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Exhibit 15-2
72. Refer to Exhibit 15-2. A(n)__________ in the money supply from S1 to S2 would have a tendency to __________ the
amount of investment, assuming investment is sensitive to changes in the interest rate.
a.
decrease; raise
b.
decrease; lower
c.
increase; raise
d.
increase; lower
73. Refer to Exhibit 15-2. A(n)__________ in the money supply from S1 to S2 would have a tendency to __________ the
opportunity cost of holding money.
a.
increase; raise
b.
increase; lower
c.
decrease; raise
d.
decrease; lower
74. Refer to Exhibit 15-2. If the interest rate is i1 and the relevant money supply curve is S2, then there is a
a.
shortage of money between points B and A.
b.
surplus of money between points B and A.
c.
surplus of money between points C and D.
d.
shortage of money between points C and D.
75. Refer to Exhibit 15-2. If the interest rate is i2 and the relevant money supply curve is S1, then there is a
a.
shortage of money between points B and A.
b.
surplus of money between points B and A.
c.
surplus of money between points C and D.
d.
shortage of money between points C and D.
76. A change in the money supply will change investment when
a.
the money supply is a function of the price level.
b.
investment is interest-sensitive.
c.
investment depends only on the level of GDP.
d.
investment is interest-insensitive.
e.
the supply for money is a function of the interest rate.
77. The routes or channels that ripple effects created in the money market travel to impact the goods-and-services market
are known as
a.
the transmission lag.
b.
monetary policy.
c.
the liquidity trap.
d.
the transmission mechanism.
78. Which of the following may block the Keynesian transmission mechanism?
a.
the loanable funds market
b.
aggregate demand
c.
interest-insensitive investment
d.
the liquidity trap
e.
c and d
79. Under conditions of a liquidity trap and interest-insensitive investment, Keynesians would be most likely to propose
__________ policy to eliminate a recessionary gap.
a.
expansionary fiscal
b.
contractionary fiscal
c.
expansionary monetary
d.
contractionary monetary
80. Under a constant growth rate of money rule of 4 percent in an economy in which Real GDP grows at an average rate
of 3 percent and velocity is constant, the inflation rate is
a.
7 percent.
b.
-7 percent.
c.
1 percent.
d.
-1 percent.
e.
constant at zero.
81. Under a constant growth rate of money rule of 5 percent in an economy in which Real GDP grows at an average rate
of 5 percent and velocity is constant, the inflation rate is
a.
5 percent.
b.
-5 percent.
c.
25 percent.
d.
-25 percent.
e.
constant at zero.
82. The quantity demanded of money is
a.
inversely related to the interest rate.
b.
directly related to the interest rate.
c.
inversely related to the general price level.
d.
inversely related to GDP.
e.
a, c, and d
83. The quantity supplied of money is assumed (in the textbook) to be
a.
inversely related to the interest rate.
b.
directly related to the interest rate.
c.
independent of the interest rate.
d.
determined exclusively by banks.
e.
c and d
84. As the opportunity cost of holding money decreases, the quantity demanded of money
a.
increases.
b.
decreases.
c.
remains unchanged.
d.
increases, then decreases.
e.
decreases, then increases.
85. According to the Keynesian transmission mechanism, an increase in the money supply causes a(n) __________ in the
interest rate and a(n) __________ in investment, which in turn causes a(n) __________ in total expenditures and
aggregate demand.
a.
increase; decrease; decrease
b.
increase; increase; decrease
c.
decrease; increase; increase
d.
decrease; decrease; increase
86. In the Keynesian transmission mechanism, if investment is completely interest-insensitive, then an increase in the
money supply will
a.
cause total expenditures and aggregate demand to increase.
b.
cause total expenditures and aggregate demand to decrease.
c.
have no impact on total expenditures and aggregate demand.
d.
cause total expenditures to increase and aggregate demand to decrease.
e.
cause total expenditures to decrease and aggregate demand to increase.
87. In the Keynesian transmission mechanism, if the money market is in the liquidity trap, an increase in the money
supply will
a.
cause total expenditures and aggregate demand to increase.
b.
cause total expenditures and aggregate demand to decrease.
c.
have no impact on total expenditures and aggregate demand.
d.
cause total expenditures to increase and aggregate demand to decrease.
e.
cause total expenditures to decrease and aggregate demand to increase.
88. The liquidity trap is the
a.
vertical portion of the demand curve for money.
b.
horizontal portion of the demand curve for money.
c.
vertical portion of the supply curve of money.
d.
horizontal portion of the supply curve of money.
e.
vertical portion of the demand curve for investment.
89. According to the monetarist transmission mechanism, a decrease in the money supply __________ aggregate demand.
a.
directly increases
b.
indirectly increases
c.
directly decreases
d.
indirectly decreases
e.
equals the increase in
90. Monetary policy is
a.
the policy concerning changes in the money supply that is pursued to achieve particular macroeconomic goals.
b.
the expenditures and taxation policy that the government pursues to achieve particular macroeconomic goals.
c.
the investment policy that businesses pursue to achieve particular macroeconomic goals.
d.
the spending and saving policy that consumers pursue to achieve particular macroeconomic goals.
e.
the spending policy that the Treasury pursues to achieve particular macroeconomic goals.
91. To try to eliminate a recessionary gap the Fed typically__________ the money supply, and to try to eliminate an
inflationary gap the Fed typically __________ the money supply.
a.
increases; decreases
b.
increases; increases
c.
decreases; increases
d.
decreases; decreases
92. To eliminate a recessionary gap the Fed typically uses __________ monetary policy, and to eliminate an inflationary
gap the Fed typically uses __________ monetary policy.
a.
expansionary; expansionary
b.
expansionary; contractionary
c.
contractionary; contractionary
d.
contractionary; expansionary
93. Activists hold that
a.
activist monetary policy is flexible.
b.
nonactivist monetary policy is inflexible.
c.
the economy does not always return quickly enough to full-employment output.
d.
a and b
e.
all of the above
94. Nonactivists hold that
a.
activist monetary policies are likely to be destabilizing rather than stabilizing.
b.
economic fine-tuning is quite feasible.
c.
flexibility in wages and prices is sufficient to allow the economy to return at a reasonable speed to full-
employment output.
d.
a and c
e.
all of the above
95. A rules-based monetary policy
a.
is advocated by activists.
b.
is advocated by nonactivists.
c.
could involve a predetermined steady growth rate in the money supply.
d.
b and c
e.
all of the above
96. The monetary policy most likely to be favored by monetarists is
a.
a constant (nongrowing) money supply.
b.
frequent discretionary changes in the money growth rate.
c.
a constant and slow rate of monetary growth.
d.
vigorous monetary expansion during recessions.
e.
a steadily increasing rate of monetary growth.
97. If the investment demand curve is vertical, a decrease in the interest rate will __________ investment, and therefore
aggregate demand will __________.
a.
increase; increase
b.
decrease; increase
c.
decrease; decrease
d.
decrease; remain unchanged
e.
not affect; remain unchanged
98. Persons who argue against the deliberate use of fiscal and monetary policies to smooth out the business cycle are
referred to as
a.
nonactivists.
b.
fine-tuners.
c.
activists.
d.
b and c
e.
none of the above
99. Economic fine-tuning is the (usually frequent) use of
a.
monetary policy that is based on a predetermined steady growth rate in the money supply to counteract even
small undesirable movements in economic activity.
b.
only fiscal policy to counteract even small undesirable movements in economic activity.
c.
monetary and fiscal policies to counteract even small undesirable movements in economic activity.
d.
fiscal policy that both balances the budget and counteracts even small undesirable movements in economic
activity.
100. Activists
a.
probably favor economic fine-tuning.
b.
favor rules-based monetary policy.
c.
argue for the deliberate use of monetary and fiscal policies to smooth out the business cycle.
d.
argue against the deliberate use of monetary and fiscal policies to manage the economy.
e.
a and c
101. If a country’s rules-based monetary policy sets the annual money supply growth rate equal to the average annual
growth rate of Real GDP, and velocity is a constant, then the price level
a.
is also constant.
b.
rises in years when Real GDP rises.
c.
rises in years when Real GDP growth is less than average.
d.
rises in years when Real GDP growth is greater than average.
102. Suppose a constant-money-growth-rate rule of 3 percent is being considered. If it is estimated that average annual
Real GDP growth is 3.5 percent and it turns out that velocity is rising by 2 percent a year on average, the rule would
produce an average annual rate of inflation of __________ percent.
a.
1.5
b.
2.5
c.
3.0
d.
5.5
e.
2.0
103. If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 1 percent per year, then rules-
based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate
at
a.
1
b.
2
c.
3
d.
4
e.
6
104. If Real GDP increases at an annual rate of 3 percent and velocity increases at a rate of 2 percent per year, then rules-
based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate
at
a.
-2 percent.
b.
0 percent.
c.
1 percent.
d.
6 percent.
e.
-1 percent.
105. According to the Keynesian transmission mechanism, if the Fed conducts an open market purchase of government
securities, it may cause which of the following in the investment goods market?
a.
a rightward shift in the investment demand curve
b.
a leftward shift in the investment demand curve
c.
a movement down and along a given investment demand curve
d.
a movement up and along a given investment demand curve
106. According to the Keynesian transmission mechanism, if the Fed conducts an open market sale of government
securities, it may cause which of the following in the investment goods market?
a.
a rightward shift in the investment demand curve
b.
a leftward shift in the investment demand curve
c.
a movement down and along a given investment demand curve
d.
a movement up and along a given investment demand curve
107. Which of the following might break the link in the Keynesian transmission mechanism between the expansionary
monetary policy and the goods-and-services market?
a.
a downward-sloping investment demand curve
b.
a vertical money supply curve
c.
a belief on the part of individuals that bond prices are extraordinarily low
d.
all of the above
e.
none of the above
108. Assume that because of a long policy lag, the Fed starts implementing expansionary monetary policy too late, i.e., at
a time when the economy is already healing itself. As a result, the economy will probably move from an initial
a.
recessionary gap to an even deeper recessionary gap.
b.
recessionary gap to an inflationary gap.
c.
inflationary gap to the natural level of Real GDP.
d.
inflationary gap to a recessionary gap.
109. The price of holding money balances is equal to the
a.
price of bonds that could have been purchased with those money balances.
b.
price of goods and services that could have been purchased with those money balances.
c.
the interest rate that could have been earned had those money balances been invested in an interest-bearing
alternative (e.g., a bond).
d.
any of the above
110. Equilibrium in the money market exists when
a.
at a given interest rate, excess supply of money is equal to the quantity demanded of money.
b.
at a given interest rate, excess demand for money is equal to the quantity demanded of money.
c.
the supply of money curve intersects the demand for money curve at the prevailing interest rate.
d.
b and c
111. The existence of a liquidity trap implies that
a.
a decrease in the interest rate might not increase investment spending.
b.
an increase in the demand for money will be followed by an equal increase in the supply of money.
c.
an increase in the supply of money may not lower interest rates.
d.
a and c
112. One criticism of monetary policy based on a predetermined steady growth rate in money supply is that
a.
wages and prices are sufficiently flexible to allow the economy to restore the natural level of Real GDP on its
own.
b.
the total lag in monetary policy may be too long to allow for effective monetary policy.
c.
changes in velocity, if not accounted for, can then be a source of price instability.
d.
a and b
e.
all of the above
113. Suppose the economy is experiencing an inflationary gap. Based on available data, the Fed starts implementing
contractionary monetary policy, but this moves the economy into a recessionary gap. The most probable explanation is
that, because of the total lag in monetary policy, the government did not realize that the economy was already healing
itself, i.e., that the
a.
AD curve was shifting rightward.
b.
AD curve was shifting leftward.
c.
SRAS curve was shifting rightward.
d.
SRAS curve was shifting leftward.
114. Which of the following statements is true?
a.
The demand curve for money balances represents a direct relationship between the quantity demanded of
money balances and the price of holding money balances.
b.
In the United States, the position of the money supply curve is determined exclusively by the Fed.
c.
The "money market" discussed in this chapter refers to the market for short-term securities.
d.
If, at a given interest rate, individuals want to hold less money than is supplied, this will put downward
pressure on the interest rate.
e.
none of the above
115. As the interest rate __________, the quantity supplied of money __________ and the quantity demanded of money
__________.
a.
falls; rises; falls
b.
rises; remains unchanged; falls
c.
falls; remains unchanged; falls
d.
rises; rises; rises
e.
none of the above
116. As the interest rate increases, the opportunity cost of holding money __________ and individuals choose to hold
__________ money.
a.
rises; more
b.
falls; less
c.
rises; less
d.
falls; more
117. According to the Keynesian transmission mechanism (and assuming there is no liquidity trap and investment is not
interest insensitive), if the money supply increases, the interest rate __________, investment spending __________ and
the AD curve shifts to the __________.
a.
falls; falls; left
b.
rises; rises; right
c.
falls; rises; left
d.
falls; rises; right
e.
rises; falls; right
118. The economy is in the horizontal portion of the AS curve, there is no liquidity trap and investment is sensitive to
changes in the interest rate. According to the Keynesian transmission mechanism, if the money supply drops the interest
rate will __________, investment spending will __________, the AD curve will shift to the __________, and the price
level will __________.
a.
rise; fall; left; rise
b.
fall; rise; right; rise
c.
rise; fall; left; not change
d.
fall; fall; left; fall
e.
rise; rise; left; fall
119. The economy is in the horizontal portion of the AS curve, there is no liquidity trap and investment is sensitive to
changes in the interest rate. According to the Keynesian transmission mechanism, if the money supply increases the
interest rate will __________, investment spending will __________, the AD curve will shift to the __________, and Real
GDP will __________.
a.
fall; rise; right; not change
b.
fall; rise; left; rise
c.
rise; rise; right; rise
d.
fall; rise; right; fall
e.
fall; fall; left; fall
120. The economy is in the horizontal portion of the AS curve, investment spending is interest insensitive and there is no
liquidity trap. According to the Keynesian transmission mechanism, if the money supply increases the interest rate will
__________, investment spending will __________, the AD curve will __________, and Real GDP will __________.
a.
fall; fall; left; fall
b.
rise; drop; left; fall
c.
fall; remain unchanged; not shift; not change
d.
rise; remain unchanged; not shift; not change
e.
none of the above
121. According to Keynesian economists, monetary policy is __________ effective at changing the price level and Real
GDP.
a.
always
b.
sometimes
c.
never
d.
There is no Keynesian position with respect to monetary policy.
122. The economy is in the horizontal portion of the AS curve, there is a liquidity trap, and investment spending is
sensitive to changes in the interest rate. According to the Keynesian transmission mechanism, if the money supply
increases the interest rate __________, investment spending __________, the AD curve __________ and the price level
__________.
a.
falls; rises; shifts to the right; rises
b.
falls; rises; shifts to the right; remains unchanged
c.
does not change; does not change; does not change; does not change
d.
does not change; shifts to the left; does not change; rises
e.
rises; falls; left; falls
123. The SRAS curve is upward sloping, there is a liquidity trap, and investment spending is sensitive to changes in the
interest rate. According to the monetarist transmission mechanism, if the money supply increases the AD curve
__________ and the price level __________.
a.
does not change; does not change
b.
shifts to the left; falls
c.
shifts to the right; rises
d.
does not change; rises
e.
none of the above
124. Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping. According
to a monetarist, an increase in the money supply will __________ Real GDP. According to a Keynesian, an increase in the
money supply will __________ Real GDP.
a.
raise; not change
b.
not change; raise
c.
lower; lower
d.
raise; lower
e.
none of the above
125. Last year, Leah bought a bond for $1,000 that promises to pay $105 a year. This year, a person who buys a bond for
$1,000 receives $95 a year. If Leah were to sell her (old) bond, its price would be approximately
a.
$818.
b.
$846.
c.
$905.
d.
$1,105.
e.
$1,273.
126. Last year, Danielle bought a bond for $10,000 that promises to pay $1,150 a year. This year, a person who buys a
bond for $10,000 receives $1,210 a year. If Danielle were to sell her (old) bond, its price would be approximately
a.
$9,504.
b.
$10,522.
c.
$11,211.
d.
$9,115.
127. Interest rates and the price of old or existing bonds are
a.
directly related.
b.
independent of each other.
c.
inversely related.
d.
sometimes directly related and sometimes inversely related.
e.
There is not enough information to answer the question.
128. The money supply increased and the AD curve did not shift to the right. This is consistent with the
a.
Keynesian transmission mechanism when there is either a liquidity trap or interest-insensitive investment.
b.
monetarist transmission mechanism when there is interest-insensitive investment.
c.
Keynesian transmission mechanism when there is a liquidity trap.
d.
monetarist transmission mechanism when there is a liquidity trap.
e.
c and d
129. The money supply decreased and the AD curve shifted to the left. This is consistent with the
a.
Keynesian transmission mechanism when there is neither a liquidity trap nor interest-insensitive investment.
b.
monetarist transmission mechanism.
c.
Keynesian transmission mechanism when there is a liquidity trap.
d.
Keynesian transmission mechanism with interest-insensitive investment.
e.
a and b
130. According to Keynesians, __________ monetary policy will not remove the economy from a(an) __________ gap if
__________.
a.
contractionary; recessionary; investment is interest-insensitive
b.
expansionary; recessionary; the economy is in the liquidity trap
c.
expansionary; inflationary; investment is interest-insensitive
d.
contractionary; inflationary; the economy has been in the inflationary gap for more than one year
e.
none of the above
131. The economy is in a recessionary gap, wages are inflexible downward, and investment spending is insensitive to
changes in the interest rate. In this situation, a Keynesian is likely to advocate the use of __________ policy.
a.
expansionary monetary
b.
contractionary monetary
c.
expansionary fiscal
d.
contractionary fiscal
132. The economy is in a recessionary gap and there is evidence that the economy is in a liquidity trap. In this situation, a
Keynesian is likely to advocate the use of __________ policy.
a.
expansionary fiscal
b.
contractionary fiscal
c.
expansionary monetary
d.
contractionary monetary
133. The economy is in a recessionary gap and there is complete crowding out. Furthermore, there is no evidence that the
economy is in a liquidity trap or that investment is interest-insensitive. This makes the case for the use of __________
policy stronger than it might be otherwise.
a.
contractionary monetary
b.
contractionary fiscal
c.
expansionary fiscal
d.
expansionary monetary
134. If you believe the economy is self-regulating, you are more likely to be a(an) __________ than a(an) __________.
a.
nonactivist; activist
b.
Keynesian; monetarist
c.
activist; nonactivist
d.
advocate of fiscal policy; advocate of monetary policy
e.
b and d
