Because policies in the United States were too expansionary from 1965 through 1973,
the U.S. suffered
A) demand-pull inflation.
B) cost-push inflation, as workers sought higher wages in order to keep up with
inflation.
C) both demand-pull and cost-push inflation.
D) neither demand-pull nor cost-push inflation.
Answer:
Monetary policy is considered time-inconsistent because
A) of the lag times associated with the implementation of monetary policy and its effect
on the economy.
B) policymakers are tempted to pursue discretionary policy that is more contractionary
in the short run.
C) policymakers are tempted to pursue discretionary policy that is more expansionary
in the short run.
D) of the lag times associated with the recognition of a potential economic problem and
the implementation of monetary policy.
Answer:
The components of the U.S. M1 money supply are demand and checkable deposits plus
A) currency.
B) currency plus savings deposits.
C) currency plus travelers checks.
D) currency plus travelers checks plus money market deposits.
Answer:
The collapse of the subprime mortgage market increased the spread between Baa and
default-free U.S. Treasury bonds. This is due to
A) a reduction in risk.
B) a reduction in maturity.
C) a flight to quality.
D) a flight to liquidity.
Answer:
Higher capital requirements will reduce the problems incurred when troubled ________
which had been off-balance sheet activities come back on the balance sheet.
A) structured investment vehicles (SIVs)
B) negotiable CDs
C) Eurodollars
D) Federal funds
Answer:
________ is creating a marketable capital market instrument by bundling a portfolio of
mortgage or auto loans.
A) diversification.
B) arbitrage.
C) computerization.
D) securitization.
Answer:
A rise in autonomous planned investment spending causes the equilibrium level of
aggregate output to ________ and shifts the ________ curve to the ________,
everything else held constant.
A) rise; LM; right
B) rise; IS; right
C) fall; IS; left
D) fall; LM; left
Answer:
The ________ describes the combinations of interest rates and aggregate output for
which the quantity of money demanded equals the quantity of money supplied.
A) IS curve
B) LM curve
C) consumption function
D) investment schedule
Answer:
The theory of PPP suggests that if one country’s price level falls relative to another’s, its
currency should
A) depreciate.
B) appreciate.
C) float.
D) do none of the above.
Answer:
When housing prices began to decline after their peak in 2006, many subprime
borrowers found that their mortgages were “underwater.” This meant that
A) the value of the house fell below the amount of the mortgage.
B) the basement flooded since they could not afford to fix the leaky plumbing.
C) the roof leaked during a rainstorm.
D) the amount that they owed on their mortgage was less than the value of their house.
Answer:
Property promised to the lender as compensation if the borrower defaults is called
A) collateral.
B) deductibles.
C) restrictive covenants.
D) contingencies.
Answer:
High-powered money minus reserves equals
A) reserves.
B) currency in circulation.
C) the monetary base.
D) the nonborrowed base.
Answer:
Assume a closed economy with no government. Suppose that autonomous
consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
In the simple Keynesian framework, declines in planned investment spending that
produce high unemployment can be offset by raising
A) taxes.
B) government spending.
C) consumer confidence.
D) business confidence.
Answer:
Member commercial banks have purchased stock in their district Fed banks; the
dividend paid by that stock is limited by law to ________ percent annually.
A) four
B) five
C) six
D) eight
Answer:
If the money supply is $500 and nominal income is $4,000, the velocity of money is
A) 1/20.
B) 1/8.
C) 8.
D) 20.
Answer:
A credit market instrument that requires the borrower to make the same payment every
period until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer:
According to the interest parity condition, if the domestic interest rate is 12 percent and
the foreign interest rate is 10 percent, then the expected ________ of the foreign
currency must be ________ percent.
A) appreciation; 4
B) appreciation; 2
C) depreciation; 2
D) depreciation; 4
Answer:
Regular bank examinations and restrictions on asset holdings help to indirectly reduce
the ________ problem because, given fewer opportunities to take on risk, risk-prone
entrepreneurs will be discouraged from entering the banking industry.
A) moral hazard
B) adverse selection
C) ex post shirking
D) post-contractual opportunism
Answer:
Although neither ________ nor the ________ are officially set by the Federal Open
Market Committee, decisions concerning these policy tools are effectively made by the
committee.
A) margin requirements; discount rate
B) margin requirements; federal funds rate
C) reserve requirements; discount rate
D) reserve requirements; federal funds rate
Answer:
Irving Fisher took the view that the institutional features of the economy which affect
velocity change ________ over time so that velocity will be fairly ________ in the
short run.
A) rapidly; erratic
B) rapidly; stable
C) slowly; stable
D) slowly; erratic
Answer:
The ________ of the term structure of interest rates states that the interest rate on a
long-term bond will equal the average of short-term interest rates that individuals
expect to occur over the life of the long-term bond, and investors have no preference for
short-term bonds relative to long-term bonds.
A) segmented markets theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
Answer:
If the liquidity effect is smaller than the other effects, and the adjustment to expected
inflation is immediate, then the
A) interest rate will fall.
B) interest rate will rise.
C) interest rate will fall immediately below the initial level when the money supply
grows.
D) interest rate will rise immediately above the initial level when the money supply
grows.
Answer:
Which of the following statements concerning Keynesian ISLM analysis is true?
A) For a given change in taxes, the IS curve will shift less than for an equal change in
government spending.
B) Changes in net exports arising from a change in interest rates causes a shift in the IS
curve.
C) A fall in the money supply shifts the LM curve to the right.
D) Expansionary fiscal policy will cause the interest rate to fall.
Answer:
Analysis of the transmission mechanisms of monetary policy provides four basic
lessons for a central bank’s conduct of monetary policy. Which of the following is not
one of these lessons?
A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest
rates indicate an easing of monetary policy.
B) Monetary policy can be highly effective in reviving a weak economy even if
short-term interest rates are already near zero.
C) Avoiding unanticipated fluctuations in the price level is an important objective of
monetary policy, thus providing a rationale for price stability as the primary long-run
goal for monetary policy.
D) Other asset prices beside those on short-term debt instruments do not contain
important information about the stance of monetary policy because they are important
elements in various monetary policy transmission mechanisms.
Answer:
Assume a closed economy. Suppose that autonomous consumption equals $400,
planned investment equals $500, government expenditure equals $200, net taxes
equals $50, and the mpc equals 0.9.
Aggregate output is ________ related to autonomous consumer expenditure, and is
________ related to the level of taxes.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
Answer:
If fluctuations in interest rates become smaller, then, other things equal, the demand for
stocks ________ and the demand for long-term bonds ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer:
Recent Japanese experience has been characterized by tight monetary policy, as
indicated by
A) falling interest rates.
B) short-term interest rates near zero.
C) falling asset prices.
D) low real interest rates.
Answer:
Everything else held constant, a credit-drive bubble is generally considered to have the
potential to cause ________ damage to an economy compared to an irrational
exuberance bubble.
A) less
B) about the same amount of
C) more
D) either more, less, or the same amount of
Answer:
Both ________ and ________ are Federal Reserve assets.
A) currency in circulation; reserves
B) currency in circulation; securities
C) securities; loans to financial institutions
D) securities; reserves
Answer:
Financial markets improve economic welfare because
A) they channel funds from investors to savers.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) eliminate the need for indirect finance.
Answer:
While the discount rate is “established” by the regional Federal Reserve Banks, in truth,
the rate is determined by
A) Congress.
B) the president of the United States.
C) the Senate.
D) the Board of Governors.
Answer:
Assume that autonomous consumption equals $200 and disposable income equals
$1000. If total consumption equal $800, then the mpc equals
A) 0.2
B) 0.6
C) 0.8
D) 1
Answer: