Question 1

The Federal Open Market Committee engages in contractionary monetary policy by

Accepted Answer

A)  lowering interest rates. 
B)  creating excess reserves. 
C)  selling bonds. 
D)  buying bonds.

Question 2

According to Keynes, the effect on planned real investment spending resulting from the interest-rate impact of a decrease in the money supply

Accepted Answer

A)  impacts the economy through the multiplier. 
B)  impacts the economy by reducing the value of the U.S. dollar. 
C)  impacts the economy by increasing the deficit. 
D)  does not impact the economy.

Question 3

The opportunity cost of holding money refers to

Accepted Answer

A)  the service fees associated with checking accounts. 
B)  the service fees associated with checking accounts plus the costs undertaken to prevent theft. 
C)  the interest that could have been earned if the money balances had been transferred to an interest-bearing asset. 
D)  the pleasure that would have been received if the money balances had been used to buy a good or service.

Question 4

The federal funds rate is

Accepted Answer

A)  the interest rate paid on reserves held with the Fed. 
B)  the interest rate at which banks can borrow excess reserves from other banks. 
C)  the interest rate on bonds issued by the federal government. 
D)  none of the above.

Question 5

-Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new short-run equilibrium is given by point

Accepted Answer

A)  A. 
B)  B. 
C)  C. 
D)  D.

Question 6

The asset demand for money is

Accepted Answer

A)  greater at high interest rates as investors can earn more on their investments. 
B)  greater at low interest rates, because the opportunity cost of holding money is low. 
C)  greater at low interest rates, because the opportunity cost of holding money is high. 
D)  lower at low interest rates, because the opportunity cost of holding money is high.

Question 7

A depreciation of the U.S. dollar

Accepted Answer

A)  makes U.S. exports more expensive in terms of foreign currency and imports less expensive in terms of the dollar, increasing net exports. 
B)  makes U.S. exports less expensive in terms of foreign currency and imports more expensive in terms of the dollar, increasing net exports. 
C)  makes U.S. exports less expensive in terms of foreign currency and imports more expensive in terms of the dollar, decreasing net exports. 
D)  makes U.S. exports more expensive in terms of foreign currency and imports less expensive in terms of the dollar, decreasing net exports.

Question 8

Asset demand for money is related to money functioning as a

Accepted Answer

A)  unit of accounting. 
B)  medium of exchange. 
C)  store of value. 
D)  medium of deferred payment.

Question 9

The main reason people hold money is that

Accepted Answer

A)  money provides a standard of value. 
B)  money is used to buy goods and services. 
C)  money is intrinsically valuable. 
D)  money is power.

Question 10

"The demand for money is infinite since everyone wants more money." Do you agree or disagree with this statement? Why?

Accepted Answer

The answer of "The demand for money is infinite since...

Question 11

According to the equation of exchange, if real Gross Domestic Product (GDP) is $25 billion, the money supply is $10 billion, and the price index equals 2, then the income velocity of money is

Accepted Answer

A)  5. 
B)  10. 
C)  25. 
D)  50.

Question 12

-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 13

The relationship between the interest rate and the asset demand for money is

Accepted Answer

A)  positive. 
B)  inverse. 
C)  positive sometimes and inverse other times. 
D)  nonexistent.

Question 14

An increase in bond prices will most likely result in

Accepted Answer

A)  an increase in interest rates. 
B)  a decrease in the quantity demanded of money. 
C)  an increase in the quantity demanded of money. 
D)  an increase in the opportunity cost of holding money.

Question 15

In the real world, contractionary monetary policy would be used to

Accepted Answer

A)  combat a recession. 
B)  reduce the rate of inflation. 
C)  increase nominal GDP. 
D)  increase long-run aggregate supply.

Question 16

Which of the following is a variable in the equation of exchange?

Accepted Answer

A)  the price level. 
B)  the money supply. 
C)  the velocity of money. 
D)  real GDP. 
E)  all of the above.

Question 17

If a nation's nominal GDP is $40 billion, its money supply is $8 billion, and its price level is 2, then the velocity of money is

Accepted Answer

A)  16. 
B)  2. 
C)  5. 
D)  10.

Question 18

One of the tools of monetary policy is to change the discount rate. Since 2003

Accepted Answer

A)  the Fed has not changed the discount rate. 
B)  the Fed has pegged the discount rate to the reserve requirement. 
C)  the Fed has kept the discount rate a fixed amount above the federal funds rate. 
D)  the Fed has kept the federal funds rate one percentage point above the discount rate.

Question 19

Javier has been thinking about purchasing a bond but is afraid that the bond will lose value. He has decided to hold money instead. This is known as the

Accepted Answer

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

Question 20

The incentive of holding excess reserves is equal to

Accepted Answer

A)  the discount rate. 
B)  the federal funds rate. 
C)  the interest rate earned on excess reserves. 
D)  none of the above.

Exam 16: Domestic and International Dimensions of Monetary Policy