Question 1

People hold money because it is liquid and lacks risk under the

Accepted Answer

A)  money balance demand for money. 
B)  asset demand for money. 
C)  precautionary demand for money. 
D)  transactions demand for money.

Question 2

Which of the following will tend to occur when the interest rate increases?

Accepted Answer

A)  The demand for money curve shifts leftward. 
B)  The demand for money curve shifts rightward. 
C)  There is a rightward movement along the demand for money curve. 
D)  There is a leftward movement along the demand for money curve.

Question 3

The net-export effect of contractionary monetary policy is

Accepted Answer

A)  the depreciation of the value of the dollar and a resulting increase of U.S. net exports. 
B)  the depreciation of the value of the dollar and a resulting decrease of U.S. net exports. 
C)  the appreciation of the value of the dollar and a resulting increase of U.S. net exports. 
D)  the appreciation of the value of the dollar and a resulting decrease of U.S. net exports.

Question 4

According to the Taylor rule, the Fed will set the federal funds rate target based on which of the following?

Accepted Answer

A)  an estimated long-run real interest rate 
B)  the current deviation of the actual inflation rate from the Fed's inflation objective 
C)  the proportionate gap between actual real GDP and a measure of potential real GDP 
D)  all of the above

Question 5

According to the interest-rate-based transmission mechanism for monetary policy, an increase in the money supply will cause the

Accepted Answer

A)  interest rate to fall, causing planned real investment spending to rise and leading to a decrease in aggregate demand. 
B)  interest rate to rise, causing planned real investment spending to rise and leading to a decrease in aggregate demand. 
C)  interest rate to fall, causing planned real investment spending to rise and leading to an increase in aggregate demand. 
D)  interest rate to fall, causing planned real investment spending to fall and leading to an increase in aggregate demand.

Question 6

According to the interest-rate-based monetary policy transmission mechanism, which of the following monetary policies would result in an increase in the level of planned real investment spending?

Accepted Answer

A)  contractionary 
B)  expansionary 
C)  reactionary 
D)  Monetary policy has no effect on investment.

Question 7

The quantity theory of money is based on the formula that

Accepted Answer

A)  V = PY  . 
B)  Y = PV/  . 
C)   = PV/Y. 
D)  P =  V/Y.

Question 8

If a nation's nominal GDP is $40 billion, its money supply is $8 billion, and its price level is 1.25, then the velocity of money is

Accepted Answer

A)  0.2. 
B)  2.0. 
C)  5.0. 
D)  6.25.

Question 9

A person keeps $500 in his home in order to be prepared for some unforeseen future event. This reflects his

Accepted Answer

A)  speculative demand for money. 
B)  asset demand for money. 
C)  precautionary demand for money. 
D)  liquidity demand for money.

Question 10

An indirect effect of monetary policy is that as the money supply

Accepted Answer

A)  increases, interest rates fall, and borrowing and spending increase. 
B)  increases, interest rates rise, and borrowing and spending decrease. 
C)  decreases, interest rates fall, and borrowing and spending increase. 
D)  decreases, interest rates rise, and borrowing and spending increase.

Question 11

Which of the following best represents the equation of exchange?

Accepted Answer

A)  M * P = V * Y 
B)  M * V = P * Y 
C)  M * Y = P * V 
D)  M * Y * V = P

Question 12

The income velocity of money is the absolute number of times, on average, that

Accepted Answer

A)  people purchase goods and services during a year. 
B)  each monetary unit is spent on final goods and services. 
C)  each unit of real GDP is produced by business firms. 
D)  each one-unit increase in the price level occurs.

Question 13

One of the economic costs of holding currency is that

Accepted Answer

A)  it fulfills no precautionary role. 
B)  it fulfills no transactions role. 
C)  it earns no interest income. 
D)  its real value always increases.

Question 14

An increase in the money supply, other things being constant,

Accepted Answer

A)  causes interest rates to rise. 
B)  generates an increase in the demand for money. 
C)  causes the price level to increase. 
D)  causes the purchasing power of money to increase.

Question 15

During a period of expansionary monetary policy,

Accepted Answer

A)  the price level is increased, which leads to an increase in the money supply. 
B)  the price level is decreased, which leads to a decrease in the money supply. 
C)  the rate of growth of the money supply is increased, leading to an increase in the price level. 
D)  the rate of growth of the money supply is reduced, leading to a decrease in the price level.

Question 16

The amount of money that people wish to hold to use in transactions varies directly with

Accepted Answer

A)  their planned near-term purchases. 
B)  the money supply. 
C)  the income tax rate. 
D)  the interest rate.

Question 17

If the Fed purchases U.S. government securities in the open market, all of the following would occur EXCEPT

Accepted Answer

A)  an expansion of the money supply. 
B)  an increase in investment. 
C)  a fall in bond prices. 
D)  an increase in real Gross Domestic Product (GDP).

Question 18

-In the above figure, assume the economy is in equilibrium at point d. Then the Fed decreases the money supply so that the new aggregate demand curve is AD1. In the long run, the new price level will be

Accepted Answer

A)  100. 
B)  120. 
C)  130. 
D)  110.

Question 19

An assumption used in the quantity theory of money is that

Accepted Answer

A)  the price level is constant. 
B)  velocity is constant. 
C)  nominal Gross Domestic Product (GDP) is constant. 
D)  the money supply is constant.

Question 20

The interest rate that the Fed charges banks to borrow funds from the Fed is the

Accepted Answer

A)  discount rate. 
B)  federal funds rate. 
C)  money market rate. 
D)  nominal interest rate.

Exam 16: Domestic and International Dimensions of Monetary Policy