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Economics Chapter 14—Modern Macroeconomics and Monetary Policy
MULTIPLE CHOICE
1. The velocity of money is
a.
the rate at which the price index for consumer goods rises.
b.
the multiple by which an increase in government expenditures will cause output to rise.
c.
set by the Board of Governors of the Federal Reserve System.
d.
the average number of times one dollar is used to buy final goods and services during a
year.
2. During 2001-2004, the Fed injected additional reserves into the banking system, which reduced the
federal funds rate and other short-term interest rates. Other things constant, what is the most likely
short-run impact of this policy?
a.
an increase in the rate of unemployment
b.
a reduction in the growth of employment
c.
an increase in aggregate demand and real GDP
d.
a reduction in the long-run rate of inflation
3. The demand curve for money
a.
shows the amount of money balances that individuals and businesses wish to hold at
various interest rates.
b.
reflects the open market operations policy of the Federal Reserve.
c.
shows the amount of money that individuals and businesses wish to hold at various price
levels.
d.
reflects the discount rate policy of the Federal Reserve.
4. Which of the following makes it more difficult for monetary policy makers to time policy changes
correctly?
a.
Monetary policy makers cannot act without congressional approval.
b.
The primary effects of the policy change will not be felt for 6 to 15 months into the future.
c.
The Board of Governors of the Federal Reserve System does not meet very often.
d.
Monetary policy affects only the general level of prices; it exerts no impact on real
variables such as output and employment.
5. Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in
the short run an unanticipated increase in the money supply will
a.
raise real interest rates, lower prices, and reduce real GDP.
b.
raise real interest rates, lower prices, and leave real GDP unchanged.
c.
raise nominal interest rates, lower prices, and leave real GDP unchanged.
d.
lower real interest rates, raise prices, and increase real GDP.
6. A shift to a more expansionary monetary policy will
a.
help bring inflation under control.
b.
exert a stabilizing impact on the economy if the effects of the policy are felt during an
economic downturn.
c.
exert a stabilizing impact if the effects of the policy are felt when the economy is
operating at its full-employment capacity.
d.
reduce the natural rate of unemployment.
7. Persistently expansionary monetary policy that stimulates aggregate demand and leads to inflation will
a.
lead to higher rates of real output in the long run.
b.
fail to increase real output once decision makers fully anticipate the inflation.
c.
lead to lower nominal interest rates once decision makers fully anticipate the inflation.
d.
permanently reduce the rate of unemployment below its natural rate.
8. The highest interest rates in the world are found in countries
a.
that have followed a monetary policy that is highly restrictive.
b.
with governments that have run large budget surpluses.
c.
with governments that have run sizable budget deficits.
d.
that have followed an expansionary monetary policy that resulted in high rates of inflation.
9. Cross country data illustrates that rapid expansion in the supply of money over a lengthy period of
time (for example, a decade) leads to
a.
rapid growth of real output.
b.
a low real rate of interest.
c.
high rates of inflation.
d.
an inflow of capital and a high rate of investment.
10. If there is a "long and variable time lag" between when a change in monetary policy is instituted and
when it impacts aggregate demand and output, this will
a.
make it easier for the Fed to properly time changes in monetary policy.
b.
make it more difficult for the Fed to properly time changes in monetary policy.
c.
not affect the Fed's ability to time monetary policy changes correctly.
d.
make it easier for the Fed to control inflation and achieve price stability.
11. According to the monetarists, which of the following is true?
a.
Instability in the money supply is the primary cause of economic instability.
b.
A reduction in the money supply will cause consumers to increase spending.
c.
A reduction in the money supply will cause a proportional reduction in wages and prices,
leaving output unchanged.
d.
A rapid growth rate of the money supply will lead to a rapid growth rate of real GDP.
12. According to monetarists, which of the following would be most important for the control of inflation?
a.
a steady increase in federal expenditures
b.
the imposition of price controls
c.
keeping the growth rate of the money supply low and steady
d.
a steady increase in the size of the budget deficit
13. "Every major contraction in the U.S. economy has either been created or greatly exacerbated by
monetary instability. Every major inflation has been caused by monetary expansion." Which of the
following economists made this statement?
a.
Adam Smith
b.
John Maynard Keynes
c.
Milton Friedman
d.
Paul Samuelson
14. The demand curve for money
a.
shows the amount of money balances that individuals and businesses wish to hold at
various levels of private investment.
b.
reflects the open market operations policy of the Federal Reserve.
c.
shows the amount of money that households and businesses wish to hold at various rates
of interest.
d.
indicates the amount that consumers wish to borrow at a given interest rate.
15. The cost of holding money balances increases when
a.
the inflation rate decreases.
b.
the nominal interest rate increases.
c.
the nominal interest rate decreases.
d.
nominal GDP is far from full employment.
16. An increase in the nominal interest rate would
a.
encourage people to hold smaller money balances.
b.
encourage people to hold larger money balances.
c.
force the Fed to reduce the money supply.
d.
cause the real interest rate to decline.
17. A decrease in the nominal interest rate would
a.
encourage people to hold larger money balances.
b.
encourage people to hold smaller money balances.
c.
force the Fed to increase the money supply.
d.
cause households to decrease consumption.
18. Which one of the following factors would reduce the quantity of money balances that households
would want to hold?
a.
higher prices
b.
a rise in inflation
c.
higher nominal interest rates
d.
an expansion in nominal income (nominal GDP)
19. The quantity of money that households and businesses will demand
a.
increases if income falls but decreases if interest rates rise.
b.
increases if income falls and increases if interest rates rise.
c.
decreases if income falls but increases if interest rates rise.
d.
decreases if income falls and decreases if interest rates rise.
20. Other things constant, a decrease in nominal GDP will generally
a.
increase the demand for money.
b.
decrease the demand for money.
c.
increase the nominal interest rate.
d.
decrease the money supply.
21. Which of the following will increase interest rates in the short run?
a.
an decrease in reserve requirements
b.
the sale of bonds by the Federal Reserve in the open market
c.
a decrease in real GDP
d.
an decrease in the price level
22. If the Federal Reserve increases its bond purchases, the short-run effects will be
a.
an increase in the money supply and lower real interest rates.
b.
a decrease in the money supply and lower real interest rates.
c.
an increase in the money supply and higher real interest rates.
d.
a decrease in the money supply and higher real interest rates.
23. If the Federal Reserve sells bonds, the short-run effects will be
a.
an increase in the money supply and lower real interest rates.
b.
a decrease in the money supply and lower real interest rates.
c.
an increase in the money supply and higher real interest rates.
d.
a decrease in the money supply and higher real interest rates.
24. When the Fed decreases the money supply, interest rates
a.
rise.
b.
fall.
c.
are unaffected.
d.
rise and then fall.
e.
fall and then rise.
25. If expansionary monetary policy reduces real interest rates in the United States, which of the following
is most likely to occur?
a.
Net foreign investment will decline, causing the dollar to depreciate and net exports to
increase.
b.
Net foreign investment will decline, causing the dollar to appreciate and net exports to
decrease.
c.
Net foreign investment will increase, causing the dollar to appreciate and net exports to
decline.
d.
Net foreign investment will increase, causing the dollar to depreciate and net exports to
increase.
26. Which of the following correctly indicates a potential path for the transmission of expansionary
monetary policy to the goods and services market?
a.
Higher real interest rates will lead to a decrease in both business investment and consumer
purchases of durable items, causing a decrease in aggregate demand.
b.
Lower interest rates lead to a depreciation in the foreign exchange value of the dollar, an
increase in net exports, and an expansion in aggregate demand.
c.
Higher interest rates will tend to increase asset prices, leading to a decrease in wealth that
will decrease consumer spending and aggregate demand.
d.
A reduction in the general level of prices will increase the disposable income of
households and aggregate demand.
27. An unexpected increase in the supply of money will
a.
reduce the real rate of interest and, thereby, trigger an increase in current spending by
households and businesses.
b.
reduce aggregate demand and real output in the short run.
c.
increase only the general level of prices in the short run.
d.
lead to a higher rate of unemployment in the short run.
28. An increase in the money supply
a.
lowers the interest rate, causing a decrease in investment and an increase in GDP.
b.
lowers the interest rate, causing an increase in investment and a decrease in GDP.
c.
lowers the interest rate, causing an increase in investment and an increase in GDP.
d.
raises the interest rate, causing an increase in investment and an increase in GDP.
e.
raises the interest rate, causing a decrease in investment and a decrease in GDP.
29. A decrease in the money supply
a.
lowers the interest rate, causing a decrease in investment and a decrease in GDP.
b.
lowers the interest rate, causing a decrease in investment and an increase in GDP.
c.
raises the interest rate, causing an increase in investment and a decrease in GDP.
d.
raises the interest rate, causing an increase in investment and an increase in GDP.
e.
raises the interest rate, causing a decrease in investment and a decrease in GDP.
30. The most likely impact of an unanticipated increase in the money supply is
a.
an increase in the real interest rate, which in turn stimulates investment and GDP.
b.
a decrease in the real interest rate, which in turn stimulates investment and GDP.
c.
a reduction in the general level of prices, which will increase the disposable income of
households.
d.
an improvement in technology, which will stimulate both output and employment.
31. If the Fed wanted to institute a more expansionary monetary policy, which of the following would it be
most likely to do?
a.
reduce taxes
b.
increase government expenditures
c.
buy government bonds from the public
d.
raise the discount rate
32. If the Federal Reserve wanted to expand the money supply in order to increase output, it should
a.
sell government bonds, which will increase the money supply; this will cause interest rates
to fall and aggregate demand to rise.
b.
buy government bonds, which will increase the money supply; this will cause interest rates
to fall and aggregate demand to rise.
c.
increase the discount rate, which will raise the market rate of interest; this will cause both
costs and prices to rise.
d.
decrease taxes, which will reduce costs and cause prices to fall.
33. In the short run, an unanticipated shift to a more expansionary monetary policy is most likely to result
in
a.
an increase in short-term interest rates.
b.
a reduction in aggregate demand.
c.
a reduction in the inflation rate.
d.
an increase in employment.
34. In the short run, which of the following is the most likely effect of an unanticipated move to a more
expansionary monetary policy?
a.
an increase in employment
b.
a decrease in employment
c.
an increase in the velocity of money
d.
an increase in prices proportional to the rise in the money supply
35. In the short run, an unanticipated increase in the money supply will exert its primary impact on
a.
output and employment rather than on prices.
b.
prices; output and employment will be largely unaffected.
c.
interest rates; rising interest rates will stimulate additional saving.
d.
prices, if the economy operates at an output level below its long-run supply constraint.
36. In the short run, which of the following is the most likely effect of an unanticipated move to
expansionary monetary policy?
a.
an increase in real output
b.
a decrease in real output
c.
an improvement in technology, which will stimulate growth in the long run
d.
an increase in prices proportional to the increase in the money supply
37. When the Fed unexpectedly increases the money supply,
a.
real interest rates will tend to decline.
b.
the exchange rate value of the dollar will tend to appreciate.
c.
aggregate demand will tend to increase.
d.
all of the above are correct.
e.
both a and c are correct.
38. When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand
because
a.
real interest rates will fall, stimulating business investment and consumer purchases.
b.
the dollar will appreciate on the foreign exchange market, leading to a decrease in net
exports.
c.
lower interest rates will tend to decrease asset prices (for example, stock prices), which
decreases wealth and, thereby, decreases current consumption.
d.
the general level of prices will fall, which will increase the disposable income of
households.
39. If the Fed unexpectedly shifts to a more expansionary monetary policy, which of the following will
most likely occur in the short run?
a.
a decrease in the real interest rate
b.
an increase in unemployment
c.
a decrease in real GDP
d.
an increase in the nominal interest rate
40. An unanticipated shift to a more expansionary monetary policy by the Fed will
a.
increase real interest rates and, thereby, reduce investment, current consumption, and
aggregate demand.
b.
reduce real interest rates, leading to an appreciation of the dollar and an expansion in net
exports and aggregate demand.
c.
increase real interest rates, leading to higher asset prices that will stimulate aggregate
demand.
d.
reduce real interest rates and, thereby, stimulate investment, current consumption, and
aggregate demand.
41. If the Federal Reserve lowered the reserve requirements imposed on the banking industry, which of the
following will most likely happen in the short run?
a.
an increase in the demand for loanable funds, which will exert upward pressure on the
interest rate
b.
an increase in the supply of loanable funds, which will exert downward pressure on the
interest rate
c.
an increase in the unemployment rate
d.
a decrease in the rate of inflation
42. When the Fed buys bonds and injects additional reserves into the banking system, this action will
a.
place downward pressure on short-term interest rates.
b.
cause many decision makers to expect that the future rate of inflation will fall.
c.
place upward pressure on both short-term and long-term interest rates.
d.
place upward pressure on short-term interest rates and downward pressure on long-term
interest rates.
43. If policy makers wanted to use both monetary and fiscal policy to stimulate demand and reduce a high
rate of unemployment, which of the following would be most appropriate?
a.
a larger budget deficit and the purchase of securities in the open market
b.
a government surplus and the sale of securities in the open market
c.
a larger government deficit and an increase in the discount rate
d.
a government surplus and a reduction in the discount rate
44. If a country was operating well below its long-run capacity (potential GDP), the initial impact of an
unanticipated increase in the money supply would most likely result in an increase in
a.
prices with little change in output.
b.
output with little change in prices.
c.
output and a decline in prices.
d.
prices and a decline in output.
45. If the long-run equilibrium of an economy is disrupted by an unexpected shift to a more expansionary
monetary policy, the policy shift will
a.
reduce aggregate demand and real output in the short run.
b.
lead to a higher rate of unemployment in the short run.
c.
stimulate real output in the short run, but in the long run, its primary impact will be on the
general level of prices.
d.
lead to an increase in the general level of prices in the short run, but in the long run, its
primary impact will be an expansion in real output.
46. Starting from an initial long-run equilibrium, an unanticipated shift to a more expansionary monetary
policy would tend to increase
a.
prices and unemployment in the long run.
b.
real output in the short run but not in the long run.
c.
real output in the long run but not in the short run.
d.
real output in both the long run and the short run.
47. Unanticipated restrictive monetary policy would tend to cause
a.
real interest rates to rise.
b.
the exchange rate value of the dollar to fall (the dollar to depreciate).
c.
loans to become more available for small businesses.
d.
asset prices to rise.
48. An unanticipated shift to a more restrictive monetary policy by the Fed will
a.
increase real interest rates and, thereby, reduce investment, current consumption, and
aggregate demand.
b.
reduce real interest rates, leading to a depreciation of the dollar and an expansion in net
exports and aggregate demand.
c.
increase real interest rates, leading to higher asset prices that will stimulate aggregate
demand.
d.
reduce real interest rates and, thereby, stimulate investment, current consumption, and
aggregate demand.
49. If the Fed unexpectedly shifts to a more restrictive monetary policy, which of the following will most
likely occur in the short run?
a.
a decrease in the real interest rate
b.
an increase in unemployment
c.
an increase in real GDP
d.
an increase in inflation
50. When the Fed unexpectedly reduces the money supply, it will cause a decrease in aggregate demand
because
a.
real interest rates will rise, lowering business investment and consumer spending.
b.
the dollar will depreciate on the foreign exchange market, leading to an increase in net
exports.
c.
lower interest rates will cause the value of assets (for example, stocks) to rise.
d.
the national debt will increase, causing consumers to reduce their spending.
51. In the short run, an unanticipated shift to a more restrictive monetary policy is most likely to result in
a.
a decrease in short-term interest rates.
b.
a reduction in the growth rate of real GDP.
c.
an increase in the rate of inflation.
d.
an increase in employment.
52. The short-run impact of an unanticipated shift to a more restrictive monetary policy is most likely to be
a reduction in
a.
prices, while real output is unaffected.
b.
the rate of unemployment.
c.
real output.
d.
the size of the budget deficit.
53. If the Fed sells bonds and, thereby, unexpectedly shifts to a more restrictive monetary policy, in the
short run, the primary impact of this policy will tend to
a.
increase inflation.
b.
reduce unemployment.
c.
increase real output.
d.
increase real interest rates.
54. If the Federal Reserve unexpectedly decides to sell bonds, which of the following will most likely
happen in the short run?
a.
The demand for loanable funds will increase, which will exert upward pressure on the
interest rate.
b.
The supply of loanable funds will decrease, which will exert upward pressure on the
interest rate.
c.
The supply of loanable funds will increase, which will exert downward pressure on the
interest rate.
d.
The natural rate of unemployment will increase.
55. Which of the following options would be most likely to cause an increase in short-term real interest
rates?
a.
The Federal Reserve cuts the discount rate.
b.
The Federal Reserve lowers the reserve requirement.
c.
The Federal Reserve sells bonds in the open market.
d.
The federal budget is shifted toward a surplus.
56. Which of the following policies would be most likely to reduce the rate of inflation?
a.
sale of government bonds by the Federal Reserve
b.
a reduction in the discount rate
c.
an increase in the size of the federal budget deficit
d.
a reduction in the required reserves imposed on the banking system
57. An expansionary monetary policy is most likely to produce an inflationary effect with little impact on
output when the economy
a.
is near full employment and the short-run aggregate supply curve is flat.
b.
is near full employment and the short-run aggregate supply curve is steep.
c.
has substantial unemployment and the short-run aggregate supply curve is steep.
d.
has substantial unemployment and the short-run aggregate supply curve is flat.
58. The short run sequence of events following an unanticipated shift to restrictive monetary policy would
be higher interest rates followed by dollar
a.
depreciation, higher exports, and lower imports.
b.
depreciation, lower exports, and higher imports.
c.
appreciation, lower exports, and higher imports.
d.
appreciation, higher exports, and lower imports.
59. The short run sequence of events following an unanticipated shift to a more expansionary monetary
policy would be lower interest rates followed by dollar
a.
depreciation, and an increase in the current account deficit.
b.
depreciation, and a decrease in the current account deficit.
c.
appreciation, and an increase in the current account deficit.
d.
appreciation, and a decrease in the current account deficit.
60. The short run sequence of events following an unanticipated shift to a more expansionary monetary
policy would be
a.
lower interest rates, decrease in aggregate demand, and a reduction in output.
b.
lower interest rates, increase in aggregate demand, and an expansion in output.
c.
higher interest rates, decrease in aggregate demand, and a reduction in output.
d.
higher interest rates, increase in aggregate demand, and an expansion in output.
61. The short run sequence of events following an unanticipated shift to a more restrictive monetary policy
would be
a.
lower interest rates, decrease in aggregate demand, and a reduction in output.
b.
lower interest rates, increase in aggregate demand, and an expansion in output.
c.
higher interest rates, decrease in aggregate demand, and a reduction in output.
d.
higher interest rates, increase in aggregate demand, and an expansion in output.
62. The Fed's purchase of U.S. government securities constitutes
a.
a restrictive policy because it lowers the amount of total reserves in the banking system.
b.
a restrictive policy because it lowers the amount of excess reserves in the banking system.
c.
an expansionary policy because it raises the amount of total reserves in the banking
system.
d.
an expansionary policy because it lowers the amount of required reserves in the banking
system.
63. The Fed's sale of U.S. government securities in its open market operations constitutes
a.
a restrictive policy because it lowers the amount of total reserves in the banking system.
b.
a restrictive policy because it raise the amount of required reserves in the banking system.
c.
an expansionary policy because it raises the amount of total and excess reserves in the
banking system.
d.
an expansionary policy because it raises the amount of excess reserves and lowers the
amount of required reserves in the banking system.
e.
an expansionary policy because it raises the amount of required reserves in the banking
system.
64. An increase in the required reserve ratio would be
a.
a restrictive policy because it lowers the amount of total reserves in the banking system.
b.
a restrictive policy because it lowers the amount of excess reserves in the banking system.
c.
an expansionary policy because it raises the amount of total reserves in the banking
system.
d.
an expansionary policy because it raises the amount of excess reserves in the banking
system.
e.
an expansionary policy because it raises the amount of required reserves in the banking
system.
65. A decrease in the required reserve ratio would be
a.
a restrictive policy because it lowers the amount of total reserves in the banking system.
b.
a restrictive policy because it lowers the amount of excess reserves in the banking system.
c.
an expansionary policy because it raises the amount of required reserves in the banking
system.
d.
an expansionary policy because it raises the amount of total reserves in the banking system
e.
an expansionary policy because it raises the amount of excess reserves in the banking
system.
66. In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated increase in
the money supply will be
a.
lower real interest rates and an increase in aggregate demand.
b.
higher real interest rates and an increase in aggregate demand.
c.
lower real interest rates and a reduction in aggregate demand.
d.
higher real interest rates and a reduction in aggregate demand.
67. In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated decrease in
the money supply will be
a.
lower real interest rates and an increase in aggregate demand.
b.
higher real interest rates and an increase in aggregate demand.
c.
lower real interest rates and a reduction in aggregate demand.
d.
higher real interest rates and a reduction in aggregate demand.
68. If the Fed unexpectedly increases the money supply, real GDP
a.
increases because the resulting increase in the interest rate leads to a decrease in
investment.
b.
increases because the resulting decrease in the interest rate leads to an increase in
investment.
c.
decreases because the resulting increase in the interest rate leads to a decrease in
investment.
d.
decreases because the resulting increase in the interest rate leads to an increase in
investment.
e.
decreases because the resulting decrease in the interest rate leads to an increase in
investment.
69. If the Fed unexpectedly decreases the money supply, real GDP
a.
increases because the resulting increase in the interest rate leads to a decrease in
investment.
b.
increases because the resulting decrease in the interest rate leads to an increase in
investment.
c.
decreases because the resulting increase in the interest rate leads to a decrease in
investment.
d.
decreases because the resulting increase in the interest rate leads to an increase in
investment.
e.
decreases because the resulting decrease in the interest rate leads to an increase in
investment.
70. An unanticipated increase in the money supply will lead to
a.
a decline in interest rates, an increase in investment, and an increase in aggregate demand.
b.
a decline in interest rates, a decrease in investment, and an increase in aggregate demand.
c.
a decline in interest rates, an increase in investment, and a decline in aggregate demand.
d.
an increase in interest rates, an increase in investment, and an increase in aggregate
demand.
e.
a decline in interest rates, a decline in investment, and a decline in aggregate demand.
71. What happens to the aggregate demand curve when the Fed reduces the money supply?
a.
It shifts leftward, lowering real GDP and the price level.
b.
It shifts leftward, raising real GDP and the price level.
c.
It shifts leftward, lowering real GDP but raising the price level.
d.
It shifts rightward, raising real GDP and the price level.
e.
It shifts rightward, lowering real GDP but raising the price level.
72. If the Fed decreases the money supply,
a.
aggregate demand and aggregate supply both increase.
b.
aggregate demand increases, which leads to movement along the short-run aggregate
supply curve.
c.
aggregate demand decreases, which leads to movement along the short-run aggregate
supply curve.
d.
aggregate supply increases, which leads to movement along the aggregate demand curve.
e.
aggregate supply decreases, which leads to movement along the aggregate demand curve.
73. If there is a recession, the Fed would most likely
a.
increase bank reserves by raising the discount rate.
b.
increase bank reserves by buying government securities.
c.
decrease bank reserves by raising the discount rate.
d.
decrease bank reserves by selling government securities.
e.
decrease bank reserves by lowering the legal reserve requirement.
74. If the economy is in an inflationary boom, the Fed would most likely
a.
increase bank reserves by raising the discount rate.
b.
increase bank reserves by buying government securities
c.
decrease bank reserves by lowering the discount rate.
d.
decrease bank reserves by selling government securities.
e.
decrease bank reserves by lowering the legal reserve requirement.
75. If the economy is in an inflationary boom, the Fed would most likely
a.
encourage banks to provide loans by buying government securities.
b.
encourage banks to provide loans by raising the discount rate.
c.
encourage banks to provide loans by selling government securities.
d.
restrict bank lending by selling government securities.
e.
restrict bank lending by lowering the federal funds rate.
76. If the Fed fears an economic downturn, it would be most likely to
a.
encourage banks to provide loans by lowering the discount rate.
b.
encourage banks to provide loans by raising the discount rate.
c.
restrict bank lending by lowering the discount rate.
d.
restrict bank lending by raising the discount rate.
e.
restrict bank lending by lowering the federal funds rate.
77. If the Fed fears an economic downturn, it would be most likely to
a.
buy additional bonds in order to reduce the federal funds rate.
b.
buy additional bonds in order to increase the federal funds rate.
c.
sell additional bonds in order to increase the federal funds rate.
d.
sell additional bonds in order to reduce the federal funds rate.
78. When the Fed unexpectedly decreases the money supply,
a.
real interest rates will tend to decline.
b.
the exchange rate value of the dollar will tend to appreciate.
c.
aggregate demand will tend to increase.
d.
there is generally no impact on the economy.
79. What effect does expansionary monetary policy have on short-term real interest rates?
a.
Expansionary monetary policy tends to push short-term interest rates upward.
b.
Expansionary monetary policy tends to push short-term interest rates downward.
c.
The effect of expansionary monetary policy on short-term interest rates is unpredictable.
d.
Expansionary monetary policy has no effect on short-term interest rates.
80. What effect does restrictive monetary policy have on short-term real interest rates?
a.
Restrictive monetary policy tends to push short-term interest rates upward.
b.
Restrictive monetary policy tends to push short-term interest rates downward.
c.
The effect of restrictive monetary policy on short-term interest rates is unpredictable.
d.
Restrictive monetary policy has no effect on short-term interest rates.
81. The velocity of money is
a.
money supply divided by prices.
b.
spending divided by output.
c.
required monetary reserves divided by income.
d.
GDP divided by the money supply.
82. The velocity of money is the
a.
rate at which the price index for consumer goods rises.
b.
multiple by which an increase in government expenditures will cause output to expand.
c.
average number of times a dollar is used to buy goods and services included in GDP.
d.
number of times a dollar is taken out of the country during a year.
83. If the amount of money in circulation is $400 billion and the nominal GDP is $800 billion, the velocity
of money is
a.
0.5.
b.
2.
c.
4.
d.
8.
84. If the amount of money in circulation is $50 billion and the nominal GDP is $200 billion, the velocity
of money is
a.
0.25
b.
0.75.
c.
2.
d.
4.
85. Which of the following developments will most likely lead to an increase in the velocity of money?
a.
a decrease in the expected inflation rate
b.
an increase in money interest rates
c.
a sharp decline in using credit cards
d.
a decrease in real income
86. Which of the following best describes the relationship between the velocity of money and the demand
for money?
a.
The demand for money is not related to the velocity of money.
b.
When the demand for money increases, the velocity of money increases.
c.
The demand for money must be stable for the velocity of money to increase.
d.
When the demand for money declines, the velocity of money increases.
87. Empirical studies indicate that the velocity of money tends to increase when interest rates rise. Which
of the following best explains why this is true?
a.
When the velocity of money is high, banks will increase their lending interest rates.
b.
An increase in the growth rate of GDP will cause the velocity of money to increase.
c.
The higher interest rates increase the cost of holding money balances and, thereby,
increase the velocity of money.
d.
Both the velocity of money and interest rates will rise when the inflation rate falls.
88. In an economy in which velocity is constant and real output grows at an average rate of 3 percent per
year, a 5 percent average rate of growth in the money supply would result in a
a.
constant price level.
b.
low (approximately 2 percent) rate of inflation.
c.
decline in the general level of prices at an annual rate of approximately 2 percent.
d.
rate of inflation of approximately 8 percent.
89. In an economy in which real output grows at an average rate of 3 percent per year, a 7 percent average
rate of growth in the money supply would result in
a.
an inflation rate of 4 percent, if velocity were constant.
b.
an inflation rate of −4 percent, if velocity were constant.
c.
a $4 increase in the price level per year.
d.
a $4 decrease in the price level per year.
90. The equation of exchange states that
a.
money supply multiplied by real output equals velocity.
b.
velocity multiplied by money supply equals real output times the price level.
c.
money supply divided by velocity equals nominal GDP.
d.
money supply divided by velocity equals real GDP.
91. According to the quantity theory of money, which one of the following economic variables would
change in response to an increase in the money supply?
a.
prices
b.
real income
c.
velocity
d.
employment
92. Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent,
prices would
a.
fall by 50 percent.
b.
rise by 50 percent.
c.
increase by 100 percent.
d.
decrease by 100 percent.
93. Given the strict quantity theory of money, if the quantity of money doubled, prices would
a.
fall by half.
b.
double.
c.
remain constant.
d.
increase somewhat but less than double.
94. Suppose the velocity of money is 8, the amount of money in circulation is $200 billion, the index of
prices is 150, and real GDP is $10 billion. According to the strict quantity theory of money, if the
money supply doubled to $400 billion,
a.
the velocity of money would fall to 4.
b.
the index of prices would increase to 300.
c.
real GDP would increase to $20 billion.
d.
the velocity of money would rise to 16.
95. Suppose the velocity of money is 6, the amount of money in circulation is $600 billion, the index of
prices is 180, and real GDP is $20 billion. According to the strict quantity theory of money, if the
money supply decreased to $300 billion,
a.
the velocity of money would rise to 12.
b.
the index of prices would fall to 90.
c.
real GDP would decrease to $10 billion.
d.
the velocity of money would decline to 3.
96. According to the modern view, the impact of expansionary monetary policy will
a.
be the same in the long run as in the short run.
b.
be the same regardless of whether the effects of the policy are anticipated or unanticipated.
c.
initially be an increase in real output if the policy is unanticipated, but in the long run, the
primary result will be a higher price level (inflation).
d.
initially be an increase in prices if the policy is unanticipated, but in the long run, the
primary result will be larger real output.
97. The primary cause of inflation is
