the growth rate of the M1 money supply
d.
A reduction in the monetary base, lower short-term interest rates, and a decline in the
growth rate of the M2 money supply
159. Which of the following would be most indicative of a shift to a more restrictive monetary policy?
a.
Rapid expansion in the monetary base, higher short–term interest rates, and a decline in
the growth rate of the M1 money supply.
b.
Rapid expansion in the monetary base, declining short–term interest rates, and an
increase in the growth rate of the M2 money supply.
c.
A reduction in the monetary base, higher short-term interest rates, and a decline in the
growth rate of the M2 money supply.
d.
A reduction in the monetary base, lower short-term interest rates, and a decline in the
growth rate of the M1 money supply.
160. Monetary policy pushed interest rates to historically low levels during 2002-2004, but was more
restrictive during 2005-2006. Economic analysis indicates that this policy
a.
helped to smooth the ups and downs of the business cycle during this era.
b.
contributed to the boom and bust of the housing market, and thereby the instability of this
era.
c.
contributed to the housing bust of 2002-2004, but helped to restore stability to the housing
market in 2006-2008.
d.
helped to bring inflation under control during 2002-2004, and thereby established a
foundation for a strong recovery during 2007-2010
161. In response to the severe recession of 2008-2009, the Fed
a.
expanded the monetary base and pushed short-term interest rates sharply higher.
b.
reduced the size of the monetary base and pushed short-term interest rates sharply higher.
c.
more than doubled the size of the monetary base and pushed short-term interest rates to
near zero.
d.
more than doubled the size of the monetary base and pushed short-term interest rates to a
historic high.
162. In response to a severe recession, the Fed more than doubled the monetary base and pushed short-term
interest rates to near zero during 2009-2010. What happened in 2011?
a.
The inflation rate soared to double-digit levels.
b.
Aggregate demand increased and the economy recovered rapidly.
c.
The large budget deficit of the earlier years was transformed into a budget surplus.
d.
The high rate of unemployment continued.
Use the figure below to answer the following question(s).
Figure 14-1
163. In Figure 14-1, an unanticipated shift to a more expansionary monetary policy will shift
a.
AD to the right and temporarily increase real GDP.
b.
AD to the left and temporarily reduce real GDP.
c.
AD to the right and SRAS to the left and lead to higher prices (inflation).
d.
both AD and SRAS to the right and lead to an increase in real GDP.
Use the figure below to answer the following question(s).
Figure 14-2
164. If the Fed anticipates that the conditions illustrated by AD1 and SRAS in Figure 14-2 will be present in
the near future, it should
a.
shift to a more restrictive policy.
b.
shift to a more expansionary policy.
c.
request that Congress raise tax rates.
d.
refuse to buy any more U.S. securities.
165. If the Fed anticipates that the conditions illustrated by AD2 and SRAS in Figure 14-2 will be present in
the near future, it should
a.
decrease the discount rate.
b.
reduce reserve requirements.
c.
sell U.S. treasury bonds on the open market.
d.
buy U.S. treasury bonds on the open market.
Figure 14-3
166. Suppose the economy was currently operating at SRAS and AD2 in Figure 14-3. To combat inflation,
the Fed institutes restrictive monetary policy. Suppose that by the time the policy impacts the
economy, AD has already moved to AD1. Which of the following would be true?
a.
The policy would cause the economy to fall further into a recession than it would have if
the Fed had not undertaken the policy.
b.
The policy will help by preventing the recession from becoming worse.
c.
The policy would cause the economy to go into an economic boom.
d.
This is a trick question; the impact of monetary policy is felt immediately by the economy.
Figure 14-4
167. In Figure 14-4, an unanticipated shift to a more restrictive monetary policy will shift
a.
AD to the right and temporarily increase real GDP.
b.
AD to the left and temporarily reduce real GDP.
c.
AD to the right and SRAS to the left and lead to higher prices (inflation).
d.
both AD and SRAS to the right and lead to an increase in real GDP.
Use the figure below to answer the following question(s).
Figure 14-5
168. In Figure 14-5, AD1 and SRAS1 indicate an economy initially operating at full-employment output
level, Y1. The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy
will be
a.
a decrease in aggregate demand to AD2 and a decrease in real output to Y2.
b.
a decrease in aggregate demand to AD2 but real output would remain at Y1.
c.
a decrease in aggregate demand to AD2 and an increase in short-run aggregate supply to
SRAS2, causing the price level to fall to P3 and real output to remain unchanged at Y1.
d.
no change; AD and SRAS will stay at AD1 and SRAS1.
169. In Figure 14-5, AD1 and SRAS1 indicate an economy initially operating at full-employment output
level, Y1. The long-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy
will be
a.
a decrease in aggregate demand to AD2 and a decrease in real output to Y2.
b.
a decrease in the full-employment level of output to Y2.
c.
a decrease in aggregate demand to AD2 and an increase in short-run aggregate supply to
SRAS2, causing the price level to fall to P3 and real output to remain unchanged at Y1.
d.
no change; AD and SRAS will stay at AD1 and SRAS1.
Figure 14-6
170. In the situation shown in Figure 14-6, how could the Fed return the economy to potential output?
a.
decrease government spending
b.
increase taxes
c.
decrease taxes
d.
shift to a more restrictive monetary policy
e.
shift to a more expansionary monetary policy
171. In the situation shown in Figure 14-6, how could the Fed return the economy to potential output?
a.
decrease government spending
b.
decrease taxes
c.
sell U.S. government bonds to banks
d.
lower the discount rate
e.
lower the required reserve ratio
Figure 14-7
172. In Figure 14-7, short-run equilibrium occurs
a.
at point a.
b.
at point b.
c.
at point c, where the actual price level exceeds the expected price level.
d.
at point c, where the actual price level is less than the expected price level.
Figure 14-8
173. Refer to Figure 14-8. There is excess money demand at an interest rate of
a.
2 percent.
b.
3 percent.
c.
4 percent.
d.
None of the above is correct.
174. Refer to Figure 14-8. At an interest rate of 4 percent there is excess
a.
money demand equal to the distance between a and b.
b.
money demand equal to the distance between b and c.
c.
money supply equal to the distance between b and a.
d.
money supply equal to the distance between c and b.
175. The cost of holding money balances increases when
a.
the purchasing power of money rises.
b.
the money interest rate increases.
c.
the price of goods and services falls.
d.
consumer income expands.
176. In 2008, nominal GDP was equal to $14,265 billion while the M1 money supply was $1,423 billion.
What was the velocity of the M1 money stock?
a.
1.0
b.
10.0
c.
1.8
d.
0.1
177. When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand
because
a.
lower interest rates will stimulate business investment and consumer purchases.
b.
real interest rates will fall, causing the dollar to depreciate and net exports to rise.
c.
lower interest rates will cause the value of assets (for example, stocks) to rise.
d.
all of the above are correct.
178. When the Fed unexpectedly decreases the money supply,
a.
real interest rates will rise and the foreign exchange value of the dollar will appreciate.
b.
real interest rates will rise and the foreign exchange value of the dollar will depreciate.
c.
real interest rates will fall and the foreign exchange value of the dollar will appreciate.
d.
real interest rates will fall and the foreign exchange value of the dollar will depreciate.
179. Cross-country figures indicate that
a.
countries with high rates of monetary growth also experience high inflation.
b.
countries with high rates of monetary growth experience low inflation.
c.
monetary growth rates and inflation are unrelated.
d.
inflation is primarily the result of restrictive monetary policy.
180. Which of the following interest rates will be least affected by a shift in monetary policy that alters the
money supply?
a.
a three-month certificate of deposit
b.
interest on checking accounts
c.
a one-year bank loan
d.
a thirty-year home mortgage
181. If the Federal Reserve unexpectedly increases the money supply, which of the following will most
likely happen in the short run?
a.
real GDP will rise.
b.
real GDP will fall.
c.
real interest rates will rise.
d.
the budget deficit will rise.
182. An expansionary monetary policy is most likely to increase real output
a.
when the economy is operating at less than full-employment capacity.
b.
when the economy is at full employment.
c.
when actual output is beyond the economy’s long-run capacity.
d.
when the inflationary side effects are fully anticipated by decision makers.
183. Which economist made the following statement: “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.”
a.
Milton Friedman
b.
John Maynard Keynes
c.
Adam Smith
d.
Paul Samuelson
184. A study of countries with high inflation rates indicates that the inflation is generally
a.
caused by strong labor unions.
b.
the result of restrictive macroeconomic policy, which pushes up interest rates.
c.
caused by supply shocks.
d.
the result of rapid growth in the money supply.
185. The coefficient that represents the average number of times a dollar is used to buy goods and services
is called
a.
the demand for money.
b.
the quantity theory of money.
c.
the price level.
d.
the velocity of money.
186. Continuous rapid growth of the money supply relative to the growth of real output will most likely
lead to
a.
persistent inflation.
b.
low nominal interest rates.
c.
high rates of real economic growth.
d.
low unemployment.
187. Since the mid-1980s, if the Fed wanted to shift to a more expansionary monetary policy, it would
a.
expand the reserves available to the banking system, which would drive down short-term
interest rates.
b.
reduce the reserves available to the banking system, which would drive down short-term
interest rates.
c.
expand the reserves available to the banking system, which would drive up short-term
interest rates.
d.
reduce the reserves available to the banking system, which would drive up short-term
interest rates.
188. If the actual federal funds rate is substantially above the appropriate rate implied by the Taylor rule,
this indicates that
a.
monetary policy is overly expansionary and a shift toward a more restrictive policy would
be appropriate.
b.
monetary policy is too restrictive and a shift to a more expansionary policy would be
appropriate.
c.
monetary policy is unable to influence interest rates, and therefore it is unable to influence
either output or prices.
d.
current monetary policy is on target and no policy shifts should be made.
189. The low interest rate policies of the Federal Reserve during 2002-2004,
a.
indicated that monetary policy was highly restrictive.
b.
increased the demand for housing, placing upward pressure on housing prices.
c.
made home mortgages less attractive, weakening the demand for housing.
d.
was on target with the federal funds rate proscribed by the Taylor rule.
ESSAY
190. Why do individuals choose to hold part of their wealth in money rather than in other types of assets?
Discuss the benefits and costs of holding money.
191. Answer the following questions:
a.
What is the equation of exchange? Explain each component.
b.
What assumptions are placed on the equation of exchange to generate the quantity theory of
money?
c.
Explain the quantity theory of money and what it implies about the impact of changes in the
money supply on real output and prices.
equals nominal GDP.
of money in circulation. In this framework, changes in the money supply cause a proportional
change in prices and do not affect real output.
192. Discuss the following views concerning the impact of monetary policy:
a.
classicals
b.
Keynesians
c.
monetarists
d.
“modern view”
(and its effects unpredictable) during a recession because of changes in the velocity of money.
193. Indicate how changes in monetary policy are transmitted to the goods and services market? Discuss for
the case of an expansion in the money supply.
194. Beginning from full-employment equilibrium, illustrate graphically how each of the following would
impact the economy.
a.
the short-run impact of an unanticipated decrease in the money supply
b.
the long-run impact of an unanticipated decrease in the money supply
ANS:
195. Write out the equation of exchange. What assumptions did the classical economists make about the
variables that compose the equation, and what did this lead them to conclude about money and prices?
196. According to the monetarists, what is the primary cause of a recession? Explain the steps by which
reductions in the money supply lead to reductions in real output.