Question 1

-In the above figure, if we begin at S2 and the Fed buys bonds

Accepted Answer

A)  the price of bonds falls, and the interest rate rises. 
B)  the price of bonds falls, and so does the interest rate. 
C)  the price of bonds rises, and so does the interest rate. 
D)  the price of bonds rises, and the interest rate falls.

Question 2

The quantity theory of money is based on the formula that

Accepted Answer

A)  V = P*Y*Ms. 
B)  Y = P*V/Ms. 
C)  Ms= P*V/Y. 
D)  P = Ms*V/Y.

Question 3

According to Keynes, contractionary monetary policy

Accepted Answer

A)  impacts the economy by an amount smaller than the change in investment. 
B)  impacts the economy by an amount larger than the change in investment. 
C)  will have no impact on the equilibrium nominal GDP. 
D)  will have no impact on the equilibrium real GDP.

Question 4

The Federal Reserve's credit policy refers to

Accepted Answer

A)  a direct credit on bank depositors' saving and checking accounts. 
B)  regulations on terms on credit cards that banks issue. 
C)  the Fed's direct lending to homeowners and students. 
D)  the Fed's direct lending to financial and nonfinancial firms.

Question 5

What are the two features of money that distinguish it from all other assets in the economy?

Accepted Answer

A)  Money is government issued and it is redeemable for gold or silver. 
B)  Money is accepted as a medium of exchange and it is the common unit of account used to express prices. 
C)  Money is part of every barter transaction and it is divisible. 
D)  Money is a common unit of account and it can also be traded for other currencies at a guaranteed exchange rate.

Question 6

The indirect effect of an increase in the money supply is to

Accepted Answer

A)  raise interest rates so people will save more. 
B)  lower interest rates, which stimulates both investment and consumption spending. 
C)  put more cash in people's pockets, thereby increasing aggregate demand. 
D)  pay off a portion of the public debt.

Question 7

The demand for money for which the purpose is making unexpected purchases or meeting emergencies is considered to be part of

Accepted Answer

A)  precautionary demand. 
B)  transactions demand. 
C)  asset demand. 
D)  savings demand.

Question 8

The long-run effect of an increase in the money supply when starting from full employment is to

Accepted Answer

A)  increase real GDP only. 
B)  increase the price level only. 
C)  increase both real GDP and the price level. 
D)  increase real GDP as the price level increases too.

Question 9

Open market operations by the Fed cause

Accepted Answer

A)  changes in the difference between the discount rate. and the federal funds rate. 
B)  aggregate supply to change. 
C)  the prices of bonds to change. 
D)  changes in the required reserve ratio.

Question 10

Warren always carries a one hundred dollar bill in case of emergencies. This is an example of the

Accepted Answer

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

Question 11

Which of the following is NOT a type of demand for holding money?

Accepted Answer

A)  transactions demand 
B)  precautionary demand 
C)  asset demand 
D)  qualitative demand

Question 12

Typically, increasing the difference between the discount and federal funds rates causes

Accepted Answer

A)  an increase in market interest rates. 
B)  no change in interest rates. 
C)  a boom in the economy. 
D)  high corporate profits.

Question 13

Under the Fed's current interest-rate-targeting approach to monetary policy, if the demand for federal funds by depository institutions increases today, then, other things being equal

Accepted Answer

A)  the market federal funds rate decreases, and the Fed's Trading Desk responds by selling bonds. 
B)  the market federal funds rate increases, and the Fed's Trading Desk responds by buying bonds. 
C)  the market federal funds rate decreases, and the Fed's Trading Desk responds by buying bonds. 
D)  the market federal funds rate increases, and the Fed's Trading Desk responds by selling bonds.

Question 14

In an economy that is at full employment, an increase in money supply will result in inflation, unless

Accepted Answer

A)  velocity increases. 
B)  velocity decreases. 
C)  real GDP falls. 
D)  tax reduction is proportional to increases in the money supply.

Question 15

Which of the following is associated with a contractionary monetary policy?

Accepted Answer

A)  lowering the differential between the discount rate and the federal funds rate 
B)  selling bonds 
C)  lowering the required reserve ratio 
D)  raising bond prices

Question 16

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 17

According to the quantity theory of money

Accepted Answer

A)  a change in the money supply can lead only to a proportionate change in the price level. 
B)  the velocity of money is the least stable factor in monetary analysis. 
C)  the rate of inflation is not related to changes in the money supply. 
D)  price level changes can best be explained by Keynesian analysis.

Question 18

The market prices of existing bonds are

Accepted Answer

A)  not related to the interest rate. 
B)  directly related to the interest rate. 
C)  inversely related to the interest rate. 
D)  stated in terms of the interest rate.

Question 19

-In the above figure, suppose the economy is in short-run equilibrium at point D. Which of the following is the best policy option for the Fed?

Accepted Answer

A)  Increase the required reserve ratio. 
B)  Increase government spending. 
C)  Increase taxes. 
D)  open market purchase of government securities

Question 20

In the market for bank reserves, a reduction in the required reserve ratio will cause

Accepted Answer

A)  a reduction in the federal funds rate. 
B)  an increase in the equilibrium quantity of reserves. 
C)  a reduction in the demand for reserves. 
D)  all of the above.

Exam 16: Domestic and International Dimensions of Monetary Policy