a.
large budget deficits.
b.
high taxes.
c.
rapid expansion of the money supply.
d.
government expenditures that are large relative to the size of the economy.
98. In the long run, the primary effect of rapid monetary growth is
a.
lower nominal interest rates.
b.
reduced unemployment.
c.
inflation.
d.
an increase in real output.
99. If the monetary authorities persistently expand the money supply at a rapid rate, the probable result
will be
a.
inflation.
b.
high nominal interest rates.
c.
rapid growth of real GDP.
d.
both a and b.
100. Equilibrium in the loanable funds market is initially present at a stable price level (zero inflation) and a
nominal (and real) interest rate of 4 percent. If a shift to expansionary monetary policy eventually
leads to actual and expected inflation of 6 percent,
a.
both the nominal and real interest rates will rise to 10 percent.
b.
the nominal interest rate will rise to 10 percent, but the real interest rate will remain at 4
percent.
c.
the real interest rate will rise to 10 percent, but the nominal interest rate will remain at 4
percent.
d.
both the real and nominal interest rates will remain at 4 percent.
101. An analysis of countries experiencing rapid inflation indicates that inflation is generally
a.
caused by strong labor unions.
b.
the result of restrictive macroeconomic policy, which pushes up interest rates.
c.
caused by the impulse buying of consumers, who continue to buy the same goods even
when prices rise.
d.
the result of rapid growth in the money supply.
102. An analysis of countries experiencing rapid inflation indicates that inflation is generally
a.
caused by strong labor unions that push wages up rapidly.
b.
caused by rapid growth in the money supply.
c.
the result of restrictive macroeconomic policy, which pushes up interest rates.
d.
the result of bad weather conditions that reduce the supply of agriculture products.
103. When continued for several years, rapid growth in the money supply relative to the growth of real
output will likely lead to an extended period of
a.
low unemployment.
b.
high inflation.
c.
low nominal interest rates.
d.
high rates of real economic growth.
104. Countries that persistently expand the supply of money at a rapid rate can expect to experience
a.
high rates of inflation
b.
rapid economic growth.
c.
lower interest rates.
d.
low rates of unemployment.
105. Comparisons of the link between the growth of the money supply and inflation 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.
106. If the U.S. government decided to pay off the national debt by creating money, what would be the
most likely effect?
a.
a substantial reduction in real GDP
b.
a deflationary collapse
c.
rapid inflation
d.
an increase in the trade surplus
107. Expansionary monetary policy will
a.
often raise real interest rates in the short run.
b.
generally reduce aggregate demand in the short run.
c.
lead to higher nominal interest rates if the expansionary policy persists over a lengthy time
period.
d.
lead to a rapid growth of real GDP if the expansionary policy persists over a lengthy time
period.
108. Large or persistent inflation is almost always caused by
a.
excessive government spending.
b.
excessive growth in the quantity of money.
c.
foreign competition.
d.
higher-than-normal levels of productivity.
109. Low rates of inflation are generally associated with
a.
low rates of government spending.
b.
small or nonexistent government budget deficits.
c.
low rates of productivity growth.
d.
low rates of growth of the quantity of money.
110. Suppose the economy is in long-run equilibrium at the level of potential output. What will be the
long-run effect of an expansionary monetary policy?
a.
a higher price level
b.
a higher level of real output
c.
both a higher price level and a higher level of real output
d.
a lower price level
e.
a lower level of real output
111. In the long run, changes in the money supply affect only the price level because
a.
the aggregate demand curve is vertical.
b.
the aggregate demand curve is downward sloping.
c.
the long-run aggregate supply curve is vertical.
d.
the long-run aggregate supply curve is upward sloping.
e.
current real GDP is less than the economy’s potential GDP.
112. According to modern analysis, what is the link between the long-run growth rate of the money supply
and inflation?
a.
there is little correlation between money growth and inflation
b.
there is a positive link between money growth and inflation, contrary to the quantity theory
of money
c.
there is a strong, positive link between rapid money growth and inflation
d.
there is an inverse relationship between rapid money growth and inflation
113. An unexpected shift to a more expansionary monetary policy will generally
a.
stimulate aggregate demand and real output as soon as the policy is instituted.
b.
exert its primary impact on aggregate demand and real output 6 to 15 months in the future.
c.
cause inflation in the short run, but expand real output in the long run.
d.
increase real interest rates in the short run.
114. If the Fed shifts to a more restrictive monetary policy in order to help control inflation, the policy shift
will generally
a.
stimulate aggregate demand and real output as soon as the policy is instituted.
b.
reduce aggregate demand immediately and quickly bring the inflation under control.
c.
reduce aggregate demand and help bring the inflation under control, but the primary
effects may not be felt for several months (or quarters).
d.
lower real interest rates in the short run, but in the long run, real interest rates will rise.
115. Monetarists reject using discretionary monetary policy as an effective stabilization tool because
a.
it would require the money supply to grow at a rate equal to the economy’s long-run rate
of economic growth.
b.
they do not believe that changes in the money stock affect output or prices.
c.
they believe that there are lengthy and variable time lags between when a change in
monetary policy is instituted and when the change exerts its primary impact on output and
prices.
d.
they believe monetary policy can stimulate aggregate demand, but it cannot control
inflation.
116. A shift to a more expansionary monetary policy will have its greatest effect on
a.
the interest rate on a 30-year fixed-rate mortgage.
b.
the interest rate on 10-year government bonds.
c.
short-term interest rates.
d.
the 15-year corporate bond interest rate.
117. When the Fed increases the money supply by buying Treasury securities, it will
a.
decrease short-term interest rates to a greater degree than long-term interest rates.
b.
decrease long-term interest rates to a greater degree than short-term interest rates.
c.
increase short-term interest rates to a greater degree than long-term interest rates.
d.
increase long-term interest rates to a greater degree than short-term interest rates.
118. When the Fed sells bonds and drains reserves from the banking system, thereby reducing the supply of
money, this policy will
a.
decrease short-term interest rates to a greater degree than long-term interest rates.
b.
decrease long-term interest rates to a greater degree than short-term interest rates.
c.
increase short-term interest rates to a greater degree than long-term interest rates.
d.
increase long-term interest rates to a greater degree than short-term interest rates.
119. Which of the following is true?
a.
Monetary policy influences long-term real interest rates more than short-term interest
rates.
b.
Short-term interest rates are primarily determined by real factors and the expected
inflation.
c.
A shift to a more expansionary monetary policy will tend to raise short-term interest rates.
d.
A shift to expansionary monetary policy that increases the fear of future inflation will tend
to increase long-term interest rates.
120. Which of the following is true?
a.
Monetary policy influences long-term real interest rates more than short-term interest
rates.
b.
Short-term interest rates are primarily determined by real factors and the expected
inflation.
c.
A shift to a more expansionary monetary policy will tend to reduce short-term interest
rates.
d.
A shift to a more expansionary monetary policy will tend to reduce the expected rate of
inflation in the future.
121. When an expansionary monetary policy leads to an acceleration in the rate of inflation, it will also
result in
a.
lower nominal interest rates.
b.
higher nominal interest rates.
c.
an appreciation of the dollar in the foreign exchange market.
d.
lower money wages.
122. When the Fed conducts expansionary monetary policy, lower short-term interest rates will tend to
stimulate the economy. How will the change in the velocity of money affect this result?
a.
Velocity will decline, enhancing the stimulus effect.
b.
Velocity will increase, somewhat dampening the stimulus effect.
c.
Velocity will increase, enhancing the stimulus effect.
d.
Velocity will decline, somewhat dampening the stimulus effect.
123. When the Fed purchases more bonds and, thereby, increases the money supply, the initial effects of the
more expansionary monetary policy will often be weakened as a result of
a.
lower nominal interest rates and a decline in the velocity of money.
b.
higher nominal interest rates and a decline in the velocity of money.
c.
higher nominal interest rates and an increase in the velocity of money.
d.
lower real interest rates and an increase in the velocity of money.
124. Since the mid-1980s, the primary indicator of monetary policy has been
a.
movement of short-term interest rates.
b.
the growth rate of real government expenditures.
c.
the growth of the M1 money supply.
d.
changes in the nominal (dollar) size of budget deficits or surpluses.
125. Since 1980, changes in the nature of both the M1 and M2 money supply have
a.
increased their reliability as indicators of monetary policy.
b.
decreased their reliability as indicators of monetary policy.
c.
had no effect on their reliability as indicators of monetary policy.
d.
decreased their reliability as indicators of fiscal policy.
126. If changes in monetary policy are going to help stabilize the economy, they must
a.
be expansionary.
b.
be restrictive.
c.
reduce the real rate of interest.
d.
be properly timed.
e.
stimulate aggregate demand.
127. If the Fed wanted to shift to a more restrictive 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.
128. Shifts in monetary policy will
a.
stimulate output and employment almost immediately, and this will make it easier for
policy-makers to change monetary policy in a manner that will promote macroeconomic
stability.
b.
stimulate output and employment almost immediately, and this will make it more difficult
for policy-makers to change monetary policy in a manner that will promote
macroeconomic stability.
c.
stimulate output and employment with time lags that are long and variable and this will
make it easier for policy-makers to change monetary policy in a manner that will promote
macroeconomic stability.
d.
stimulate output and employment with time lags that are long and variable and this will
make it more difficult for policy-makers to change monetary policy in a manner that will
promote macroeconomic stability.
129. When the Fed purchases additional securities and shifts to a more expansionary monetary policy,
a.
the inflation rate will rise almost immediately.
b.
the growth of output and employment will increase quickly.
c.
several months will typically pass before the shift in policy exerts much impact on output
and employment.
d.
this policy will eventually lead to a decline in the general level of prices if it is continued
for a prolonged period of time.
130. A shift to a more expansionary monetary policy will
a.
increase the long-term growth rate of the economy.
b.
reduce the future rate of inflation.
c.
Stimulate output and employment almost immediately.
d.
Stimulate output and employment, but only after a time lag that is generally long and
variable.
131. A shift to a more expansionary monetary policy will generally _________ in the short run, but if
the rapid monetary expansion persists, the long-run result will be ______.(fill in the blanks.)
a.
expand output and employment; inflation
b.
increase the general level of prices; expand output and employment
c.
increase the rate of unemployment; reduce the rate of inflation
d.
reduce the rate of inflation; increase the rate of unemployment
132. According to the Austrian view of the business cycle, if expansionary monetary policy pushes the
interest rate to an artificially low level, the result will be
a.
a long-term increase in output and employment.
b.
malinvestment and an unsustainable economic boom, followed by a recession.
c.
an increase in demand stimulus, that will expand employment and lead to a rapid increase
in long-term economic growth.
d.
a temporary increase in the inflation rate, followed by a sustainable expansion in output
and employment.
133. According to the Austrian view of the business cycle, expansionary monetary policy that pushes the
interest rate to an artificially low level will
a.
lead to an increase in long-term investments like houses and office buildings without
generating the savings that will be required for their purchase in the future.
b.
lead to a reduction in long-term investments like houses and office buildings that will
quickly throw the economy into a recession.
c.
lead to an increase in long-term investments like houses and office buildings that will
enhance the long-term growth of the economy.
d.
lead to a reduction in investment, but there will be no impact on output, employment or
the general level of prices.
134. The Fed pushed interest rates to artificially low levels during 2002-2004. The Austrian view predicts
that this policy will lead to
a.
excessive investment in long-lasting assets like housing that will eventually prove to be
unprofitable and result in recession.
b.
an increase in sound investments that will propel future economic growth.
c.
a reduction in the general level of prices that will throw the economy into a recession.
d.
an increase in aggregate demand that will generate sustainable expansion in both real
output and employment.
135. When expansionary monetary policy pushes real interest rates to an artificial low, the Austrian view of
the business cycle predicts this will lead to
a.
an increase in aggregate demand and a lengthy expansion in real output.
b.
a recession, followed by a strong and lengthy expansion in real output.
c.
malinvestment during an economic boom, followed by a recession.
d.
malinvestment during a temporary recession, followed by a strong and lengthy
economic boom.
136. The Austrian view of the business cycle stresses that
a.
expansionary monetary policy will stimulate aggregate demand and thereby promote
lengthy economic expansions.
b.
the velocity of money is constant and therefore an increase in the quantity of money will
lead only to a proportional increase in the general level of prices.
c.
expansionary monetary policy will lead to higher interest rates that will retard investment
and throw the economy into a recession.
d.
the interest rate is one of the most important prices and manipulation of the interest rate by
monetary policy-makers is a major source of economic instability.
137. Which of the following contributed to the dramatic rise in housing prices between 2002 and mid-year
2006?
a.
government policy made credit for housing abundant and easily available
b.
the Fed’s restrictive monetary policy, which led to high interest rates
c.
the tightening of loan standards by commercial lenders
d.
the large amounts of reserves and equity capital being held by financial institutions in
order to back new mortgages
138. Which of the following is true of home mortgage loans since the late 1990s?
a.
Government regulations required homebuyers to make larger down payments in order to
obtain a mortgage.
b.
Traditional fixed-rate, long-term mortgages grew in popularity.
c.
There was a substantial increase in the volume of mortgage loans extended with little or no
down payment.
d.
High interest rates made it less attractive to lock in to a fixed-rate, long-term loan.
139. Which of the following contributed to the strong auto sales and soaring housing prices during
2002-2004?
a.
the Fed’s high-interest rate policy during the period
b.
the tightening of loan standards by commercial lenders
c.
the increasing popularity of fixed-rate, long-term loans to lock in low interest rates
d.
the Fed’s low-interest rate policy during the period
140. Which of the following contributed to the financial crisis of 2008?
a.
the housing price boom (2002-2005), followed by a housing price bust (2007-2008)
b.
a sharp reduction in stock prices in 2008
c.
a sharp increase in the price of crude oil from January 2007 to mid-year 2008
d.
all of the above
141. Which of the following was true of the actions of the Federal Reserve in response to the recession of
2008?
a.
The Fed shifted toward a highly restrictive monetary policy in 2008, which was a major
cause of the recession.
b.
The Fed continued to focus only on price stability and therefore it expanded the money
supply at a slow and steady rate throughout the recession.
c.
The Fed introduced several new procedures for the conduct of monetary policy and
substantially increased bank reserves as the recession worsened.
d.
The Fed continued to purchase and sell only U.S. Treasury bonds when conducting open
market operations to control the money supply.
142. As the Fed increased the volume of loans to financial institutions in response to the 2008 financial
crisis, this resulted in
a.
a vast increase in the monetary base and the excess reserves of the commercial banking
system.
b.
a substantial increase in short term interest rates.
c.
a sharp decrease in the monetary base and a contraction in the excess reserves of the
commercial banking system.
d.
an increase in the volume of loans extended by commercial banks and a sharp increase in
the inflation rate.
143. The sharp increase in the excess reserves held by the commercial banking system since the second half
of 2008 increases the potential for
a.
a sharp contraction in the money supply, which is likely to increase the length and severity
of the recession.
b.
a rapid increase in the money supply, potentially leading to inflation.
c.
a gradual increase in the money supply, following the trend of the previous decade.
d.
a reduction in the ability of banks to extend additional loans.
144. During 2008-2013, the Fed initiated several rounds of “quantitative easing.” Under this policy, the
Fed
a.
increased its purchases of financial assets and thereby injected additional reserves into the
banking system.
b.
increased its purchases of financial assets, which reduced the reserves available to the
banking system.
c.
reduced its purchases of financial assets and thereby injected additional reserves into the
banking system.
d.
reduced its purchases of financial assets and thereby reduced the quantity of reserves
available to the banking system.
145. The “quantitative easing” policies of the Fed during, and following, the financial crisis of 2008-2009,
a.
expanded the reserves available to the banking system, leading to a rapid increase in the
M1 money supply as banks used the reserves to extend additional loans.
b.
reduced the reserves available to the banking system, leading to a sharp reduction in
outstanding loans and a decline in the M1 money supply.
c.
expanded the reserves available to the banking system, but the M1 money supply
increased slowly because the banks enlarged their excess reserves.
d.
reduced the reserves available to the banking system, leading to a substantial increase in
outstanding loans and the M1 money supply.
146. The “quantitative easing” policies of the Fed during, and following, the financial crisis of 2008-2009,
resulted in
a.
rapid growth of both the money supply and nominal GDP.
b.
rapid growth of the money supply and a substantial increase in the rate of inflation.
c.
low interest rates and a sharp decline in the velocity of the money supply.
d.
low interest rates and a sharp increase in the velocity of the money supply.
147. When expansionary monetary policy pushes interest rates downward to a low level,
a.
the velocity of money will decline, which will weaken the expansionary impact on
demand and nominal GDP.
b.
the velocity of money will increase, which will strengthen the expansionary impact on
demand and nominal GDP.
c.
the prices of stocks and other real assets can be expected to fall, which will weaken the
impact of the expansionary policy on demand and nominal GDP.
d.
the earnings derived from savings accounts will increase, which will stimulate demand and
nominal GDP.
148. Which of the following reduced the demand stimulus effects of the Fed’s low interest rate policy
pursued during, and after, the financial crisis of 2008-2009?
a.
Declining stock prices during 2010-2012.
b.
An increase in the velocity of money.
c.
A reduction in earnings derived from money market accounts, saving deposits, and similar
saving instruments.
d.
A sharp increase in the rate of inflation during 2009-2012.
149. Which of the following reduced the demand stimulus effects of the Fed’s low interest rate policy
pursued during, and after, the financial crisis of 2008-2009?
a.
Declining stock prices during 2010-2012.
b.
A reduction in the velocity of money.
c.
An increase in earnings derived from money market accounts, saving deposits, and similar
saving instruments.
d.
A sharp increase in the rate of inflation during 2009-2012.
150. As the Fed maintained interest rates at near zero during 2008-2012,
a.
the economy recovered and the unemployment rate fell to normal levels.
b.
households and businesses held larger money balances and the velocity of money fell
substantially.
c.
stock prices declined during 2010-2012, causing the economy to remain weak.
d.
the earnings senior citizens derived from saving deposits and other forms of savings rose
substantially, leading to higher incomes and a strong increase in aggregate demand.
151. Why didn’t the Fed’s quantitative easing policies exert a stronger impact on aggregate demand and
lead to a more rapid recovery during 2010-2012?
a.
The low interest rates accompanying the policy failed to increase stock prices.
b.
Even though the Fed made additional reserves available to the banking system, the policy
did not result in lower interest rates.
c.
The velocity of money increased, partially offsetting the impact of the Fed’s low interest
rate policy.
d.
The earnings of senior citizens and others from money market accounts, saving deposits,
and other forms of savings fell, reducing their incentive to spend and thereby increasing
aggregate demand.
152. Which of the following is inconsistent with the view that Fed monetary policy was excessively
expansionary during 2010-2013?
a.
Short-term interest rates that were near zero throughout these years.
b.
A rapid increase in the monetary base throughout these years.
c.
A tripling of Fed asset holdings from less than $1 trillion in 2008 to approximately $3
trillion in 2012.
d.
Growth of nominal GDP during 2010-2012 at a rate similar to that of recent decades.
153. Which of the following weakened the demand stimulus effects of the fed’s low interest rate policy
during the years following the 2008-2009 recession?
a.
Rising stock prices in response to the low-interest rate policy.
b.
The lower cost of borrowing to undertake business investment.
c.
An increase in the velocity of money.
d.
A reduction in earnings of senior citizens and others from money market accounts, saving
deposits, and similar forms of savings.
154. Which of the following is true?
a.
If the Fed wants to increase the money supply, it should increase the interest rate it pays
banks on their excess reserves.
b.
When the Fed reduces the interest rate paid on excess reserves, it increases the incentive of
commercial banks to hold excess reserves.
c.
If the Fed wants to reduce the future growth rate of the money supply, it could do so by
increasing the interest rate it pays banks on excess reserves.
d.
When the Fed increases the interest rate it pays on excess reserves, this encourages banks
to extend more loans and thereby increase the money supply.
155. During the second half of 2008 the monetary base was growing far more rapidly than the money
supply because
a.
banks were using most of their excess reserves to extend loans and make investments.
b.
the Fed quickly shifted from expansionary monetary policy to restrictive monetary policy.
c.
banks were using their excess reserves to make foreign investments.
d.
banks were maintaining huge excess reserves.
156. As the Fed shifted to a highly expansionary monetary policy during the second half of 2008, why were
banks reluctant to extend loans and make investments?
a.
Banks did not have enough excess reserves to extend loans and make investments.
b.
The demand for loans was weak and the business climate was uncertain.
c.
The rate of return on short-term investments was high, so banks were reluctant to make
long-term investments.
d.
The interest rate that the Fed pays on excess reserves was maintained at a high rate.
157. Why will it difficult for the Fed to use monetary policy to direct the economy back to full employment
and price stability from the recession of 2008-2009?
a.
The Fed does not have the tools needed to alter the supply of money.
b.
Monetary policy is unable to alter short-term interest rates.
c.
The time lags between changes in monetary policy and when the changes exert an impact
on output and prices are long and variable.
d.
It takes the Fed a long time to change the direction of monetary policy.
158. Which of the following would be most indicative of a shift to a more expansionary 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