GDP. 
D)  Higher real GDP.

Question 20

Which type of demand for money causes the demand for money curve to slope downward?

Accepted Answer

A)  Speculative demand. 
B)  Precautionary demand. 
C)  Transactions demand. 
D)  Foreign-exchange demand.

Exam 20: Monetary Policy