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1. The interest-rate effect
a.
depends on the idea that increases in interest rates increase the quantity of money demanded.
b.
depends on the idea that increases in interest rates increase the quantity of money supplied.
c.
is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand
curve.
d.
is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand
curve.
2. The interest-rate effect
a.
depends on the idea that decreases in interest rates increase the quantity of goods and services demanded.
b.
depends on the idea that decreases in interest rates decrease the quantity of goods and services demanded.
c.
is responsible for the downward slope of the money-demand curve.
d.
is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand
curve.
3. The wealth effect stems from the idea that a higher price level
a.
increases the real value of households’ money holdings.
b.
decreases the real value of households’ money holdings.
c.
increases the real value of the domestic currency in foreign-exchange markets.
d.
decreases the real value of the domestic currency in foreign-exchange markets.
4. The idea that a decrease in the price level raises the real value of households’ money holdings, which increases
consumer spending and the quantity of goods and services demanded is known as
a.
the interest-rate effect.
b.
the exchange-rate effect.
c.
the theory of liquidity preference.
d.
the wealth effect.
5. With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct
ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?
a.
wealth effect, exchange-rate effect, interest-rate effect
b.
exchange-rate effect, interest-rate effect, wealth effect
c.
interest-rate effect, wealth effect, exchange-rate effect
d.
interest-rate effect, exchange-rate effect, wealth effect
6. For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-
demand curve?
a.
the wealth effect
b.
the interest-rate effect
c.
the exchange-rate effect
d.
the real-wage effect
7. Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small
economy than it is for the United States?
a.
the wealth effect
b.
the interest-rate effect
c.
the exchange-rate effect
d.
the real-wage effect
8. For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?
a.
An increase in the price level decreases the interest rate.
b.
An increase in the price level increases the interest rate.
c.
An increase in the money supply decreases the interest rate.
d.
An increase in the money supply increases the interest rate.
9. The wealth effect helps explain the slope of the aggregate-demand curve. This effect is
a.
relatively important in the United States because expenditures on consumer durables is very responsive to
changes in wealth.
b.
relatively important in the United States because consumption spending is a large part of GDP.
c.
relatively unimportant in the United States because money holdings are a small part of consumer wealth.
d.
relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates.
10. Which of the following claims concerning the importance of effects that explain the slope of the U.S. aggregate-
demand curve is correct?
a.
The exchange-rate effect is relatively small because exports and imports are a small part of real GDP.
b.
The interest-rate effect is relatively small because investment spending is not very responsive to interest rate
changes.
c.
The wealth effect is relatively large because money holdings are a significant portion of most households'
wealth.
d.
None of the above is correct.
11. Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?
a.
only the nominal interest rate
b.
both the nominal interest rate and the real interest rate
c.
only the interest rate on long-term bonds
d.
only the interest rate on short-term government bonds
12. According to John Maynard Keynes,
a.
the demand for money in a country is determined entirely by that nation’s central bank.
b.
the supply of money in a country is determined by the overall wealth of the citizens of that country.
c.
the interest rate adjusts to balance the supply of, and demand for, money.
d.
the interest rate adjusts to balance the supply of, and demand for, goods and services.
13. According to the theory of liquidity preference,
a.
if the interest rate is below the equilibrium level, then the quantity of money people want to hold is less than
the quantity of money the Fed has created.
b.
if the interest rate is above the equilibrium level, then the quantity of money people want to hold is greater
than the quantity of money the Fed has created.
c.
the demand for money is represented by a downward-sloping line on a supply-and-demand graph.
d.
All of the above are correct.
14. According to classical macroeconomic theory,
a.
the price level is sticky in the short run and it plays only a minor role in the short-run adjustment process.
b.
for any given level of output, the interest rate adjusts to balance the supply of, and demand for, money.
c.
output is determined by the supplies of capital and labor and the available production technology.
d.
All of the above are correct.
15. According to classical macroeconomic theory,
a.
output is determined by the supplies of capital and labor and the available production technology.
b.
for any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds.
c.
given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money.
d.
All of the above are correct.
16. According to the liquidity preference theory, an increase in the overall price level of 10 percent
a.
increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.
b.
decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded.
c.
increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and
services demanded unchanged.
d.
decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods
and services demanded unchanged.
17. On the graph that depicts the theory of liquidity preference,
a.
the demand-for-money curve is vertical.
b.
the supply-of-money curve is vertical.
c.
the interest rate is measured along the horizontal axis.
d.
the price level is measured along the vertical axis.
18. Using the liquidity-preference model, when the Federal Reserve decreases the money supply,
a.
the equilibrium interest rate increases.
b.
the aggregate-demand curve shifts to the right.
c.
the quantity of goods and services demanded is unchanged for a given price level.
d.
the short-run aggregate-supply curve shifts to the left.
19. In recent years, the Federal Reserve has conducted policy by setting a target for the
a.
size of the money supply.
b.
growth rate of the money supply.
c.
federal funds rate.
d.
discount rate.
20. While a television news reporter might state that “Today the Fed raised the federal funds rate from 1 percent to 1.25
percent,” a more precise account of the Fed’s action would be as follows:
a.
“Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium
federal funds rate would increase to 1.25 percent.”
b.
“Today the Fed raised the discount rate by a quarter of a percentage point, and this action will force the federal
funds rate to rise by the same amount.”
c.
“Today the Fed took steps to increase the money supply by an amount that is sufficient to increase the federal
funds rate to 1.25 percent.”
d.
“Today the Fed took a step toward expanding aggregate demand, and this was done by raising the federal
funds rate to 1.25 percent.”
21. Monetary policy
a.
must be described in terms of interest-rate targets.
b.
must be described in terms of money-supply targets.
c.
can be described either in terms of the money supply or in terms of the interest rate.
d.
cannot be accurately described in terms of the interest rate or in terms of the money supply.
22. Which of the following is not a reason the aggregate-demand curve slopes downward? As the price level increases,
a.
firms may believe the relative price of their output has risen.
b.
real wealth declines.
c.
the interest rate increases.
d.
the exchange rate increases.
23. Which of the following would not be an expected response from a decrease in the price level and so help to explain
the slope of the aggregate-demand curve?
a.
When interest rates fall, In-and-Out Convenience Stores decides to build some new stores.
b.
The exchange rate falls, so French restaurants in Paris buy more Kansas beef.
c.
Tyler feels wealthier because of the price-level decrease and so he decides to remodel his kitchen.
d.
With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.
24. Liquidity preference refers directly to Keynes' theory concerning
a.
the effects of changes in money demand and supply on interest rates.
b.
the effects of changes in money demand and supply on exchange rates.
c.
the effects of wealth on expenditures.
d.
the difference between temporary and permanent changes in income.
25. According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in
a.
the price level.
b.
the interest rate.
c.
the exchange rate.
d.
real wealth.
26. Liquidity preference theory is most relevant to the
a.
short run and supposes that the price level adjusts to bring money supply and money demand into balance.
b.
short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
c.
long run and supposes that the price level adjusts to bring money supply and money demand into balance.
d.
long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
27. The theory of liquidity preference is most helpful in understanding
a.
the wealth effect.
b.
the exchange-rate effect.
c.
the interest-rate effect.
d.
misperceptions theory.
28. People choose to hold a larger quantity of money if
a.
the interest rate rises, which causes the opportunity cost of holding money to rise.
b.
the interest rate falls, which causes the opportunity cost of holding money to rise.
c.
the interest rate rises, which causes the opportunity cost of holding money to fall.
d.
the interest rate falls, which causes the opportunity cost of holding money to fall.
29. If expected inflation is constant, then when the nominal interest rate increases, the real interest rate
a.
increases by more than the change in the nominal interest rate.
b.
increases by the change in the nominal interest rate.
c.
decreases by the change in the nominal interest rate.
d.
decreases by more than the change in the nominal interest rate.
30. If expected inflation is constant, then when the nominal interest rate falls, the real interest rate
a.
falls by more than the change in the nominal interest rate.
b.
falls by the change in the nominal interest rate.
c.
rises by the change in the nominal interest rate.
d.
rises by more than the change in the nominal interest rate.
31. If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest
rate
a.
increases by 2 percentage points.
b.
increases, but by less than 2 percentage points.
c.
decreases, but by less than 2 percentage points.
d.
decreases by 2 percentage points.
32. The theory of liquidity preference assumes that the nominal supply of money is determined by the
a.
level of real output only.
b.
interest rate only.
c.
level of real output and by the interest rate.
d.
Federal Reserve.
33. According to the theory of liquidity preference, money demand
a.
and the money supply are positively related to the interest rate.
b.
and the money supply are negatively related to the interest rate.
c.
is negatively related to the interest rate, while the money supply is independent of the interest rate.
d.
is independent of the interest rate, while money supply is negatively related to the interest rate.
34. According to liquidity preference theory, the money-supply curve is
a.
upward sloping.
b.
downward sloping.
c.
vertical.
d.
horizontal.
35. According to liquidity preference theory, the money-supply curve would shift rightward
a.
if the money demand curve shifted right.
b.
if the Federal Reserve chose to increase the money supply.
c.
if the interest rate increased.
d.
All of the above are correct.
36. According to liquidity preference theory, the money-supply curve would shift if the Fed
a.
engaged in open-market operations.
b.
increased money demand.
c.
increased the real income.
d.
did any of the above.
37. In the graph of the money market, the money supply curve is
a.
vertical. It shifts rightward if the Fed buys bonds.
b.
vertical. It shifts rightward if the Fed sells bonds.
c.
upward sloping. It shifts rightward if the Fed buys bonds.
d.
upward sloping. It shifts rightward if the Fed sells bonds.
38. Which of the following Fed actions would both decrease the money supply?
a.
buy bonds and raise the reserve requirement
b.
buy bonds and lower the reserve requirement
c.
sell bonds and raise the reserve requirement
d.
sell bonds and lower the reserve requirement
39. When the Fed buys government bonds, the reserves of the banking system
a.
increase, so the money supply increases.
b.
increase, so the money supply decreases.
c.
decrease, so the money supply increases.
d.
decrease, so the money supply decreases.
40. When the Fed sells government bonds, the reserves of the banking system
a.
increase, so the money supply increases.
b.
increase, so the money supply decreases.
c.
decrease, so the money supply increases.
d.
decrease, so the money supply decreases.
41. Liquidity refers to
a.
the relation between the price and interest rate of an asset.
b.
the risk of an asset relative to its selling price.
c.
the ease with which an asset is converted into a medium of exchange.
d.
the sensitivity of investment spending to changes in the interest rate.
42. People hold money primarily because it
a.
increases in value when there is inflation.
b.
serves as a store of value.
c.
serves as a medium of exchange.
d.
functions as a unit of account.
43. According to liquidity preference theory, the opportunity cost of holding money is
a.
the interest rate on bonds.
b.
the inflation rate.
c.
the cost of converting bonds to a medium of exchange.
d.
the difference between the inflation rate and the interest rate on bonds.
44. When the interest rate increases, the opportunity cost of holding money
a.
increases, so the quantity of money demanded increases.
b.
increases, so the quantity of money demanded decreases.
c.
decreases, so the quantity of money demanded increases.
d.
decreases, so the quantity of money demanded decreases.
45. When the interest rate decreases, the opportunity cost of holding money
a.
increases, so the quantity of money demanded increases.
b.
increases, so the quantity of money demanded decreases.
c.
decreases, so the quantity of money demanded increases.
d.
decreases, so the quantity of money demanded decreases.
46. The opportunity cost of holding money
a.
decreases when the interest rate decreases, so people desire to hold more of it.
b.
decreases when the interest rate decreases, so people desire to hold less of it.
c.
increases when the interest rate decreases, so people desire to hold more of it.
d.
increases when the interest rate decreases, so people desire to hold less of it.
47. In which of the following cases would the quantity of money demanded be smallest?
a.
r = 0.06, P = 1.2
b.
r = 0.05, P = 1.0
c.
r = 0.04, P = 1.2
d.
r = 0.06, P = 1.0
48. In which of the following cases would the quantity of money demanded be largest?
a.
r = 0.03, P = 1.2
b.
r = 0.03, P = 1.3
c.
r = 0.04, P = 1.2
d.
r = 0.05, P = 0.9
49. People are likely to want to hold more money if the interest rate
a.
increases, making the opportunity cost of holding money rise.
b.
increases, making the opportunity cost of holding money fall.
c.
decreases, making the opportunity cost of holding money rise.
d.
decreases, making the opportunity cost of holding money fall.
50. According to liquidity preference theory, a decrease in money demand for some reason other than a change in the
price level causes
a.
the interest rate to fall, so aggregate demand shifts right.
b.
the interest rate to fall, so aggregate demand shifts left.
c.
the interest rate to rise, so aggregate demand shifts right.
d.
the interest rate to rise, so aggregate demand shifts left.
51. If people decide to hold less money, then
a.
money demand decreases, there is an excess supply of money, and interest rates rise.
b.
money demand decreases, there is an excess supply of money, and interest rates fall.
c.
money demand increases, there is an excess demand for money, and interest rates fall.
d.
money demand increases, there is an excess demand for money, and interest rates rise.
52. When households decide to hold more money,
a.
interest rates fall and investment decreases.
b.
interest rates fall and investment increases.
c.
interest rates rise and investment increases.
d.
interest rates rise and investment decreases.
53. According to liquidity preference theory, the slope of the money demand curve is explained as follows:
a.
Interest rates rise as the Fed reduces the quantity of money demanded.
b.
Interest rates fall as the Fed reduces the supply of money.
c.
People will want to hold less money as the cost of holding it falls.
d.
People will want to hold more money as the cost of holding it falls.
54. According to liquidity preference theory,
a.
an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along
the money-demand curve. An increase in the price level shifts money demand to the right.
b.
an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along
the money-demand curve. An increase in the price level shifts money demand leftward.
c.
an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the
money-demand curve. An increase in the interest rate shifts money demand rightward.
d.
an increase in the price level increases the quantity of money demanded. This is shown as a movement along
the money-demand curve. An increase in the interest rate shifts money demand leftward.
55. According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?
a.
interest rate
b.
money supply
c.
quantity of output
d.
price level
Figure 34-1
56. Refer to Figure 34-1. If the current interest rate is 2 percent,
a.
there is an excess supply of money.
b.
people will sell more bonds, which drives interest rates up.
c.
as the money market moves to equilibrium, people will buy more goods.
d.
All of the above are correct.
57. Refer to Figure 34-1. There is an excess demand for money at an interest rate of
a.
2 percent.
b.
3 percent.
c.
4 percent.
d.
None of the above is correct.
58. Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess
a.
demand for money equal to the distance between points a and b.
b.
demand for money equal to the distance between points b and c.
c.
supply of money equal to the distance between points a and b.
d.
supply of money equal to the distance between points b and c.
59. Refer to Figure 34-1. Which of the following is correct?
a.
If the interest rate is 4 percent, there is excess money demand, and the interest rate will fall.
b.
If the interest rate is 3 percent, there is excess money supply, and the interest rate will rise.
c.
Starting with an interest rate of 4 percent, the demand for goods and services will increase until the money
market reaches a new equilibrium.
d.
None of the above is correct.
Figure 34-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on
the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
