Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Page 1
1.
The Federal Reserve can influence financial crises because it:
A)
determines tax rates.
B)
determines government spending.
C)
conducts monetary policy.
D)
is responsive to the people who elected its members to office.
2.
Janet Yellen is:
A)
chair of the Board of Governors of the Federal Reserve System.
B)
an AIG executive who received large bonuses.
C)
a Supreme Court justice who ruled that budget deficits are unconstitutional.
D)
a financial adviser on CNBC.
3.
In 2014, Ben Bernanke was succeeded as chair of the Board of Governors of the Federal
Reserve by:
A)
Janet Yellen.
B)
Paul Ryan.
C)
Joe Biden.
D)
Nancy Pelosi.
4.
The chair of the Board of Governors during the 2008 financial crisis was:
A)
Barack Obama.
B)
Ben Bernanke.
C)
J. P. Morgan.
D)
John McCain.
5.
Generally, the more liquid an asset is, the:
A)
lower its purchasing power.
B)
lower its rate of return.
C)
higher its capacity to store value over time.
D)
higher its rate of return.
6.
The short-term interest rate applies to financial assets that mature within:
A)
less than a year.
B)
a year or more.
C)
2 years.
D)
5 years.
Page 2
7.
If during 2007 the interest rate on one-month Treasury bills was 2.5% and during 2008
it was 2%, the opportunity cost of holding money:
A)
decreased.
B)
became negative.
C)
increased.
D)
did not change.
8.
If a checking account has an interest rate of 1% and a Treasury bill has an interest rate
of 3%, the opportunity cost of holding cash in a checking account is:
A)
zero.
B)
0.02%.
C)
1%.
D)
2%.
9.
People forgo interest and hold money:
A)
because they are required to.
B)
to reduce their transaction costs.
C)
because there are no substitutes for money.
D)
because banks are too risky.
10.
If a checking account has an interest rate of 1% and a Treasury bill has an interest rate
of 2%, the opportunity cost of holding the checking account as money is:
A)
zero.
B)
0.02%.
C)
1%.
D)
2%.
11.
The opportunity cost of holding money is:
A)
zero.
B)
the interest rate when someone uses a credit card.
C)
the difference between interest rates on monetary assets and on nonmonetary
assets.
D)
the discount rate.
12.
We hold money to:
A)
earn interest.
B)
reduce transaction costs.
C)
increase transaction costs
D)
protect our purchasing power.
Page 3
13.
Short-term interest rates apply to financial assets due within:
A)
24 hours.
B)
three months.
C)
six months.
D)
one year.
14.
The interest earnings one gives up to hold more liquid assets are:
A)
an opportunity cost.
B)
a transaction cost.
C)
an asset of the company.
D)
a liability of the company.
15.
An individual who decides to hold money instead of other assets:
A)
is giving up the interest that other assets could have earned.
B)
is likely to be subject to money illusion.
C)
is not affected by unanticipated inflation.
D)
can maintain a higher standard of living.
16.
When the short-term interest rate _____, the opportunity cost of holding money _____,
and the quantity of money individuals want to hold _____.
A)
falls; falls; falls
B)
falls; falls; rises
C)
rises; falls; falls
D)
rises; falls; rises
17.
In a graph of a money demand curve, _____ is plotted on the vertical axis.
A)
the interest rate on liquid assets such as short-term CDs
B)
the interest rate on 30-year Treasury bills
C)
the rate of inflation
D)
the rate of return in the stock market
18.
The money demand curve shows the relationship between the _____ and the _____ of
money demanded.
A)
money supply; quantity
B)
aggregate price level; nominal quantity
C)
interest rate; nominal quantity
D)
real GDP; nominal quantity
Page 4
19.
The money demand curve is _____ because the opportunity cost of holding money is
_____ related to the interest rate.
A)
downward-sloping; inversely
B)
downward-sloping; directly
C)
upward-sloping; inversely
D)
upward-sloping; directly
20.
The amount of money that people demand is:
A)
positively related to the interest rate.
B)
independent the interest rate.
C)
negatively related to the interest rate.
D)
positively or negatively related to the interest rate depending on the state of the
economy.
21.
The money demand curve is _____ because a lower interest rate _____ the opportunity
cost of holding money.
A)
upward-sloping; increases
B)
downward-sloping; increases
C)
upward-sloping; decreases
D)
downward-sloping; decreases
22.
The slope of the demand curve for money is:
A)
vertical.
B)
horizontal.
C)
positive.
D)
negative.
23.
A decrease in the demand for money would result from:
A)
an increase in income.
B)
a decrease in real GDP.
C)
an increase in the price level.
D)
an increase in nominal GDP.
24.
A decrease in the demand for money would result from:
A)
an increase in income.
B)
an increase in real GDP.
C)
a decrease in the price level.
D)
an increase in nominal GDP.
Page 5
25.
An increase in the demand for money would result from a(n):
A)
decrease in nominal GDP.
B)
decrease in real GDP.
C)
decrease in the price level.
D)
increase in the price level.
26.
An increase in the aggregate price level _____ the demand for money.
A)
increases
B)
decreases
C)
does not affect
D)
left-shifts
27.
A 20% increase in the aggregate price level will increase the quantity of money
demanded by:
A)
20%.
B)
the money multiplier.
C)
10%.
D)
half of the money multiplier.
28.
An increase in interest rates causes the demand for money to:
A)
increase.
B)
decrease.
C)
stay the same.
D)
shift to the right.
29.
U.S. banks did not offer interest on checking accounts until the beginning of the 1980s.
As a result, before the early 1980s:
A)
the opportunity costs of keeping funds in checking accounts was zero.
B)
the opportunity costs of keeping funds in checking accounts was lower.
C)
the opportunity costs of keeping funds in checking accounts was higher.
D)
people kept money under their mattress.
30.
If inflation increases from 2% to 5%, the money demand curve will:
A)
remain constant.
B)
remain constant, but the quantity of money demanded will decrease.
C)
shift to the left.
D)
shift to the right.
Page 6
31.
If Congress imposes a $5 tax on each ATM transaction, the demand for money will
likely:
A)
increase.
B)
decrease.
C)
fluctuate randomly.
D)
be unaffected.
32.
If Congress places a $5 tax on each ATM transaction, there will likely be:
A)
a movement up a stationary money demand curve.
B)
a movement down a stationary money demand curve.
C)
a shift to the left of the money demand curve.
D)
a shift to the right of the money demand curve.
33.
A 30% increase in the aggregate price level will:
A)
increase money demand by 30%.
B)
increase money demand by the money multiplier.
C)
decrease money demand by 30%.
D)
not affect the demand for money.
34.
An increase in real aggregate spending will shift the money:
A)
demand curve rightward.
B)
demand curve leftward.
C)
supply curve rightward.
D)
supply curve leftward.
35.
Improvements in information technology have:
A)
shifted the demand for cash to the right.
B)
decreased the demand for money.
C)
not affected the demand for money.
D)
increased the demand for money.
36.
The fact that many stores in the United States have found it economical to accept credit
cards has:
A)
increased the demand for money.
B)
decreased the demand for money.
C)
increased the demand for credit card transactions but has not affected the demand
for money.
D)
decreased the demand for credit card transactions but has not affected the demand
for money.
Page 7
37.
The introduction of ATMs:
A)
increased the demand for cash because it made cash easier to get.
B)
decreased the demand for cash because it reduced the cost of moving from other
assets into cash.
C)
did not change the demand for cash because it is proportional to the price level.
D)
did not change the demand for cash, as ATMs do not affect public spending habits.
38.
Which one of the following events will NOT decrease the demand for money?
A)
an increase in the aggregate price level
B)
the advent of ATMs
C)
the ability of the stores to process credit cards
D)
a fall in real GDP
39.
Now that fast food places such as McDonald's are accepting credit card payments, the:
A)
demand for money has increased.
B)
demand for money has decreased.
C)
demand for money has not been affected.
D)
supply of money has increased, as some cash is unused.
40.
U.S. banks did not offer interest on checking accounts until the beginning of the 1980s.
Then banking regulations changed, allowing banks to pay interest on checking account
funds. As a result, the _____ money _____ and shifted the money demand curve to the
_____.
A)
supply of; fell; left
B)
demand for; fell; left
C)
demand for; rose; right
D)
supply of; rose; right
41.
If the aggregate price level doubles:
A)
the money supply will also double.
B)
neither money demand nor the money supply will rise.
C)
both money demand and the money supply will rise proportionally.
D)
money demand at any given interest rate will also double.
42.
Suppose a typical basket of goods is now more expensive than it used to be. All else
equal, we would expect:
A)
the demand for money to shift inward.
B)
a downward movement along a fixed money demand curve.
C)
the demand for money to shift outward.
D)
an upward movement along a fixed money demand curve.
Page 8
43.
Suppose that the economy enters a recession and real GDP falls. All else equal, we
would expect:
A)
the money demand curve to shift inward.
B)
the money demand curve to shift outward.
C)
a downward movement along a fixed money demand curve.
D)
an upward movement along a fixed money demand curve.
44.
Every year more and more purchases are made with credit cards on the Internet. Given
this trend, all else equal, we would expect:
A)
the money demand curve to shift outward.
B)
the money demand curve to shift inward.
C)
a downward movement along a fixed money demand curve.
D)
an upward movement along a fixed money demand curve.
45.
The demand for money is higher in Japan than in the United States because:
A)
Japanese banks pay interest on checking accounts.
B)
most stores in Japan do not accept credit cards.
C)
the ATMs are open all night.
D)
the average price level is lower in Japan.
46.
The demand for money is higher in Japan than in the United States because:
A)
telecommunications and information technology is more advanced in the United
States than in Japan.
B)
Japanese consumers use credit cards more than people in the United States.
C)
Japanese interest rates are higher than those in the United States.
D)
Japanese interest rates are lower than those in the United States.
47.
Which of the following is NOT one of the reasons that the Japanese tend to keep large
amounts of cash?
A)
Banks have invested heavily in credit card technology.
B)
Japan has a low crime rate.
C)
Interest rates in Japan have been below 1% since the 1990s.
D)
Japan's retail sector is dominated by mom-and-pop stores that don't accept credit
cards.
Page 9
48.
A high demand for money (as in Japan) would result from:
A)
a decrease in nominal GDP and a high crime rate.
B)
a decrease in real GDP and a preference from businesses to accept only debit cards.
C)
a decrease in the price level.
D)
low crime rates and widespread lack of capacity to accept noncash payments.
49.
If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money
will _____ and the quantity demanded of money will _____.
A)
increase; decrease
B)
increase; increase
C)
decrease; increase
D)
decrease; decrease
50.
The quantity demanded of money is negatively related to _____, and the demand for
money is positively related to _____.
A)
the interest rate; real GDP
B)
the interest rate; unemployment
C)
real GDP; the interest rate
D)
real GDP; the money supply
51.
A change in _____ does NOT shift the money demand curve.
A)
the interest rate
B)
the price level
C)
banking technology
D)
real GDP
52.
The demand curve for money will shift to the right because of a:
A)
fall in the interest rate.
B)
rise in real GDP.
C)
rise in the interest rate.
D)
fall in real GDP.
53.
Among the factors that could cause money demand to shift are all of the following
EXCEPT:
A)
real aggregate spending.
B)
institutional constraints in the banking system.
C)
technology of transactions.
D)
interest rates.
Page 10
54.
All of the following factors will shift the money demand curve EXCEPT:
A)
changes in inflation.
B)
changes in the real GDP.
C)
changes in the aggregate price level.
D)
changes in the interest rate.
55.
The federal funds rate is the interest rate on _____, and it is controlled by the _____.
A)
loans from the Federal Reserve to banks; Federal Open Market Committee
B)
reserves that banks lend to each other; Federal Open Market Committee
C)
loans from the Federal Reserve to banks; president and Congress
D)
reserves that banks lend to each other; president and Congress
56.
If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%,
money demanded is _____ than money supplied.
A)
less than
B)
greater than
C)
equal to
D)
It is impossible to predict which is greater, money demanded or money supplied.
57.
In the liquidity preference model, the money supply is represented by:
A)
a vertical line.
B)
an upward-sloping curve with a slope of 1 / V.
C)
a horizontal line.
D)
a downward-sloping curve with a slope of 1 / k.
58.
According to the liquidity preference model, if the interest rate rises above its
equilibrium value, the quantity demanded of nonmonetary interest-bearing financial
assets _____, and this leads to a _____ in the interest rate.
A)
decreases; rise
B)
increases; fall
C)
decreases; fall
D)
increases; rise
59.
If the demand for money is $100 billion and the supply of money is $200 billion, then
the interest rate will:
A)
fall.
B)
rise.
C)
remain unchanged.
D)
be in equilibrium.
Page 11
60.
If the demand for money is $300 billion and the supply of money is $200 billion, then
the interest rate will:
A)
fall.
B)
rise.
C)
remain unchanged.
D)
be in equilibrium.
61.
The liquidity preference model uses the demand for and supply of money to determine:
A)
GDP.
B)
the price level.
C)
the interest rate.
D)
nominal output.
62.
At interest rates below equilibrium, people will want to:
A)
shift their wealth into Treasury bills.
B)
shift their wealth into money.
C)
decrease the amount of money that they hold.
D)
make no changes to their assets.
63.
If the equilibrium interest rate in the money market is 5%, at an interest rate of 2% the
quantity of nonmonetary interest-bearing financial assets demanded is _____ the
quantity supplied.
A)
less than
B)
greater than
C)
equal to
D)
irrelevant to
64.
If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%
sellers of interest-bearing financial assets _____ interest rates to find willing buyers.
A)
must offer higher
B)
can offer lower
C)
can offer 2%
D)
Sales of financial assets do not depend on the rate offered.
65.
According to the liquidity preference model, the equilibrium interest rate is determined
by:
A)
the supply of and demand for loanable funds.
B)
the supply of and demand for money.
C)
the level of investment spending and saving.
D)
the International Monetary Fund.
Page 12
66.
If the interest rate is below the equilibrium rate, the:
A)
supply of nonmonetary financial assets is greater than the demand for them.
B)
demand for nonmonetary financial assets is greater than the supply.
C)
demand and supply of money can still be in balance.
D)
supply of money is greater than the demand.
Use the following to answer questions 67-69:
Figure: Equilibrium in the Money Market
67.
(Figure: Equilibrium in the Money Market) Look at the figure Equilibrium in the Money
Market. Equilibrium will occur at interest rate _____ and quantity of money _____.
A)
r2; Q0
B)
r0; Q2
C)
r1; Q1
D)
r1; Q2
68.
(Figure: Equilibrium in the Money Market) Look at the figure Equilibrium in the Money
Market. If the interest rate is above equilibrium, there will be an excess _____ money
and the interest rate will _____.
A)
demand for; rise
B)
supply of; fall
C)
demand for; fall
D)
supply of; rise
Page 13
69.
(Figure: Equilibrium in the Money Market) Look at the figure Equilibrium in the Money
Market. If the rate of interest is below equilibrium, there will be an excess _____ money
and the interest rate will _____.
A)
demand for; rise
B)
supply of; fall
C)
demand for; fall
D)
supply of; rise
70.
An increase in the demand for money with no change in supply will lead to _____ in the
equilibrium quantity of money and _____ in the equilibrium interest rate.
A)
no change; a rise
B)
no change; a fall
C)
a decrease; a rise
D)
an increase; a fall
71.
The idea that the interest rate is determined by the supply and demand for money is
known as:
A)
the liquidity preference model.
B)
the quantity theory of money.
C)
the monetarist theory.
D)
the loanable funds theory.
72.
The money supply curve is:
A)
downward sloping.
B)
vertical.
C)
upward rising.
D)
horizontal.
73.
An increase in the supply of money with no change in demand will lead to a(n) _____ in
the equilibrium quantity of money and a _____ in the equilibrium interest rate.
A)
increase; rise
B)
increase; fall
C)
decrease; rise
D)
decrease; fall
Page 14
74.
A decrease in the supply of money with no change in demand for money will lead to
a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest
rate.
A)
increase; rise
B)
increase; fall
C)
decrease; rise
D)
decrease; fall
75.
A sale of Treasury bills by the Federal Reserve _____ interest rates and _____ the
money supply.
A)
raises; increases
B)
raises; reduces
C)
lowers; reduces
D)
lowers; increases
76.
Suppose the Federal Reserve buys Treasury bills. We can expect this transaction to
_____ the money supply, _____ Treasury bill prices, and _____ interest rates.
A)
reduce; increase; lower
B)
increase; lower; lower
C)
increase; raise; lower
D)
reduce; reduce; raise
77.
Suppose the Federal Reserve sells Treasury bills. We can expect this transaction to
_____ the money supply, _____ Treasury bill prices, and _____ interest rates.
A)
reduce; increase; lower
B)
increase; lower; lower
C)
increase; raise; lower
D)
reduce; reduce; raise
Page 15
Use the following to answer questions 78-79:
Figure: Changes in the Money Supply
78.
(Figure: Changes in the Money Supply) Look at the figure Changes in the Money
Supply. If the supply of money shifts from S1 to S2, the Federal Reserve must have
_____ Treasury bills in the open market.
A)
sold
B)
bought
C)
issued new
D)
borrowed
79.
(Figure: Changes in the Money Supply) Look at the figure Changes in the Money
Supply. Federal Reserve policy to increase the supply of money, hence to lower the
interest rate from 6% to 4%, is accomplished by action that _____ the _____ Treasury
bills.
A)
lowers; price of
B)
increases; interest rate on
C)
increases; demand for
D)
increases; supply of
80.
According to the liquidity preference model:
A)
an increase in the money supply lowers the equilibrium rate of interest.
B)
a decrease in the money supply lowers the equilibrium rate of interest.
C)
the money supply curve is a horizontal line.
D)
the demand for money curve is a vertical line.
Page 16
81.
If the Federal Reserve wants to lower the interest rate, it will:
A)
decrease the money supply.
B)
increase the money supply.
C)
keep the money supply unchanged.
D)
mandate a lower interest rate.
82.
The Federal Open Market Committee does NOT directly control the _____ with
monetary policy.
A)
discount rate
B)
reserve ratio
C)
prime rate
D)
federal funds rate
83.
If the target rate of interest is higher than the equilibrium interest rate, the Federal
Reserve will _____ Treasury bills in the open market, _____ the supply of money, and
_____ the interest rate to the target rate.
A)
sell; increase; lower
B)
buy; increase; lower
C)
sell; decrease; raise
D)
buy; decrease; raise
84.
Suppose the Federal Reserve has set a target for the federal funds rate. If initially the
equilibrium interest rate happens to be higher than the target interest rate, then the
Federal Reserve should _____ Treasury bills in the open market, _____ the money
supply, shift the supply of money curve to the _____, and _____ the interest rate to the
target rate.
A)
sell; decrease; left; raise
B)
purchase; decrease; left; lower
C)
purchase; increase; right; lower
D)
sell; increase; left; raise
85.
The federal funds rate is:
A)
determined by the supply of and demand for money.
B)
set by Congress.
C)
determined in the real market by the aggregate supply and aggregate demand
curves.
D)
the interest rate that banks pay when they borrow directly from the Fed.
Page 17
86.
If the Federal Reserve wants to lower interest rates, it can _____ the money supply by
_____ Treasury bills.
A)
decrease; selling
B)
decrease; buying
C)
increase; selling
D)
increase; buying
87.
To expand the money supply, the Federal Reserve would have to:
A)
make an open purchase of Treasury bills.
B)
have an open sale of Treasury bills.
C)
raise interest rates.
D)
get approval from Congress.
88.
According to the liquidity preference model, a _____ in the money supply shifts the
money supply curve to the _____ and increases the equilibrium interest rate.
A)
decrease; right
B)
increase; left
C)
decrease; left
D)
increase; right
89.
The Federal Reserve affects interest rates by:
A)
setting them with regulations.
B)
open market operations that shift the money demand curve.
C)
open market operations that shift the money supply curve.
D)
changing tax rates.
90.
The Federal Open Market Committee sets the target interest rate for the next:
A)
three months.
B)
six months.
C)
three weeks.
D)
six weeks.
91.
To lower the short-term interest rate, the Federal Reserve can:
A)
buy Treasury bills.
B)
sell Treasury bills.
C)
tell the banks to make more loans.
D)
tell the banks to make fewer loans.
Page 18
92.
When the Federal Reserve buys Treasury bills, this leads to:
A)
a decrease in the money supply.
B)
an increase in the money supply.
C)
an increase in short-term interest rates.
D)
an increase in the Federal Reserve funds rate.
93.
Assume the money market is in equilibrium. The Federal Reserve Bank has decided to
purchase Treasury bills in an open market operation. The result of this action will be a
_____ in the interest rate as the money _____ shifts _____.
A)
fall; supply curve; outward
B)
fall; supply curve; inward
C)
fall; demand curve; inward
D)
rise; demand curve; outward
94.
The Federal Open Market Committee has decided that the federal funds rate should be
2% rather than the current rate of 1.5%. The appropriate open market action is to _____
Treasury bills to _____ money _____.
A)
sell; decrease; demand
B)
sell; decrease; supply
C)
buy; decrease; supply
D)
buy; increase; demand
95.
The Federal Open Market Committee has decided that the federal funds rate should be
0.5% rather than the current rate of 1.25%. The appropriate open market action is to
_____ Treasury bills to _____ money _____.
A)
buy; decrease; demand
B)
buy; decrease; supply
C)
sell; decrease; demand
D)
buy; increase; supply
96.
When long-term interest rates are higher than short-term rates, as they were in 2010:
A)
it implies that short-term interest rates are expected to fall.
B)
it has no implication for short-term interest rates.
C)
it implies that inflation will fall.
D)
it implies that short-term interest rates are expected to rise.
Page 19
97.
If long-term interest rates are 8% and short-term rates are 3%, the market expects:
A)
short-term rates to fall.
B)
short-term rates to rise.
C)
short-term rates to remain the same.
D)
there is no relationship between long-term and short-term rates.
98.
Long-term interest rates and short-term interest rates:
A)
usually move in lockstep.
B)
always move closely together.
C)
don't always move closely together.
D)
are independent of one another.
99.
Long-term interest rates are higher than short-term rates. This reflects a belief that:
A)
short-term rates will fall.
B)
short-term rates will rise.
C)
short-term rates will remain the same.
D)
the Federal Reserve is undergoing a change in policy.
100.
In September 2007, reversing its course, the Federal Reserve began a series of:
A)
interest rate increases, reversing its previous policy of lowering interest rates to
fight the financial crisis.
B)
interest rate increases to combat inflation.
C)
cuts in the reserve requirements, reversing its previous policy of increasing the
reserve requirement, to stop bank failures.
D)
cuts in the federal funds target rate to lower the interest rate, reversing its previous
policy of raising interest rates, to fight the financial crisis.
Page 20
Use the following to answer questions 101-103:
Figure: Money Market I
101.
(Figure: Money Market I) Look at the figure Money Market I. If the money market is
initially in equilibrium at point E and the central bank sells Treasury bills, then the
interest rate will:
A)
move toward point H.
B)
move toward point L.
C)
remain at point E.
D)
shift rightward.
102.
(Figure: Money Market I) Look at the figure Money Market I. If the money market is
initially in equilibrium at point E and the central bank buys Treasury bills, then the
interest rate will:
A)
move toward point H.
B)
move toward point L.
C)
remain at point E.
D)
shift leftward.
103.
(Figure: Money Market I) Look at the figure Money Market I. If the interest rate is at rL
and the central bank neither buys nor sells Treasury bills, then the interest rate will:
A)
move toward point H.
B)
move toward point L.
C)
move toward point E.
D)
not change.
Page 21
104.
According to the liquidity preference model, if the Federal Reserve increases the money
supply, the equilibrium interest rate _____, and this leads to a(n) _____ in the quantity
demanded of nonmonetary interest-bearing financial assets.
A)
rises; increase
B)
falls; decrease
C)
rises; decrease
D)
falls; increase
105.
Other things equal, rising interest rates lead to a _____ in investment spending and a
_____ in _____ spending.
A)
fall; fall; consumer
B)
rise; rise; consumer
C)
fall; rise; consumer
D)
fall; rise; investment
106.
Expansionary monetary policy _____ the money supply, _____ interest rates, and _____
consumption and investment spending.
A)
increases; increases; increases
B)
decreases; decreases; decreases
C)
increases; decreases; increases
D)
decreases; increases; decreases
107.
Monetary policy that lowers the interest rate is called _____ because it _____.
A)
contractionary; aims to head off inflation
B)
expansionary; increases short-run aggregate supply
C)
contractionary; reduces saving and increases consumption
D)
expansionary; increases aggregate demand
108.
The main objective of contractionary monetary policy is to:
A)
decrease aggregate demand.
B)
close a recessionary gap.
C)
increase investment.
D)
raise the level of potential output.
109.
Monetary policy affects GDP and the price level by:
A)
changing aggregate supply.
B)
changing aggregate demand.
C)
changing the aggregate amount of labor supplied.
D)
changing exports.
Page 22
110.
Monetary policy affects aggregate demand through changes in:
A)
government spending.
B)
consumer and investment spending.
C)
tax receipts.
D)
export demand.
111.
Expansionary monetary policy increases all of the following EXCEPT:
A)
aggregate demand.
B)
GDP and the price level.
C)
consumption spending.
D)
interest rates.
112.
If interest rates rise, there will be a(n):
A)
decrease in aggregate demand.
B)
increase in aggregate demand.
C)
increase in aggregate supply.
D)
increase in the money supply.
113.
In the income–expenditure model, expansionary monetary policy leads to _____ interest
rates, a(n) _____ in planned investment spending, and a(n) _____ in equilibrium GDP.
A)
lower; increase; increase
B)
lower; decrease; increase
C)
higher; increase; increase
D)
higher; decrease; decrease
114.
In the income–expenditure model, contractionary monetary policy leads to _____
interest rates, a(n) _____ in planned investment spending, and a(n) _____ in equilibrium
GDP.
A)
lower; increase; increase
B)
lower; decrease; decrease
C)
higher; increase; increase
D)
higher; decrease; decrease
115.
Contractionary monetary policy entails _____ the money supply, _____ interest rates,
and _____ aggregate demand.
A)
increasing; increasing; increasing
B)
increasing; decreasing; decreasing
C)
decreasing; decreasing; decreasing
D)
decreasing; increasing; decreasing
Page 23
116.
Contractionary monetary policy:
A)
increases aggregate demand.
B)
increases aggregate supply.
C)
works by discouraging investment spending.
D)
decreases interest rates.
117.
An increase in the money supply that will decrease interest rates causes a shift of the:
A)
aggregate demand curve to the left.
B)
aggregate demand curve to the right.
C)
short-run aggregate supply curve to the left.
D)
short-run aggregate supply curve to the right.
118.
A rise in interest rates due to a decrease in the money supply will _____ aggregate
demand.
A)
reduce
B)
not change
C)
increase
D)
cause random fluctuations in
119.
An increase in the supply of money will lead to a(n) _____ in the equilibrium interest
rate and a(n) _____ in real GDP.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
120.
An increase in the supply of money will lead to a(n) _____ in equilibrium real GDP and
a _____ equilibrium interest rate.
A)
increase; higher
B)
increase; lower
C)
decrease; higher
D)
decrease; lower
121.
A decrease in the supply of money will lead to a(n) _____ in equilibrium real GDP and
a(n) _____ in equilibrium interest rates.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
Page 24
122.
A decrease in the supply of money will lead to a(n) _____ in equilibrium real GDP and
a _____ equilibrium interest rate.
A)
increase; higher
B)
increase; lower
C)
decrease; higher
D)
decrease; lower
123.
Contractionary monetary policy:
A)
is appropriate during a recessionary gap.
B)
decreases aggregate demand.
C)
increases aggregate demand.
D)
helps solve the problem of unemployment.
124.
If the economy is in an inflationary gap, the Federal Reserve should conduct _____
monetary policy to _____ aggregate demand.
A)
contractionary; decrease
B)
contractionary; increase
C)
expansionary; decrease
D)
expansionary; increase
Use the following to answer questions 125-126:
Scenario: Taylor Rule
Suppose the Federal Reserve is following the Taylor rule, which takes both inflation and
business cycles into account when setting the federal funds rate. Also suppose that the inflation
rate in the economy is 3% and the unemployment gap is –2%.
125.
(Scenario: Taylor Rule) Look at the scenario Taylor Rule. The economy has:
A)
an inflationary gap, since the inflation rate is high.
B)
a recessionary gap, since the economy is not producing potential GDP.
C)
an inflationary gap, since actual real GDP exceeds potential real GDP.
D)
a recessionary gap, since potential real GDP exceeds actual real GDP.
126.
(Scenario: Taylor Rule) Look at the scenario Taylor Rule. In this case, the Federal
Reserve will set the federal funds rate at:
A)
9.8%.
B)
6.25%.
C)
5.75%.
D)
4.75%.
Page 25
127.
If the Federal Reserve sets the federal funds rate on the basis of inflation and the output
gap, then the Federal Reserve is following:
A)
inflation targeting.
B)
the Taylor rule.
C)
money illusion.
D)
the quantity theory.
128.
When the central bank announces the desired inflation rate and sets policy to reach that
rate, it is using:
A)
monetary neutrality policy.
B)
the Taylor rule.
C)
inflation targeting.
D)
fiscal policy.
129.
The zero lower bound for interest rates is:
A)
the fact that interest rates can't go below zero.
B)
a theory that says that interest rates should have no bounds or limits.
C)
a law that prohibits credit unions from paying interest on checkable deposits.
D)
only a theory that never actually occurs in the real world.
130.
If interest rates are at the zero lower bound:
A)
the effectiveness of monetary policy increases.
B)
monetary policy is ineffective.
C)
automatic stabilizers don't work.
D)
monetary policy is more effective than fiscal policy.
131.
When the Fed uses quantitative easing, it is:
A)
buying three-month Treasury bills.
B)
selling three-month Treasury bills.
C)
buying longer-term government debt.
D)
selling longer-term government debt.
132.
If the economy is in a recessionary gap, the Federal Reserve should conduct _____
monetary policy by _____ the money supply.
A)
expansionary; decreasing
B)
expansionary; increasing
C)
contractionary; decreasing
D)
contractionary; increasing
Page 26
133.
To close a recessionary gap using monetary policy, the Federal Reserve should _____
the money supply to _____ investment and consumer spending and shift the aggregate
demand curve to the _____.
A)
increase; increase; left
B)
decrease; decrease; left
C)
increase; increase; right
D)
decrease; decrease; right
134.
To close an inflationary gap using monetary policy, the Federal Reserve should _____
the money supply to _____ investment and consumer spending and shift the aggregate
demand curve to the _____.
A)
increase; increase; left
B)
decrease; decrease; left
C)
increase; increase; right
D)
decrease; decrease; right
135.
Given an inflationary gap, the Federal Reserve will use monetary policy to _____ real
GDP and _____ the interest rate.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
136.
Given an inflationary gap, the Federal Reserve will use monetary policy to _____
interest rates and _____ aggregate demand.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
137.
Given a recessionary gap, the Federal Reserve will use monetary policy to _____
interest rates and _____ aggregate demand.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
Page 27
138.
Given a recessionary gap, the Federal Reserve will use monetary policy to _____ real
GDP and _____ aggregate demand.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
Use the following to answer questions 139-144:
Figure: The Money Supply and Aggregate Demand
139.
(Figure: The Money Supply and Aggregate Demand) Look at the figure The Money
Supply and Aggregate Demand. Panel (a) illustrates what happens when the Federal
Reserve decides to _____ the money supply and _____ interest rates.
A)
decrease; lower
B)
increase; raise
C)
increase; lower
D)
decrease; raise
140.
(Figure: The Money Supply and Aggregate Demand) Look at the figure The Money
Supply and Aggregate Demand. Panel (b) illustrates what happens when the Federal
Reserve decides to _____ the money supply and _____ interest rates.
A)
decrease; lower
B)
increase; raise
C)
increase; lower
D)
decrease; raise
Page 28
141.
(Figure: The Money Supply and Aggregate Demand) Look at the figure The Money
Supply and Aggregate Demand. Panel _____ illustrates what happens when the Fed
decides to _____ Treasury bills and _____ the money supply.
A)
(a); sell; increase
B)
(b); buy; increase
C)
(b); sell; decrease
D)
(a); buy; decrease
142.
(Figure: The Money Supply and Aggregate Demand) Look at the figure The Money
Supply and Aggregate Demand. If the economy is in a recessionary gap, the Federal
Reserve will _____ Treasury bills, which will _____ the money supply and _____
interest rates. This is shown in panel _____.
A)
sell; decrease; raise; (b)
B)
buy; decrease; lower; (a)
C)
buy; increase; lower; (a)
D)
sell; increase; lower; (a)
143.
(Figure: The Money Supply and Aggregate Demand) Look at the figure The Money
Supply and Aggregate Demand. If the economy is in an inflationary gap, the Federal
Reserve will _____ Treasury bills, which will _____ the money supply and _____
interest rates. This is shown in panel _____.
A)
buy; increase; lower; (a)
B)
sell; decrease; raise; (b)
C)
buy; decrease; raise; (b)
D)
sell; increase; raise; (b)
144.
(Figure: The Money Supply and Aggregate Demand) Look at the figure The Money
Supply and Aggregate Demand. If the Federal Reserve intended to encourage
investment and expand the economy, it would _____ Treasury bills, _____ the money
supply, and _____ interest rates. This is shown in panel _____.
A)
buy; increase; lower; (a)
B)
sell; increase; lower; (b)
C)
buy; decrease; lower; (a)
D)
buy; increase; raise; (a)
Page 29
145.
Suppose the Federal Reserve is conducting an expansionary monetary policy. It will
_____ Treasury bills on the open market, so that the money supply will _____, interest
rates will _____, planned investment spending will _____, and the AD curve will shift to
the _____.
A)
buy; decrease; fall; fall; left
B)
sell; decrease; rise; fall; left
C)
buy; increase; fall; rise; right
D)
sell; increase; rise; rise; left
146.
If the Federal Reserve wants to close an inflationary gap, it will _____ the money
supply and _____ the interest rate, thus _____ investment spending and GDP. The AD
curve will shift to the _____.
A)
increase; raise; increasing; right
B)
increase; lower; lowering; left
C)
decrease; raise; lowering; left
D)
decrease; lower; lowering; right
147.
To fight inflation, the Federal Reserve should conduct _____ monetary policy to _____
interest rates, which will shift the aggregate demand curve to the _____.
A)
contractionary; raise; left
B)
contractionary; raise; right
C)
expansionary; lower; right
D)
expansionary; raise; left
148.
To fight a recession, the Federal Reserve should conduct _____ monetary policy to
_____ interest rates, which will shift the aggregate demand curve to the _____.
A)
expansionary; lower; left
B)
contractionary; raise; left
C)
contractionary; lower; right
D)
expansionary; lower; right
149.
Which one of the following statements is FALSE?
A)
The Taylor rule sets the federal funds rate on the basis of both inflation rate and
output gap, whereas inflation targeting is based on a desired inflation rate.
B)
The Taylor rule sets the federal funds rate on the basis of past inflation rates,
whereas inflation targeting is based on a forecast of the inflation rate.
C)
The Taylor rule can be more flexible, whereas inflation targeting provides more
transparency and accountability.
D)
The Taylor rule sets the federal funds rate on the basis of only past inflation rates,
whereas inflation targeting is based on a target interest rate and business cycles.
Page 30
150.
Which of the following describes the difference between the Taylor rule and inflation
targeting?
A)
The Federal Reserve uses inflation targeting, and the Bank of England uses the
Taylor rule.
B)
The Taylor rule responds to past inflation, and inflation targeting is based on a
forecast of inflation.
C)
Inflation targeting responds to past inflation, and the Taylor rule is based on a
forecast of inflation.
D)
Inflation targeting is used in conducting fiscal policy, while the Taylor rule is used
in monetary policy.
151.
Which of the following monetary policies would be destabilizing?
I. an expansionary policy during an expansion
II. an expansionary policy during a recession
III. a contractionary policy during an expansion
A)
I only
B)
II only
C)
III only
D)
I, II, and III
152.
In the short run, the interest rate is determined in the _____ market.
A)
stock
B)
money
C)
loanable funds
D)
commodity
153.
In the long run, the interest rate is determined in the _____ market.
A)
stock
B)
money
C)
loanable funds
D)
commodity
154.
In the long run a change in the money supply will affect:
I. the interest rate.
II. real GDP.
III. prices.
A)
I only
B)
II only
C)
III only
D)
I, II, and III
Page 31
155.
If the economy is at potential output and the Fed increases the money supply, in the
SHORT run interest rates will likely:
A)
increase.
B)
decrease.
C)
remain constant.
D)
fluctuate randomly
156.
If the economy is at potential output and the Fed increases the money supply, in the
SHORT run the likely result will be a(n) _____ in investment and a(n) _____ in
consumption.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
157.
If the economy is at potential output and the Fed increases the money supply, in the
SHORT run the aggregate demand will likely:
A)
shift to the left.
B)
remain the same.
C)
increase.
D)
decrease.
158.
If the economy is at potential output and the Fed increases the money supply, in the
SHORT run the price level will likely:
A)
fluctuate randomly.
B)
remain the same.
C)
decrease.
D)
increase.
159.
If the economy is at potential output and the Fed increases the money supply, in the
SHORT run real GDP will likely:
A)
fluctuate randomly.
B)
remain the same.
C)
decrease.
D)
increase.
Page 32
160.
If the economy is at potential output and the Fed increases the money supply so that
actual output exceeds potential output, eventually nominal wages will:
A)
increase.
B)
decrease.
C)
remain the same.
D)
fluctuate randomly.
161.
When nominal wages increase, the short-run aggregate supply curve:
A)
shifts to the right.
B)
shifts to the left.
C)
remains constant.
D)
disappears.
162.
If the economy is at potential output and the Fed increases the money supply, in the
LONG run the price level will likely:
A)
fluctuate randomly.
B)
remain the same.
C)
decrease.
D)
increase.
163.
If the economy is at potential output and the Fed increases the money supply, in the
LONG run real GDP will likely:
A)
fluctuate randomly.
B)
remain the same.
C)
decrease.
D)
increase.
164.
If the economy is at potential output and the Fed increases the money supply, in the
SHORT run interest rates will likely:
A)
increase.
B)
decrease.
C)
remain constant.
D)
fluctuate randomly
Page 33
165.
If the economy is at potential output and the Fed decreases the money supply, in the
SHORT run the likely result will be a(n) _____ in investment and a(n) _____ in
consumption.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
166.
If the economy is at potential output and the Fed decreases the money supply, in the
SHORT run the aggregate demand will likely:
A)
shift to the right.
B)
remain the same.
C)
increase.
D)
decrease.
167.
If the economy is at potential output and the Fed decreases the money supply, in the
SHORT run the price level will likely_____ and real GDP will likely_____ .
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
168.
If the economy is at potential output and the Fed decreases the money supply so that
actual output is less than potential output, eventually nominal wages will_____ and
short-run aggregate supply will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
169.
If the economy is at potential output and the Fed decreases the money supply, in the
long run the price level will likely:
A)
fluctuate randomly.
B)
remain the same.
C)
decrease.
D)
increase.
Page 34
170.
If the economy is at potential output and the Fed decreases the money supply, in the
LONG run real GDP will likely:
A)
fluctuate randomly.
B)
remain the same.
C)
decrease.
D)
increase.
171.
When actual output is above potential output over time:
A)
nominal wages will increase, and the short-run supply curve will shift to the right.
B)
nominal wages will increase, and the short-run supply curve will shift to the left.
C)
the aggregate demand curve will shift to the right.
D)
the short-run aggregate supply curve will shift to the right.
172.
An increase in the money supply causes _____ in output in the short run and _____ in
output in the long run.
A)
an increase; no change
B)
an increase; an increase
C)
no change; an increase
D)
no change; no change
173.
Contractionary monetary policy causes _____ in the price level in the short run and
_____ in the price level in the long run.
A)
no change; a decrease
B)
a decrease; a decrease
C)
a decrease; no change
D)
no change; no change
174.
The short-run aggregate supply curve is _____, and the long-run aggregate supply curve
is _____.
A)
vertical; upward sloping
B)
upward sloping; vertical
C)
downward sloping; vertical
D)
vertical; horizontal
Page 35
175.
Suppose that the economy is operating at potential output and the money supply
increases. Aggregate output will _____ potential output, nominal wages will _____,
and the SRAS will shift _____.
A)
rise above; rise; leftward
B)
fall below; rise; leftward
C)
rise above; fall; leftward
D)
rise above; rise; rightward
176.
Over time, contractionary monetary policy _____ nominal wages and causes the
short-run aggregate supply curve to shift _____.
A)
lowers; leftward
B)
raises; rightward
C)
lowers; rightward
D)
raises; leftward
Use the following to answer question 177:
Figure: Short-Run and Long-Run Effects of Monetary Policy
Page 36
177.
(Figure: Short-Run and Long-Run Effects of Monetary Policy) Look at the figure
Short-Run and Long-Run Effects of Monetary Policy. If the economy is initially at E2
and the central bank makes no change in its monetary policy:
A)
AD2 will shift to the right, increasing the existing inflationary gap.
B)
AD2 will shift to the left, closing the inflationary gap.
C)
SRAS1 will eventually shift to the left, closing the existing inflationary gap but
raising the aggregate price level.
D)
SRAS2 will immediately shift to the right, increasing the existing inflationary gap.
Use the following to answer questions 178-185:
Figure: Monetary Policy and the AD–SRAS Model
178.
(Figure: Monetary Policy and the AD–SRAS Model) Look at the figure Monetary Policy
and the AD–SRAS Model. An increase in the money supply is most likely to cause a
shift:
A)
from SRAS to SRAS'.
B)
from AD to AD'.
C)
from SRAS' to SRAS.
D)
from AD' to AD.
179.
(Figure: Monetary Policy and the AD–SRAS Model) Look at the figure Monetary Policy
and the AD–SRAS Model. The economy may move from point i to point h as a result of:
A)
an increase in the money supply.
B)
a rise in the discount rate.
C)
a decrease in the money supply.
D)
sales of government securities in the open market.
Page 37
180.
(Figure: Monetary Policy and the AD–SRAS Model) Look at the figure Monetary Policy
and the AD–SRAS Model. If the economy is in a recessionary gap at point f, it could
move to point g as a result of:
A)
a decrease in the money supply.
B)
a rise in the discount rate.
C)
an increase in the money supply.
D)
sales of government securities in the open market.
181.
(Figure: Monetary Policy and the AD–SRAS Model) Look at the figure Monetary Policy
and the AD–SRAS Model. The economy could move from point g to point f as a result
of:
A)
an increase in the money supply.
B)
a reduction in the discount rate.
C)
a decrease in the money supply.
D)
purchases of government securities in the open market.
182.
(Figure: Monetary Policy and the AD–SRAS Model) Look at the figure Monetary Policy
and the AD–SRAS Model. If the economy is in a recessionary gap at point f, it could
move to point g as a result of:
A)
a decrease in government spending.
B)
an increase in the discount rate.
C)
a decrease in the money supply.
D)
purchases of government securities in the open market.
183.
(Figure: Monetary Policy and the AD–SRAS Model) Look at the figure Monetary Policy
and the AD–SRAS Model. If the economy is in an inflationary gap at point h, it can
move to point i as a result of:
A)
an increase in the money supply.
B)
a reduction in the discount rate.
C)
a decrease in the money supply.
D)
purchases of government securities in the open market.
184.
(Figure: Monetary Policy and the AD-SRAS Model) Look at the figure Monetary Policy
and the AD–SRAS Model. If the economy is at point h because of an open market
purchase by the Federal Reserve and no further monetary policy is implemented, in the
LONG run nominal wages will _____, SRAS will shift _____, real GDP will _____, and
the price level will _____.
A)
increase; to SRAS'; decrease; increase
B)
increase; to SRAS'; increase; decrease
C)
decrease; farther to the right; decrease; increase
D)
decrease; to SRAS'; increase; decrease
Page 38
185.
(Figure: Monetary Policy and the AD-SRAS Model) Look at the figure Monetary Policy
and the AD–SRAS Model. If the economy is at point f because of an open market sale by
the Federal Reserve and no further monetary policy is implemented, in the LONG run
nominal wages will _____ and _____ will shift to _____, real GDP will _____, and the
price level will _____.
A)
increase; SRAS; SRAS'; decrease; increase
B)
increase; SRAS; SRAS'; increase; decrease
C)
decrease; SRAS
; SRAS; increase; decrease
D)
decrease; SRAS
; SRAS; decrease; decrease
186.
Consider an economy that is facing a recessionary gap. The Federal Reserve decides to
use expansionary monetary policy to close that gap. As a result of this policy, in the
short run the money supply will _____, the interest rate will _____, investment and
consumption spending will _____, and real GDP will _____.
A)
decrease; fall; decrease; increase
B)
increase; increase; decrease; decrease
C)
decrease; increase; decrease; decrease
D)
increase; fall; increase; increase
Use the following to answer questions 187-190:
Figure: Output Gap
Page 39
187.
(Figure: Output Gap) Look at the figure Output Gap. If the economy is producing at Y1,
then it has a(n) _____ gap, as _____ real GDP exceeds _____ real GDP, and the Federal
Reserve should use _____ monetary policy.
A)
inflationary; actual; potential; contractionary
B)
recessionary; potential; actual; expansionary
C)
inflationary; potential; actual; contractionary
D)
recessionary; actual; potential; expansionary
188.
(Figure: Output Gap) Look at the figure Output Gap. If the economy is producing at Y2,
then it has a(n) _____ gap, as _____ real GDP exceeds _____ real GDP, and the Federal
Reserve should use _____ monetary policy.
A)
recessionary; actual; potential; expansionary
B)
recessionary; potential; actual; expansionary
C)
inflationary; actual; potential; contractionary
D)
inflationary; potential; actual; contractionary
189.
(Figure: Output Gap) Look at the figure Output Gap. If the economy is at Y1 as a result
of expansionary monetary policy and no further policy is implemented, in the long run
nominal wages will _____ and shift the short-run aggregate supply curve to the _____,
which will _____ real output.
A)
increase; left; decrease
B)
increase; right; increase
C)
decrease; left; decrease
D)
decrease; right; increase
190.
(Figure: Output Gap) Look at the figure Output Gap. If the economy is at Y2 because of
contractionary monetary policy and no further policy is implemented, in the long run
nominal wages will _____ and shift the short-run aggregate supply curve to the _____,
which will _____ real output.
A)
increase; left; decrease
B)
increase; right; increase
C)
decrease; left; decrease
D)
decrease; right; increase
Page 40
191.
If the Federal Reserve uses expansionary monetary policy there is a _____ short-run
effect on _____, but_____.
A)
negative short-run; real GDP; prices remain unchanged in the long run.
B)
positive short-run; real GDP; GDP remains equal to potential GDP in the long run.
C)
t positive long-run; real GDP; GDP remains unchanged at its potential level in the
short run.
D)
positive short-run; the price level; the aggregate price level remains unchanged in
the long run.
192.
Suppose the economy is in long-run equilibrium at full employment levels of real GDP.
In the long run, if the money supply increases, we would expect _____ in the price level
and _____ in real GDP.
A)
an increase; no change
B)
an increase; an increase
C)
a decrease; no change
D)
no change; an increase
193.
In the long run, changes in the money supply _____ the aggregate price level and _____
aggregate output.
A)
affect; affect
B)
affect; do not affect
C)
do not affect; affect
D)
do not affect; do not affect
194.
Assume the money supply doubles, followed by a doubling of the wage rate and the
price level. Under these circumstances, we can safely conclude that:
A)
real aggregate output will double.
B)
real aggregate output will fall in half.
C)
nominal output will double, but real output will fall.
D)
nominal output will double, but real output will remain unchanged.
195.
Economists argue that money is neutral:
A)
in both the short and the long run.
B)
in the short run only.
C)
in the long run, but money does affect the price level.
D)
in the long run, but money does not affect the price level.
Page 41
196.
Monetary neutrality implies that in the long run:
A)
monetary policy does not affect the level of economic activity.
B)
long-run aggregate supply depends on monetary policy.
C)
changing the money supply does not affect the aggregate price level.
D)
aggregate demand is independent from monetary policy.
197.
Which of the following statements is FALSE? In the long run, monetary policy:
A)
affects only the aggregate price level.
B)
does not affect aggregate output.
C)
is neutral.
D)
increases potential output.
198.
If the money supply increases by 10%, in the long run:
A)
unemployment drops by 10%.
B)
the price level increases by 10%.
C)
real GDP increases by 10%.
D)
unemployment drops by 20%.
199.
If the money supply decreases by 5%, in the long run:
A)
interest rates rise by 5%.
B)
the unemployment rate rises by 10%.
C)
the price level drops by 5%.
D)
real GDP drops by 5%.
200.
In the long run, an increase in the quantity of money:
A)
increases real output.
B)
increases prices but not long-run output.
C)
increases real interest rates.
D)
has no effect on the economy.
201.
According to the concept of monetary neutrality, _____ in the money supply _____
GDP and _____ the price level.
A)
increases; do not change; raise
B)
increases; raise; do not change
C)
decreases; lower; lower
D)
increases; raise; raise
Page 42
202.
Expansionary monetary policy causes _____ in interest rates in the short run and _____
in interest rates in the long run.
A)
a fall; no change
B)
a fall; a fall
C)
no change; a fall
D)
no change; no change
203.
Since the short-run increase in the aggregate price level that follows a monetary
expansion is smaller than the ensuing long-run increase, it follows that:
A)
money is neutral in the short run.
B)
in the short run, the interest rate remains constant.
C)
in the long run, the real money supply increases.
D)
in the short run, the real money supply increases.
204.
An increase in the money supply _____ the interest rate in the short run but _____ the
interest rate in the long run.
A)
lowers; does not affect
B)
raises; lowers
C)
does not affect; raises
D)
does not affect; lowers
205.
In the long run, changes in the money supply:
A)
don't affect the interest rate.
B)
lower the interest rate.
C)
raise the interest rate.
D)
have a small but indeterminate impact on the interest rate.
206.
Contractionary monetary policy causes a short-run _____ in interest rates in the short
run and _____ in interest rates in the long run.
A)
increase; an increase
B)
increase; no change
C)
decrease; no change
D)
decrease; a decrease
Page 43
207.
An increase in the money supply will decrease interest rates in the short run but will not
affect interest rates in the long run because an increase in the money supply will
eventually _____ prices and _____ money demand.
A)
decrease; decrease
B)
decrease; increase
C)
increase; decrease
D)
increase; increase
208.
Available international evidence for the period 1970–2010 shows that the:
A)
increases in the quantity of money led to a proportionate increase in the aggregate
price level.
B)
relationship between money and the aggregate price level changes over time and
across countries.
C)
concept of monetary neutrality applies only to developing countries.
D)
increases in the money supply in the long run led to equal percent rises in the
aggregate price level.
209.
Between 1970 and the present, research comparing similar wealthy countries found that
increases in the money supply:
A)
and increases in the price level were roughly proportional.
B)
had little effect on prices.
C)
caused large increases in real GDP.
D)
caused large decreases in real GDP.
210.
Monetary policy is similar among wealthy countries because the central banks of most
countries:
A)
try to keep inflation between 2% and 3% per year.
B)
try to keep inflation between 5% and 6% per year.
C)
try to keep inflation between 0% and 2% per year.
D)
are trying to establish a single global currency.
211.
In the long run, the only effect of monetary policy is on:
A)
the long-run aggregate supply.
B)
the interest rate.
C)
the aggregate output level.
D)
the aggregate price level.
Page 44
Use the following to answer questions 212-215:
Figure: A Money Market
212.
(Figure: A Money Market) Look at the figure A Money Market. The equilibrium
interest rate is:
A)
r1.
B)
r2.
C)
r3.
D)
M0.
213.
(Figure: A Money Market) Look at the figure A Money Market. If the interest rate is
r3, the interest rate will _____ because there is a _____ of money in the market.
A)
fall; surplus
B)
fall; shortage
C)
rise; surplus
D)
rise; shortage
214.
(Figure: A Money Market) Look at the figure A Money Market. If the current interest
rate is r1, the interest rate will _____ because there is a _____ of money in the market.
A)
fall; surplus
B)
fall; shortage
C)
rise; surplus
D)
rise; shortage
Page 45
215.
(Figure: A Money Market) Look at the figure A Money Market. Holding the money
supply constant, which of the following might cause the equilibrium interest rate to
decrease to r1?
A)
The inflation rate rises to historically high levels.
B)
Higher payroll taxes cause employers to pay workers cash under the table.
C)
A recession decreases real GDP.
D)
There is a significant increase in the stock market.
Use the following to answer questions 216-218:
Scenario: Money and Interest Rates
Banks decide to do away with fees charged when other banks' customers use the bank's own
ATM.
216.
(Scenario: Money and Interest Rates) Look at the scenario Money and Interest Rates.
The demand for money will _____, and the supply of money will _____.
A)
increase; not change
B)
increase; decrease
C)
decrease; not change
D)
decrease; increase
217.
(Scenario: Money and Interest Rates) Look at the scenario Money and Interest Rates. If
the money supply remains constant, interest rates will likely:
A)
decrease.
B)
increase.
C)
remain the same.
D)
increase or decrease, depending upon what maximizes profits for the largest
commercial banks.
218.
(Scenario: Money and Interest Rates) Look at the scenario Money and Interest Rates. If
the Federal Reserve wants to maintain the same federal funds rate, it should:
A)
increase taxes.
B)
decrease government spending.
C)
sell Treasury bills.
D)
buy Treasury bills.
Page 46
Use the following to answer questions 219-220:
Figure: Economic Adjustments
219.
(Figure: Economic Adjustments) Look at the figure Economic Adjustments. Assume
that the economy is at point c. The effect of an increase in the money supply is
represented by a shift of the _____ curve to _____.
A)
SRAS1; SRAS2
B)
SRAS2; SRAS1
C)
AD1; AD2
D)
AD2; AD1
220.
(Figure: Economic Adjustments) Look at the figure Economic Adjustments. Assume
that the economy is at point b. The effect of a decrease in the money supply is
represented by a shift of the _____ curve to _____.
A)
SRAS1; SRAS2
B)
SRAS2; SRAS1
C)
AD1; AD2
D)
AD2; AD1
Page 47
Use the following to answer questions 221-226:
Figure: Monetary Policy I
221.
(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is
initially in equilibrium at E1 and the central bank chooses to sell Treasury bills, _____
shift to the _____ a(n) _____ gap.
A)
AD2 will; right, causing; inflationary
B)
AD2 may; AD1, causing; recessionary
C)
AD1 may; AD2, closing; recessionary
D)
AD1 will; left, closing; recessionary
222.
(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is
initially in equilibrium at E1 and the central bank chooses to buy Treasury bills, _____
shift to _____ a(n) _____ gap.
A)
AD2 will; right, causing; inflationary
B)
AD2 may; AD1, causing; recessionary
C)
AD1 may; AD2, closing; recessionary
D)
AD1 will; left, increasing; recessionary
223.
(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is
initially in equilibrium at E2 and the central bank chooses to buy Treasury bills, _____
shift to _____ a(n) _____ gap.
A)
AD2 will; right, causing; inflationary
B)
AD2 may; AD1, causing; recessionary
C)
AD1 may; AD2, closing; recessionary
D)
AD1 will; left, increasing; recessionary
Page 48
224.
(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is
initially in equilibrium at E2 and the central bank chooses to sell Treasury bills_____
shift to _____ a(n) _____ gap.
A)
AD2 will; right, causing; inflationary
B)
AD2 may; AD1, causing; recessionary
C)
AD1 may; AD2, closing; recessionary
D)
AD1 will; left, increasing; recessionary
225.
(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is
initially in equilibrium at E1 and the central bank chooses to buy Treasury bills, _____
shift to _____ a(n) _____ gap.
A)
AD1 may; AD2, closing; recessionary
B)
AD1 will; left, increasing; recessionary
C)
SRAS1 will immediately; left, closing; inflationary
D)
SRAS2 will immediately; right, increasing; inflationary
226.
(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is
initially in equilibrium at E2 and the central bank chooses to sell Treasury bills:
A)
AD2 will shift to the right, causing an inflationary gap.
B)
AD2 may shift to AD1, causing a recessionary gap.
C)
SRAS1 will shift immediately to the left, closing an inflationary gap.
D)
SRAS2 will shift immediately to the right, increasing an inflationary gap.
Use the following to answer questions 227-228:
Figure: Monetary Policy II
Page 49
227.
(Figure: Monetary Policy II) Look at the figure Monetary Policy II. To eliminate the
inflationary gap from the short-run equilibrium at Y2, monetary policy should be:
A)
expansionary.
B)
contractionary.
C)
neutral.
D)
balanced.
228.
(Figure: Monetary Policy II) Look at the figure Monetary Policy II. If the short-run
equilibrium is at Y2, appropriate central bank policy is:
A)
contractionary.
B)
expansionary.
C)
neutral.
D)
balanced.
Use the following to answer questions 229-231:
Figure: Monetary Policy III
229.
(Figure: Monetary Policy III) Look at the figure Monetary Policy III. The central bank
should adopt policies to move the economy to:
A)
Y1.
B)
Y2.
C)
Y3.
D)
Y4.
Page 50
230.
(Figure: Monetary Policy III) Look at the figure Monetary Policy III. Expansionary
economic policy will lead to an equilibrium GDP of:
A)
Y1.
B)
Y2.
C)
Y3.
D)
Y4.
231.
(Figure: Monetary Policy III) Look at the figure Monetary Policy III. Expansionary
monetary policy will lead to an equilibrium price level of:
A)
P1.
B)
P2.
C)
P3.
D)
P4.
232.
Expansionary monetary policy will _____ interest rates and _____ savings in the short
run.
A)
raise; increase
B)
raise; decrease
C)
lower; increase
D)
lower; decrease
233.
In the short run:
A)
only the supply of money determines the interest rate.
B)
only the demand for money determines the interest rate.
C)
the supply and demand for money determine the interest rate, and the loanable
funds market follows the lead of the money market.
D)
the supply and demand for money determine the interest rate, and the money
market follows the lead of the loanable funds market.
234.
According to the loanable funds model, in the short run expansionary monetary policy:
A)
increases the supply of loanable funds.
B)
increases the demand for loanable funds.
C)
increases the quantity of loanable funds supplied.
D)
has no effect on the supply of loanable funds.
Page 51
235.
According to the loanable funds model, in the short run contractionary monetary policy
shifts the _____ curve for loanable funds to the _____.
A)
demand; right
B)
supply; right
C)
demand; left
D)
supply; left
236.
The loanable funds model focuses on the:
A)
demand for money.
B)
supply of funds from lenders.
C)
supply of funds from borrowers and the demand by lenders.
D)
supply of funds from lenders and the demand from borrowers.
Use the following to answer questions 237-244:
Figure: Short-Run Determination of the Interest Rate
237.
(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run
Determination of the Interest Rate. If the money supply is at MS1 and the central bank
buys Treasury bills, then the resulting short-run shift in the supply of savings (loanable
funds) may be represented by a shift of the:
A)
money supply curve to MS2, which raises the interest rate.
B)
supply of loanable funds from S1 to S2, which lowers the interest rate.
C)
supply of loanable funds from S2 to S1, which raises the interest rate.
D)
interest rate from r2 to r1.
Page 52
238.
(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run
Determination of the Interest Rate. If the money supply is at MS2 and the central bank
sells Treasury bills, then the resulting short-run shift in the supply of savings (loanable
funds) may be represented by a shift of the:
A)
money supply curve to MS1, which lowers the interest rate.
B)
supply of loanable funds from S1 to S2, which lowers the interest rate.
C)
supply of loanable funds from S2 to S1, which raises the interest rate.
D)
interest rate from r1 to r2.
239.
(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run
Determination of the Interest Rate. If the money supply is at MS1 and the central bank
buys Treasury bills, then in the short run the interest rate will:
A)
increase above r1.
B)
remain at r1.
C)
decrease to r2.
D)
fluctuate randomly.
240.
(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run
Determination of the Interest Rate. If the money supply is at MS2 and the central bank
sells Treasury bills, then in the short run the interest rate will:
A)
decrease below r2.
B)
remain at r2.
C)
increase to r1.
D)
fluctuate randomly.
241.
(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run
Determination of the Interest Rate. If the money supply is at MS1 and the Fed conducts
expansionary monetary policy, in the short run the interest rate drops to r2. In the long
run prices will _____ the demand for money.
A)
decrease, decreasing
B)
decrease, increasing
C)
increase, decreasing
D)
increase, increasing
Page 53
242.
(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run
Determination of the Interest Rate. If the money supply is at MS1 and the Fed conducts
expansionary monetary policy, in the short run the interest rate drops to r2. In the long
run the demand for money will _____, and the interest rate will_____.
A)
increase; increase to r1
B)
increase; remain at r2
C)
decrease; decrease below r2
D)
decrease; remain at r2
243.
(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run
Determination of the Interest Rate. If the money supply is at MS2 and the Fed conducts
contractionary monetary policy, in the short run the interest rate increases to r1. In the
long run prices will _____ the demand for money.
A)
decrease, decreasing
B)
decrease, increasing
C)
increase, decreasing
D)
increase, increasing
244.
(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run
Determination of the Interest Rate. If the money supply is at MS2 and the Fed conducts
contractionary monetary policy, in the short run the interest rate increases to r1. In the
long run: the demand for money will _____, and the interest rate will_____.
A)
increase; increase to r1
B)
increase; remain at r2.
C)
decrease; decrease to r2.
D)
decrease; remain at r1.
245.
When the Fed changes tax rates, interest rates change, and this changes real GDP.
A)
True
B)
False
246.
Janet Yellen is the chair of the Board of Governors of the Federal Reserve.
A)
True
B)
False
247.
People pay a cost for holding money instead of nonmonetary assets such as Treasury
bills.
A)
True
B)
False
Page 54
248.
The higher the short-term interest rate, the lower the opportunity cost of holding money.
A)
True
B)
False
249.
Long-term interest rates apply to financial assets that mature a number of years in the
future.
A)
True
B)
False
250.
Long-term interest rates affect the demand for money more than short-term interest
rates.
A)
True
B)
False
251.
As the opportunity cost of holding money changes from 5% to 3%, the quantity of
money demanded increases.
A)
True
B)
False
252.
If the opportunity cost of holding money rises, then the money demand curve shifts to
the left.
A)
True
B)
False
253.
If the inflation rate is 3% this year, the demand for money will increase by 6% this year.
A)
True
B)
False
254.
If the economy is in a recession and real GDP decreases, the demand for money will
shift to the left.
A)
True
B)
False
255.
If requirements for having a credit card become stricter, so that fewer people qualify for
one, the demand for money will decrease.
A)
True
B)
False
Page 55
256.
If banks were suddenly prohibited from paying interest on checking accounts, the
demand for money would likely decrease.
A)
True
B)
False
257.
The demand for money in Japan is much lower than the demand for money in the
United States.
A)
True
B)
False
258.
Congress sets the target federal funds rate, but it is the Fed's responsibility to achieve
the target rate through purchases and sales of reserves.
A)
True
B)
False
259.
According to the liquidity preference model, the supply and demand for money
determine the interest rate.
A)
True
B)
False
260.
If the interest rate is below equilibrium, then the quantity of money demanded is more
than the quantity of money supplied, and the quantity of interest-bearing financial assets
demanded is also more than the quantity supplied.
A)
True
B)
False
261.
If the interest rate is below equilibrium, then the quantity demanded of interest-bearing
financial assets is less than the quantity supplied, so people selling interest-bearing
financial assets have to offer higher interest rates to get people to buy them, thus raising
interest rates back to the equilibrium level.
A)
True
B)
False
262.
Other things equal, if there is an excess demand for money, the interest rate may rise.
A)
True
B)
False
Page 56
263.
Other things equal, if the amount of money demanded is greater than the amount of
money supplied, then the interest rate may fall.
A)
True
B)
False
264.
The loanable funds model focuses on interest rates in the short run.
A)
True
B)
False
265.
The liquidity preference model focuses on interest rates in the short run.
A)
True
B)
False
266.
To decrease interest rates, the Fed should increase the money supply.
A)
True
B)
False
267.
To decrease interest rates, the Fed should make an open-market sale of Treasury bills.
A)
True
B)
False
268.
If the actual interest rate is below the target rate, the Fed should decrease the money
supply.
A)
True
B)
False
269.
If the actual interest rate is 6% and the target rate is 4%, the Fed should decrease the
money supply.
A)
True
B)
False
270.
If the actual interest rate is below the target rate, the Fed should sell Treasury bills.
A)
True
B)
False
Page 57
271.
If the actual interest rate is 6% and the target rate is 4%, the Fed should sell Treasury
bills.
A)
True
B)
False
272.
When long-term rates are lower than short-term rates, the market is signaling that it
expects short-term rates to fall.
A)
True
B)
False
273.
On average short-term interest rates are higher than long-term rates to compensate for
higher risk in the short term.
A)
True
B)
False
274.
Between 2004 and 2006, the Fed raised its target federal funds rate to prevent inflation.
A)
True
B)
False
275.
In 2007, the Fed raised its target federal funds rate to prevent unemployment and a
recession.
A)
True
B)
False
276.
Expansionary monetary policy decreases interest rates and increases aggregate demand.
A)
True
B)
False
277.
Expansionary monetary policy works by decreasing consumption, allowing other sectors
of the economy to spend more.
A)
True
B)
False
278.
Expansionary monetary policy may increase consumer spending.
A)
True
B)
False
Page 58
279.
Expansionary monetary policy may decrease investment spending.
A)
True
B)
False
280.
To close a recessionary gap, the central bank could adopt an expansionary economic
policy.
A)
True
B)
False
281.
When real GDP is above potential GDP, the Fed uses contractionary monetary policy.
A)
True
B)
False
282.
When the economy is developing an inflationary gap, the Fed should increase the
money supply to decrease interest rates.
A)
True
B)
False
283.
According to the Taylor rule, the target federal funds rate should be positively related to
the inflation rate and inversely related to the unemployment rate.
A)
True
B)
False
284.
Usually there is an inverse relationship between the federal funds rate and the output
gap.
A)
True
B)
False
285.
Inflation targeting occurs when the central bank sets an explicit goal for the inflation
rate and uses monetary policy to hit that goal.
A)
True
B)
False
286.
Inflation targeting is different from the Taylor rule because the Taylor rule is based on a
forecast of inflation, but inflation targeting adjusts monetary policy to past inflation.
A)
True
B)
False
Page 59
287.
One advantage of inflation targeting over the Taylor rule is that with inflation targeting,
because the public knows the target in advance, uncertainty is reduced.
A)
True
B)
False
288.
One advantage of inflation targeting over the Taylor rule is that the central bank's policy
can be evaluated by seeing how close to the target actual inflation rates are.
A)
True
B)
False
289.
The zero lower bound for interest rates is the target that the Taylor rule sets.
A)
True
B)
False
290.
Quantitative easing occurs when instead of purchasing only short-term government
debt, the Fed buys long-term government debt as well.
A)
True
B)
False
291.
The appropriate monetary policy to stabilize the economy during a recession is an
expansionary policy.
A)
True
B)
False
292.
A contractionary monetary policy is appropriate during a recession.
A)
True
B)
False
293.
A contractionary monetary policy is appropriate during an expansion.
A)
True
B)
False
294.
The interest rate is determined in the loanable funds market in the short run.
A)
True
B)
False
Page 60
295.
The interest rate is determined in the money market in the short run.
A)
True
B)
False
296.
The Fed prints money only when it is conducting monetary policy.
A)
True
B)
False
297.
The Fed prints money not only when it is conducting monetary policy but also when it is
paying bills as the fiscal agent for the federal government.
A)
True
B)
False
298.
In the long run changes in the money supply will change prices, real GDP, and interest
rates.
A)
True
B)
False
299.
In the long-run changes in the money supply will change prices but not real GDP or
interest rates.
A)
True
B)
False
300.
Monetary policy affects both the aggregate price level and output in the long run.
A)
True
B)
False
301.
If the economy is at potential output and the Fed increases the money supply, in the
short run interest rates will likely increase.
A)
True
B)
False
302.
If the economy is at potential output and the Fed decreases the money supply, in the
short run the likely result will be a decrease in investment and a decrease in
consumption.
A)
True
B)
False
Page 61
303.
If the economy is at potential output and the Fed increases the money supply, in the
short run the aggregate demand will likely decrease.
A)
True
B)
False
304.
If the economy is at potential output and the Fed decreases the money supply, in the
short run the price level will likely decrease.
A)
True
B)
False
305.
If the economy is at potential output and the Fed increases the money supply, in the
short run real GDP will likely remain the same.
A)
True
B)
False
306.
If the economy is at potential output and the Fed decreases the money supply so that
actual output is less than potential output, eventually nominal wages will decrease.
A)
True
B)
False
307.
When nominal wages decrease, the short-run aggregate supply curve shifts to the left.
A)
True
B)
False
308.
If the economy is at potential output and the Fed increases the money supply, in the long
run the price level will likely increase.
A)
True
B)
False
309.
If the economy is at potential output and the Fed decreases the money supply, in the
long run real GDP will likely decrease.
A)
True
B)
False
310.
The concept of monetary neutrality means that changes in the money supply have no
real effects on real output in the long run.
A)
True
B)
False
Page 62
311.
If the money supply decreases by 10%, the aggregate price level will remain constant in
the long run.
A)
True
B)
False
312.
The theory of monetary neutrality implies that monetary policy is effective in the short
run but not in the long run.
A)
True
B)
False
313.
The theory of monetary neutrality means that monetary policy is completely irrelevant.
A)
True
B)
False
314.
In the long run, if the money supply rises by 10%, then the price level may rise by more
than 10%.
A)
True
B)
False
315.
In the short run changes in the money supply change the interest rate, but in the long run
changes in the money supply have no effect on interest rates.
A)
True
B)
False
316.
In the short run changes in the money supply change interest rates but not real output
and prices.
A)
True
B)
False
317.
In the long run changes in the money supply change prices but not real output and
interest rates.
A)
True
B)
False
Page 63
318.
Changes in the money supply have no long-run effects on the interest rate because when
the price level changes, the demand for money changes to offset the short-run changes
in the money supply.
A)
True
B)
False
319.
International data for 1970–2010 show that monetary neutrality occurs only in wealthy
countries.
A)
True
B)
False
320.
Between 1970 and 2010, in general, the money supply grew more rapidly in poorer
countries than in wealthy ones.
A)
True
B)
False
321.
In the long run, a change in monetary policy will affect only the aggregate price level.
A)
True
B)
False
322.
The equilibrium interest rate in the loanable funds market is the same as the equilibrium
interest rate in the money market.
A)
True
B)
False
323.
What is the opportunity cost of holding money?
324.
The money demand curve is shown in a graph with the interest rate on short-term assets
on the vertical axis. Why use this short-term interest on the vertical axis and not the rate
of return on other financial assets?
325.
Why does a recession, all else equal, decrease the demand for money?
326.
How would a significant fall in the interest rate on short-term certificates of deposit
(CDs) affect the money demand curve?
Page 64
327.
What is the goal of expansionary monetary policy, and how does it work in the short
run?
328.
What is the goal of contractionary monetary policy, and how does it work in the short
run?
329.
Suppose that the inflation rate is 2.5%. The unemployment gap is 2%. Use the Taylor
rule to estimate the target Federal funds rate.
330.
If the economy is operating at potential output, how does a contractionary monetary
policy affect short-run and long-run prices and real output?
331.
Explain what is meant by money neutrality. Use an example of expansionary monetary
policy, both in the short run and the long run.
332.
How does an increase in the money supply affect interest rates if the economy is
operating at potential output?
333.
Suppose the annual inflation rate is at 2% and 8.5% of the labor force is unemployed. If
you were on the Federal Open Market Committee, what action would you prescribe?
How would this affect the economy, the inflation rate, and the unemployment rate?
334.
Suppose the annual inflation rate is at 7% and 3% of the labor force is unemployed. If
you were on the Federal Open Market Committee, what action would you prescribe?
How would this affect the economy, the inflation rate, and the unemployment rate?
335.
Firms and businesses hold some of their assets in the form of money because:
A)
it allows them to make purchases directly.
B)
it is a form of M2.
C)
bonds are more liquid.
D)
interest rates on money tend to be lower than other types of assets.
Page 65
336.
The difference between the interest rate on assets that are not money and the interest
rate on assets that are money is:
A)
the opportunity cost of holding money.
B)
the rate of return of holding money.
C)
short-term interest rates.
D)
long-term interest rates.
337.
The higher the short-term interest rate, the:
A)
lower the opportunity cost of holding money.
B)
higher the opportunity cost of holding money.
C)
more quantity demanded of money the public will be willing to hold.
D)
higher the level of investment spending.
338.
Short-term interest rates:
A)
fluctuate widely depending on their terms.
B)
tend to move together.
C)
move in the same direction as long-term interest rates.
D)
are always less than long-term interest rates.
339.
If the price level doubled and someone wanted to maintain the same level of purchasing
power, the nominal quantity of money demanded must:
A)
also double.
B)
increase by 50%.
C)
stay the same.
D)
decrease.
340.
If aggregate output decreases in an economy whose central bank is not changing its
monetary policy, one would expect the:
A)
demand for money to fall.
B)
interest rate to rise.
C)
demand for money to rise.
D)
demand for money to be unchanged.
341.
Suppose a new regulation lowers the interest rates banks can offer on checking account
funds. This will result in a shift _____ of the money _____ curve.
A)
leftward; demand
B)
rightward; demand
C)
rightward; supply
D)
leftward; supply
Page 66
342.
When the quantity of money demanded is less than the quantity of money supplied:
A)
interest rates will fall.
B)
people want to decrease their money holdings.
C)
people will begin to sell their nonmonetary assets.
D)
interest rates will remain unchanged.
343.
Since the Federal Reserve has the power to determine the supply of money, the money
supply curve in the liquidity preference model is a(n):
A)
horizontal line.
B)
vertical line.
C)
upward-sloping line.
D)
upward-sloping, then vertical line when Congressional rules change the Federal
Reserve's powers.
344.
When the demand for money exceeds the supply:
A)
people offering to sell nonmonetary financial assets must increase the interest rate
these assets pay to sell them.
B)
interest rates will fall.
C)
the opportunity cost of holding money will fall.
D)
more people will hold money.
345.
If the interest rate is too low, it is possible that:
A)
the quantity of money demanded is greater than the quantity of money supplied.
B)
money supply is equal to money demand.
C)
the money supply curve is downward sloping.
D)
money demand is vertical.
346.
Interest rates can be determined in models of:
A)
money demand and supply.
B)
M1 markets only.
C)
the demand and supply of loanable funds.
D)
demand and supply of both money and loanable funds.
347.
If the Federal Open Market Committee decides to decrease the federal funds target rate,
it will:
A)
perform an open market purchase.
B)
perform an open market sale.
C)
increase the demand for money.
D)
offer tax breaks to specific businesses.
Page 67
348.
If the Federal Open Market Committee conducts an open market purchase:
A)
interest rates will fall.
B)
interest rates will remain unchanged.
C)
interest rates will rise.
D)
the money supply will decrease.
349.
If the Federal Open Market Committee engages in an open market purchase, it will shift
the money _____ curve to the_____,
A)
supply; right
B)
supply; left
C)
demand; left
D)
demand; right
350.
The Fed uses _____ to target the federal funds rate.
A)
open market operations
B)
changes in the discount rate
C)
changes in deposit insurance maximums
D)
government spending
351.
Contractionary monetary policy will, holding everything else constant, _____ the
interest rate and shift the AD curve to the _____.
A)
increase; right
B)
increase; left
C)
decrease; left
D)
decrease; right
352.
The Taylor rule:
A)
provides guidance for setting a federal funds rate target.
B)
says that interest rates often should be negative.
C)
provides guidance on timing of monetary policy with fiscal policy.
D)
refers to a discretionary fiscal policy rule.
353.
If a central bank announces an inflation target, it:
A)
may have to sacrifice some control over interest rates.
B)
is in effect also announcing an interest rate target.
C)
will achieve this goal only by allowing price levels to vary.
D)
must do so in coordination with fiscal policy makers.
Page 68
354.
If an economy is operating at an aggregate output level above its potential output level,
the Federal Reserve may:
A)
conduct an open market sale.
B)
conduct an open market purchase.
C)
lower the federal funds rate target.
D)
decrease government spending.
355.
If an economy is in long-run equilibrium at its potential output level, this also means:
A)
the money market is in equilibrium.
B)
money demand is greater than money supply.
C)
money supply is greater than money demand.
D)
there is excess money in the money market.
356.
If the Federal Reserve conducts an open market purchase, holding everything else
constant, in the long run there will be:
A)
an increase in the aggregate price level.
B)
an increase in the aggregate output level.
C)
a decrease in unemployment.
D)
no effects on output, unemployment, or the price level.
357.
If the AD curve shifts to the right, in the short run there will be a(n) _____ in aggregate
output and a(n) _____ in the price level.
A)
increase; increase
B)
increase; decrease
C)
decrease; decrease
D)
decrease; increase
358.
If an economy is operating below its potential output level, holding everything else
constant, one would expect:
A)
nominal wages to rise.
B)
nominal wages to stay the same.
C)
nominal wages to fall.
D)
price levels to increase.
359.
Money is neutral in _____, since it cannot alter _____.
A)
the short run; real aggregate output
B)
both the short and long run; price levels
C)
the long run; real aggregate output
D)
the short run; price levels
Page 69
Answer Key
Page 70
Page 71
Page 72
Page 73
Page 74
Page 75
Page 76
Page 77
Page 78
