Question 1

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y − 20,000r, and potential output equals 34,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

Accepted Answer

A) 7 percent 
B) 3 percent 
C) 6 percent 
D) 5 percent

Question 2

The decision about how much money to hold is an application of the:

Accepted Answer

A) scarcity principle. 
B) principle of comparative advantage. 
C) principle of increasing opportunity cost. 
D) cost-benefit principle.

Question 3

To close a recessionary gap, the Fed ________ interest rates which ________ aggregate spending and ________ short-run equilibrium output.

Accepted Answer

A) reduces; increases; increases 
B) raises; decreases; increases 
C) raises; decreases; decreases 
D) reduces; increases; decreases

Question 4

A lower real interest rate ________ saving and ________ consumption spending.

Accepted Answer

A) increases; increases 
B) increases; decreases 
C) does not change; does not change 
D) decreases; increases

Question 5

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be used to purchase government bonds earning 5 percent, then how much money should Jan's hold?

Accepted Answer

A) $10,000 
B) $8,000 
C) $6,000 
D) $4,000

Question 6

The money demand curve relates ________ to the ________.

Accepted Answer

A) the aggregate quantity of money demanded; aggregate demand 
B) aggregate demand; nominal interest rate 
C) the aggregate quantity of money demanded; price level 
D) the aggregate quantity of money demanded; nominal interest rate

Question 7

A bank is able to make new loans equal to:

Accepted Answer

A) legal reserves of the bank. 
B) excess reserves of the bank. 
C) total reserves of the bank. 
D) required reserves of the bank.

Question 8

Lower nominal interest rates ________ the amount of money demanded and a lower price level ________ the amount of money demanded.

Accepted Answer

A) increase; increases 
B) increase; decreases 
C) increase; does not change 
D) decrease; decreases

Question 9

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ________ the real interest rate by ________ percent.

Accepted Answer

A) increasing; 2.5 
B) increasing; 4.0 
C) increasing; 2.0 
D) decreasing; 2.0

Question 10

In the long run the real interest rate is determined by ________, and in the short-run the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts ________.

Accepted Answer

A) saving and investment; slowly 
B) saving and investment; quickly 
C) the Federal Reserve; to equal the increase in the money supply 
D) the Federal Reserve; slowly

Question 11

If inflation does not adjust rapidly in the short run, then when the Federal Reserve decreases the nominal interest rate, the real interest rate in the short run will:

Accepted Answer

A) increase. 
B) decrease. 
C) not change. 
D) be determined by saving and investment decisions.

Question 12

The interest rate that commercial banks charge each other for very short-term loans is called the:

Accepted Answer

A) prime rate. 
B) bank loan rate. 
C) federal funds rate. 
D) Federal Reserve discount rate.

Question 13

Joan has the following assets and liabilities:  
$\begin{array}{l|r|}
\hline \text { Credit card balance } & \$ 1,000 \
\hline \text { Cash } & \$ 200 \
\hline \text { Government bonds } & \$ 3,000 \
\hline \text { Checking } & \$ 300 \
\hline \text { Car loan balance } & \$ 10,000 \
\hline \text { Car } & \$ 15,000 \
\hline
\end{array}$
  
Which of the following actions would increase Joan's money demand by $100?

Accepted Answer

A) Joan writes a check for $100 to pay down her credit card balance. 
B) Joan writes a check for $100 to pay down her car loan balance. 
C) Joan pays $100 cash for a new lamp. 
D) Joan sells a $100 government bond and puts the proceeds in her checking account.

Question 14

Refer to the given figure.  If the Federal Reserve wants to set the nominal interest rate at 9 percent, it must conduct open market ________ to set the money supply at ________.

Accepted Answer

A) purchases; 100 
B) sales; 100 
C) purchases; 900 
D) sales; 900

Question 15

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 2 percent (0.02). If potential output equals 8,000, the central bank must ________ the interest rate to close the ________ gap.

Accepted Answer

A) lower; expansionary 
B) lower; recessionary 
C) raise; recessionary 
D) raise; expansionary

Question 16

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 5 percent (0.05). If potential output equals 11,750, the central bank must ________ the interest rate to close the ________ gap.

Accepted Answer

A) reduce; expansionary 
B) reduce; recessionary 
C) raise; recessionary 
D) raise; expansionary

Question 17

One problem with using monetary policy to address "bubbles" in asset markets is that:

Accepted Answer

A) the Federal Reserve is better than financial-market professionals at identifying bubbles. 
B) monetary policy is not a very good tool for addressing the problem of inappropriately high asset prices. 
C) reducing the real interest rate to deal with the bubble could lead to inflation. 
D) the Federal Reserve is not interested in stabilizing output.

Question 18

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600.  If the Federal Reserve wants to set the nominal interest rate at 10 percent, it must conduct open market ________ to set the money supply at ________.

Accepted Answer

A) purchases; 200 
B) sales; 200 
C) purchases; 800 
D) sales; 800

Question 19

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ________ the real interest rate by ________ percent.

Accepted Answer

A) increasing; 2.5 
B) increasing; 4.0 
C) increasing; 2.0 
D) decreasing; 2.0

Question 20

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will ________ their loans based on current deposits, and the money supply will ________.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease

Exam 26: Stabilizing the Economy: The Role of the Fed

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y − 20,000r, and potential output equals 34,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

The decision about how much money to hold is an application of the:

To close a recessionary gap, the Fed interest rates which aggregate spending and short-run equilibrium output.

A lower real interest rate saving and consumption spending.

The money demand curve relates to the .

A bank is able to make new loans equal to:

Lower nominal interest rates the amount of money demanded and a lower price level the amount of money demanded.

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by the real interest rate by percent.

In the long run the real interest rate is determined by , and in the short-run the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts .

If inflation does not adjust rapidly in the short run, then when the Federal Reserve decreases the nominal interest rate, the real interest rate in the short run will:

The interest rate that commercial banks charge each other for very short-term loans is called the:

Refer to the given figure. If the Federal Reserve wants to set the nominal interest rate at 9 percent, it must conduct open market to set the money supply at .

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 2 percent (0.02) . If potential output equals 8,000, the central bank must the interest rate to close the gap.

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 5 percent (0.05) . If potential output equals 11,750, the central bank must the interest rate to close the gap.

One problem with using monetary policy to address "bubbles" in asset markets is that:

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 10 percent, it must conduct open market to set the money supply at .

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by the real interest rate by percent.

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will their loans based on current deposits, and the money supply will .

Exam 26: Stabilizing the Economy: The Role of the Fed

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y − 20,000r, and potential output equals 34,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

The decision about how much money to hold is an application of the:

To close a recessionary gap, the Fed ________ interest rates which ________ aggregate spending and ________ short-run equilibrium output.

A lower real interest rate ________ saving and ________ consumption spending.

The money demand curve relates ________ to the ________.

A bank is able to make new loans equal to:

Lower nominal interest rates ________ the amount of money demanded and a lower price level ________ the amount of money demanded.

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ________ the real interest rate by ________ percent.

In the long run the real interest rate is determined by ________, and in the short-run the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts ________.

If inflation does not adjust rapidly in the short run, then when the Federal Reserve decreases the nominal interest rate, the real interest rate in the short run will:

The interest rate that commercial banks charge each other for very short-term loans is called the:

Refer to the given figure. If the Federal Reserve wants to set the nominal interest rate at 9 percent, it must conduct open market ________ to set the money supply at ________.

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 2 percent (0.02) . If potential output equals 8,000, the central bank must ________ the interest rate to close the ________ gap.

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 5 percent (0.05) . If potential output equals 11,750, the central bank must ________ the interest rate to close the ________ gap.

One problem with using monetary policy to address "bubbles" in asset markets is that:

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 10 percent, it must conduct open market ________ to set the money supply at ________.

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ________ the real interest rate by ________ percent.

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will ________ their loans based on current deposits, and the money supply will ________.

To close a recessionary gap, the Fed interest rates which aggregate spending and short-run equilibrium output.

A lower real interest rate saving and consumption spending.

The money demand curve relates to the .

Lower nominal interest rates the amount of money demanded and a lower price level the amount of money demanded.

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by the real interest rate by percent.

In the long run the real interest rate is determined by , and in the short-run the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts .

Refer to the given figure. If the Federal Reserve wants to set the nominal interest rate at 9 percent, it must conduct open market to set the money supply at .

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 2 percent (0.02) . If potential output equals 8,000, the central bank must the interest rate to close the gap.

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 5 percent (0.05) . If potential output equals 11,750, the central bank must the interest rate to close the gap.

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 10 percent, it must conduct open market to set the money supply at .

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by the real interest rate by percent.

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will their loans based on current deposits, and the money supply will .