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165. According to the theory of liquidity preference, if the interest rate rises
a.
people want to hold more money. This response is shown by moving to the right along the money demand
curve.
b.
people want to hold more money. This response is shown by shifting the money demand curve right.
c.
people want to hold less money. This response is shown by moving to the left along the money demand curve.
d.
people want to hold less money. This response is shown by shifting the money demand curve left.
166. According to the theory of liquidity preference, if output decreases
a.
people want to hold more money. This response is shown as a movement along the money demand curve.
b.
people want to hold more money. This response is shown as a shift of the money demand curve.
c.
people want to hold less money. This response is shown as a movement along the money demand curve.
d.
people want to hold less money. This response is shown as a shift of the money demand curve.
167. If the Federal Reserve increases the money supply, then initially there is a
a.
shortage in the money market, so people will want to sell bonds.
b.
shortage in the money market, so people will want to buy bonds.
c.
surplus in the money market, so people will want to sell bonds.
d.
surplus in the money market, so people will want to buy bonds.
168. If the Federal Reserve decreases the money supply, then initially there is a
a.
shortage in the money market, so people will want to sell bonds.
b.
shortage in the money market, so people will want to buy bonds.
c.
surplus in the money market, so people will want to sell bonds.
d.
surplus in the money market, so people will want to buy bonds.
169. If the Federal Reserve increases the money supply, then initially people want to
a.
sell bonds so the interest rate rises.
b.
sell bonds so the interest rate falls.
c.
buy bonds so the interest rate rises.
d.
buy bonds so the interest rate falls.
170. If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it
could
a.
buy bonds to increase the money supply.
b.
buy bonds to decrease the money supply.
c.
sell bonds to increase the money supply.
d.
sell bonds to decrease the money supply.
171. To decrease the interest rate the Federal Reserve could
a.
buy bonds. The fall in the interest rate would increase investment spending.
b.
buy bonds. The fall in the interest rate would decrease investment spending.
c.
sell bonds. The fall in the interest rate would increase investment spending
d.
sell bonds. The fall in the interest rate would decrease investment spending.
172. Which of the effects listed below increases the quantity of goods and services demanded when the price level falls
and decreases the quantity of goods and services demanded when the price level rises?
a.
the wealth effect
b.
the interest-rate effect
c.
the exchange-rate effect
d.
All of the above are correct.
173. The exchange-rate effect is based, in part, on the idea that
a.
a decrease in the price level reduces the interest rate.
b.
an increase in the price level causes investors to move some of their funds overseas.
c.
an increase in the price level causes domestic goods to become less expensive relative to foreign goods.
d.
a decrease in the price level reduces spending on net exports.
174. For the U.S. economy, money holdings are a
a.
large part of household wealth, and so the interest-rate effect is large.
b.
large part of household wealth, and so the wealth effect is large.
c.
small part of household wealth, and so the interest-rate effect is small.
d.
small part of household wealth, and so the wealth effect is small.
175. When the interest rate is above the equilibrium level,
a.
the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has
supplied.
b.
people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts.
c.
bond issuers and banks respond by lowering the interest rates they offer.
d.
All of the above are correct.
176. When the interest rate is below the equilibrium level,
a.
the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to
hold.
b.
people respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank
accounts.
c.
bond issuers and banks respond by lowering the interest rates they offer.
d.
All of the above are correct.
177. Charisse is of the opinion that the interest rate depends on the economy’s saving propensities and investment
opportunities. Most economists would say that Charisse’s opinion is
a.
Keynesian in nature, and that her view is more valid for the long run than for the short run.
b.
classical in nature, and that her view is more valid for the long run than for the short run.
c.
Keynesian in nature, and that her view is more valid for the short run than for the long run.
d.
classical in nature, and that her view is more valid for the short run than for the long run.
178. Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very
well. Most economists would say that Marcus’s opinion is
a.
Keynesian in nature, and that his view is more valid for the long run than for the short run.
b.
classical in nature, and that his view is more valid for the long run than for the short run.
c.
Keynesian in nature, and that his view is more valid for the short run than for the long run.
d.
classical in nature, and that his view is more valid for the short run than for the long run.
Figure 34-4. On the figure, MS represents money supply and MD represents money demand.
179. Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to
MD2?
a.
a decrease in the price level
b.
a decrease in the cost of borrowing
c.
an increase in the price level
d.
an increase in the cost of borrowing
180. Refer to Figure 34-4. Which of the following events could explain a decrease in the equilibrium interest rate from r1
to r3?
a.
a decrease in the price level
b.
a decrease in the number of firms building new factories and buying new equipment
c.
an increase in the price level
d.
an increase in the number of firms building new factories and buying new equipment
181. Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then
a.
the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has
supplied.
b.
people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank
accounts.
c.
bond issuers and banks will respond by lowering the interest rates they offer.
d.
in response, the money-demand curve will shift rightward from its current position to establish equilibrium in
the money market.
182. Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then
a.
in response, the money-demand curve will shift rightward from its current position to establish equilibrium in
the money market.
b.
people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank
accounts.
c.
bond issuers and banks will respond by lowering the interest rates they offer.
d.
there is a shortage of money.
183. Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause
the equilibrium interest rate to increase?
a.
The Federal Reserve increases the money supply.
b.
Money demand increases.
c.
The price level decreases.
d.
All of the above are correct.
184. Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause
the equilibrium interest rate to decrease?
a.
The Federal Reserve increases the money supply.
b.
Money demand decreases.
c.
The price level decreases.
d.
All of the above are correct.
185. Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Let Y1 represent the corresponding quantity
of goods and services demanded, and let P1 represent the corresponding price level. Starting from this situation, if the
Federal Reserve increases the money supply and if the price level remains at P1, then
a.
there will be an increase in the equilibrium quantity of goods and services demanded.
b.
there will be a decrease in the equilibrium quantity of goods and services demanded.
c.
there will be an increase in the equilibrium interest rate.
d.
fewer firms will choose to borrow to build new factories and buy new equipment.
186. Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Let Y3 represent the corresponding quantity
of goods and services demanded, and let P3 represent the corresponding price level. Starting from this situation, if the
Federal Reserve decreases the money supply and if the price level remains at P3, then
a.
there will be an increase in the equilibrium quantity of goods and services demanded.
b.
there will be a decrease in the equilibrium interest rate.
c.
the aggregate-demand curve will shift to the right.
d.
fewer firms will choose to borrow to build new factories and buy new equipment.
187. “Monetary policy can be described either in terms of the money supply or in terms of the interest rate.” This
statement amounts to the assertion that
a.
rightward shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest
rate.
b.
the activities of the Federal Reserve’s bond traders are irrelevant if the Federal Reserve decides to target an
interest rate.
c.
changes in monetary policy aimed at expanding aggregate demand can be described either as increasing the
money supply or as increasing the interest rate.
d.
our analysis of monetary policy is not fundamentally altered if the Federal Reserve decides to target an interest
rate.
188. “Monetary policy can be described either in terms of the money supply or in terms of the interest rate.” This
statement amounts to the assertion that
a.
shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate.
b.
the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an
interest rate.
c.
changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the
money supply or as raising the interest rate.
d.
the activities of the Federal Reserve’s bond traders are irrelevant if the Federal Reserve decides to target an
interest rate.
189. In response to the sharp decline in stock prices in October 1987, the Federal Reserve
a.
increased the money supply and increased interest rates.
b.
increased the money supply and decreased interest rates.
c.
decreased the money supply and increased interest rates.
d.
decreased the money supply and decreased interest rates.
190. In response to the sharp decline in stock prices in October 1987, the Federal Reserve
a.
increased interest rates, and the economy avoided a recession.
b.
increased interest rates, but the economy was unable to avoid a recession.
c.
decreased interest rates, and the economy avoided a recession.
d.
decreased interest rates, but the economy was unable to avoid a recession.
191. The interest rate that the Federal Reserve pays banks on the reserves they hold is called the
a.
open-market rate.
b.
discount rate.
c.
preference rate.
d.
None of the above are correct.
192. The Fed can influence the money supply by
a.
changing how much it lends to banks.
b.
changing the interest rate it pays banks on the reserves they are holding.
c.
using open-market operations.
d.
All of the above are correct.
193. Which of the following sequences best explains the negative slope of the aggregate-demand curve?
a.
price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded
↓
b.
price level ↑ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded
↓
c.
price level ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded
↓
d.
price level ↑ ⇒ equilibrium interest rate ↑ ⇒ demand for money ↑ ⇒ quantity of goods and services demanded
↓
194. Which of the following sequences best explains the negative slope of the aggregate-demand curve?
a.
price level ↑ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded
↓
b.
price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded
↓
c.
price level ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded
↑
d.
price level ↓ ⇒ equilibrium interest rate ↓ ⇒ demand for money ↑ ⇒ quantity of goods and services demanded
↑
195. Consider the following sequence of events:
price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑
⇒ quantity of goods and services demanded ↓
Τhis sequence explains why the
a.
money-supply curve is vertical.
b.
aggregate-demand curve shifts leftward in response to a monetary injection.
c.
aggregate-demand curve shifts rightward in response to a monetary injection.
d.
aggregate-demand curve slopes downward.
196. A situation in which the Fed’s target interest rate has fallen as far as it can fall is sometimes described as a
a.
liquidity preference.
b.
liquidity trap.
c.
open-market trap.
d.
interest-rate contraction.
197. Economists who are skeptical about the relevance of “liquidity traps” argue that
a.
a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower
bound of zero.
b.
a central bank continues to have the option of committing itself to future monetary contraction, even after its
interest rate target hits its lower bound of zero.
c.
a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero.
d.
while the concept of a liquidity trap is theoretically possible, nothing resembling a liquidity trap ever has been
observed in the real world.
198. If the inflation rate is zero, then
a.
both the nominal interest rate and the real interest rate can fall below zero.
b.
the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero.
c.
the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero.
d.
neither the nominal interest rate nor the real interest rate can fall below zero.
199. During the economic downturn of 2008-2009, the Federal Reserve
a.
used open-market operations to purchase mortgages and corporate debt, just as it frequently does even when
the economy is functioning normally.
b.
took the unusual step of using open-market operations to purchase mortgages and corporate debt.
c.
explicitly set its target rate of inflation at zero.
d.
explicitly set its target rate of inflation well above zero.
200. Paul Samuelson, a famous economist, said that
a.
“the bond market has predicted zero out of the past nine recessions.”
b.
“the stock market has predicted zero out of the past nine recessions.”
c.
“the bond market has predicted nine out of the past five recessions.”
d.
“the stock market has predicted nine out of the past five recessions.”
201. Using the liquidity-preference model, when the Federal Reserve increases the money supply,
a.
the equilibrium interest rate decreases.
b.
the aggregate-demand curve shifts to the left.
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 right.
202. People choose to hold a smaller quantity of money if
a.
the interest rate increases, which causes the opportunity cost of holding money to increase.
b.
the interest rate increases, which causes the opportunity cost of holding money to decrease.
c.
the interest rate decreases, which causes the opportunity cost of holding money to increase.
d.
the interest rate decreases, which causes the opportunity cost of holding money to decrease.
