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135. Suppose that a rules-based monetary policy proposal specifies that the money supply will grow 3 percent each year.
If velocity grows 1 percent this year and Real GDP grows 2 percent, the price level will __________ by __________
percent.
a.
rise; 3
b.
fall; 2
c.
rise; 2
d.
rise; 6
e.
fall; 5
136. The rules-based monetary policy reads: The annual growth rate in the money supply will be equal to the average
annual growth rate in Real GDP minus the growth rate in velocity. If the average growth rate in Real GDP this year is 3
percent and the growth rate in velocity is 2 percent, then the money supply will increase by ______________ percent this
year.
a.
1
b.
2
c.
3
d.
4
137. The rules-based monetary policy reads: The money supply will increase 3 percent each year. If the average annual
growth rate in Real GDP is 2 percent and velocity increases by 1 percent each year, it follows that
a.
the price level will, on average, rise 2 percent a year.
b.
the price level will rise 2 percent this year.
c.
in some years the price level will rise by more than in other years.
d.
in some years the price level may not change at all.
e.
a, c and d
138. The Keynesian link between the money market and the goods and services market is __________. Changes in the
money market must affect the __________ market before the goods and services market is affected.
a.
direct; credit
b.
indirect; labor
c.
indirect; investment goods
d.
direct; stock
e.
none of the above
139. The supply of bonds rises, ceteris paribus, and the price of bonds __________. This __________ the interest rate and
__________ the quantity demanded of money.
a.
rises; raises; lowers
b.
falls; lowers; raises
c.
rises; lowers; lowers
d.
falls; raises; lowers
e.
falls; lowers; lowers
140. Assuming that the SRAS curve is upward sloping, which of the following statements represents a correct and
sequentially accurate economic explanation?
a.
The demand for bonds falls, the price of bonds falls, the interest rate rises, investment spending declines, the
AD curve shifts to the left, the price level declines and Real GDP decreases.
b.
The demand for bonds rises, the price of bonds rises, the interest rate rises, investment spending declines, the
AD curve shifts to the left, the price level declines and Real GDP decreases.
c.
The supply of bonds rises, the price of bonds falls, the interest rate falls, investment spending rises, the AD
curve shifts to the right, the price level declines and Real GDP decreases.
d.
The supply of bonds falls, the price of bonds rises, the interest rate falls, investment spending rises, the AD
curve shifts to the right, the price level declines and Real GDP increases.
141. Which of the following statements is true?
a.
Interest rates are directly related to the price of old or existing bonds.
b.
The monetarist transmission mechanism is indirect whereas the Keynesian transmission mechanism is direct.
c.
The interest rate is the opportunity cost of holding money.
d.
a and b
e.
a, b and c
142. There is an increase in the money supply and the interest rate does not change. This is what happens if
a.
investment is interest-insensitive.
b.
a liquidity trap exists.
c.
activist monetary policy is used instead of nonactivist monetary policy.
d.
wages and prices are flexible.
e.
none of the above
143. Buddy bought a bond last year for $10,000. His bond pays $1,000 a year. This year a bond that sells for $10,000 pays
$900 a year. If Buddy were to sell his (old) bond, its price would be approximately
a.
$11,111.
b.
$10,120.
c.
$9,000.
d.
$12,000.
e.
$9,500.
144. The demand for money rises. According to the Keynesian transmission mechanism, the interest rate __________,
investment spending __________ (assuming it is interest-sensitive), the AD curve shifts to the __________ and if the AS
curve is horizontal, Real GDP __________.
a.
rises; falls; left; rises
b.
falls; rises; right; does not change
c.
rises; falls; right; rises
d.
falls; falls; left; does not change
e.
rises; falls; left; falls
145. The Taylor Rule specifies that the federal funds rate target should be equal to
a.
0.5 ( inflation rate) + 1.5 (GDP gap) + 1
b.
1.5 (inflation rate) + 0.5 (GDP gap) + 1.
c.
interest rate - expected inflation rate.
d.
equilibrium federal funds rate + inflation rate +1
146. If the economy is in the liquidity trap, people think that
a.
the money supply will soon rise.
b.
bond prices have nowhere to go but up.
c.
bond prices will not change.
d.
bond prices have nowhere to go but down.
e.
none of the above
147. Which of the following statements is true?
a.
Nonactivists argue that monetary and fiscal policies should be deliberately used to smooth out the business
cycle.
b.
Fine-tuning consists of the usually frequent use of monetary policy to counteract even small undesirable
movements in economy activity.
c.
Keynesians would be more likely to advocate contractionary monetary policy to correct an inflationary gap
than expansionary monetary policy to correct a recessionary gap.
d.
b and c
e.
a, b and c
Exhibit 15-3
148. Refer to Exhibit 15-3. The economy is initially at point 1. Ideally, __________ monetary policy will move the
economy to point __________.
a.
expansionary; 9
b.
contractionary; 4
c.
expansionary; 8
d.
expansionary; 7
e.
contractionary; 2
149. Refer to Exhibit 15-3. The economy is currently at point 7. If the economy self-regulates, it will end up at point
__________, whereas if contractionary monetary policy is effective, it will end up at point __________.
a.
8; 6
b.
9; 6
c.
9; 5
d.
9; 3
e.
3; 9
150. Refer to Exhibit 15-3. The economy is currently at point 5. If contractionary monetary policy is implemented, and
prices are flexible, the economy will likely move to point ______ in the short run.
a.
1
b.
3
c.
2
d.
4
e.
none of the above
151. Refer to Exhibit 15-3. The economy is currently at point 4. The Fed increases the money supply and the economy
ends up at point 8. Has monetary policy been effective at moderating the business cycle?
a.
Yes, since it eliminated the recessionary gap.
b.
Yes, since it decreased the unemployment rate.
c.
Yes, since it increased Real GDP.
d.
No, since it has moved the economy from a recessionary gap to an inflationary gap.
e.
a, b and c
152. The Taylor Rule provides policymakers with a target for
a.
the federal funds rate.
b.
the discount rate.
c.
the inflation rate.
d.
the unemployment rate.
e.
c and d
153. When is it best to sell bonds?
a.
When interest rates are expected to rise, because this means bond prices will rise.
b.
When interest rates are expected to fall, because this means bond prices will rise.
c.
When interest rates are expected to rise, because this means bond prices will fall.
d.
When interest rates are expected to fall, because this means bond prices will fall.
154. According to the Taylor Rule: if the inflation rate is 2% and the GDP gap is 3%, what does the federal funds rate
target equal?
a.
9.5 percent
b.
7.5 percent
c.
5.5 percent
d.
8.5 percent
155. According to the Taylor Rule, if the inflation rate is 3 percent and the GDP gap is 2 percent, what does the federal
funds rate target equal?
a.
8.5 percent
b.
5.5 percent
c.
3.5 percent
d.
6.5 percent
156. Assume the Keynesian transmission mechanism is operational and the economy is currently operating in the
horizontal portion of the AS curve. If the money supply increases and the demand for money curve is downward sloping
and investment is interest ____________, then Real GDP will ___________________.
a.
sensitive; rise
b.
insensitive; remain unchanged
c.
sensitive; remain unchanged
d.
insensitive; rise
e.
a and b
157. Assume the Keynesian transmission mechanism is operational and the economy is currently operating in the
horizontal portion of the AS curve. If the money supply decreases and the demand for money curve is downward sloping
and investment is interest-____________, then Real GDP will ___________________.
a.
sensitive; fall
b.
insensitive; fall
c.
sensitive; rise
d.
insensitive; rise
e.
sensitive; remain unchanged
158. The quantity demanded of money falls as the
a.
interest rate falls.
b.
interest rate rises.
c.
supply of money rises.
d.
none of the above, since the quantity demanded of money is unrelated to the interest rate
159. Last year, Bentley bought a bond for $1,000 that promises to pay $115 a year. This year, a person who buys a bond
for $1,000 receives $125 a year. If Bentley were to sell his (old) bond, its price would be approximately
a.
$920.
b.
$1,125.
c.
$1,087.
d.
$1,350.
160. The object of inflation targeting is for a country’s central bank to try to keep the inflation rate near
a.
the country’s historical average economic growth rate.
b.
some predetermined level.
c.
the country’s historical average inflation rate.
d.
the country’s historical average unemployment rate.
161. Suppose that an individual can hold her wealth in only two forms: money and bonds. A _______________ in the
bond market would then imply that there is a ________________ in the money market.
a.
surplus; surplus
b.
shortage; shortage
c.
surplus; shortage
d.
shortage; surplus
e.
c and d
Exhibit 15-4
State of the Money Market
State of the Bond Market
Shortage
(A)
Surplus
(B)
Equilibrium
(C)
Assume that people have only two choices when it comes to holding their wealth: in money or in bonds.
162. Refer to Exhibit 15-4. Identify the appropriate state of the bond market that would fill in blanks (A), (B), and (C),
respectively.
a.
surplus; shortage; equilibrium
b.
shortage; surplus; equilibrium
c.
surplus; surplus; equilibrium
d.
shortage; shortage; equilibrium
163. Refer to Exhibit 15-4. In the row of this table containing blank (B), people are holding ______________ of their
wealth in bonds and ________________ of their wealth in money.
a.
too much; too little
b.
too little; too much
c.
just the right amount; too little
d.
just the right amount; too much
e.
just the right amount; just the right amount
164. Refer to Exhibit 15-4. In the row of this table containing blank (A), people are holding ______________ of their
wealth in bonds and ________________ of their wealth in money.
a.
too much; too little
b.
too little; too much
c.
just the right amount; too little
d.
just the right amount; too much
e.
just the right amount; just the right amount
165. Refer to Exhibit 15-4. In the row of this table containing blank (C), people are holding ______________ of their
wealth in bonds and ________________ of their wealth in money.
a.
too much; too little
b.
too little; too much
c.
just the right amount; too little
d.
just the right amount; too much
e.
just the right amount; just the right amount
166. Suppose that the bond market and the money market both start out in equilibrium, then the Federal Reserve increases
the money supply. The result will be a ______________ in the money market and a _________________ in the bond
market, which will push bond prices _________________ and interest rates will ___________________ until a new
equilibrium is reached.
a.
surplus; shortage; up; fall
b.
shortage; surplus; down; rise
c.
surplus; shortage; down; rise
d.
shortage; surplus; down; fall
167. Suppose that the bond market and the money market both start out in equilibrium, then the Federal Reserve decreases
the money supply. The result will be a ______________ in the money market and a _________________ in the bond
market, which will push bond prices _________________ and interest rates will ___________________ until a new
equilibrium is reached.
a.
surplus; shortage; up; fall
b.
shortage; surplus; down; rise
c.
surplus; shortage; down; rise
d.
shortage; surplus; down; fall
168. According to economist Arnold Kling’s perspective on the economy, economic activity is best viewed by focusing
on
a.
aggregate demand.
b.
the actions of the Federal Reserve.
c.
changes in spending.
d.
specialization and trade.
169. From the Patterns of Sustainable Specialization and Trade (PSST) perspective, expansionary monetary and fiscal
policies that are designed to boost aggregate demand
a.
will not work if the money market is in disequilibrium, and may end up making the economy worse.
b.
will not work unless alternative sources of energy are employed.
c.
may not work if buyers and sellers are out of sync with one another, and may end up making the economy
worse.
d.
are always successful in pushing the economy to full-employment.
170. Which of the following events prompted the birth of market monetarism?
a.
the Great Depression
b.
the Great Recession
c.
the 1907 Bankers’ Panic
d.
the establishment of the European Union
171. Traditional monetarists advocate for a rule for _____________ , while market monetarists argue that monetary policy
should focus on a ______________________.
a.
nominal GDP target; money supply growth
b.
Real GDP target; nominal GDP target
c.
money supply growth; Real GDP target
d.
money supply growth; nominal GDP target
172. Suppose that there is a financial crisis, and people choose to spend less. As a result, velocity drops by 5
percent. According to market monetarists, if the GDP target growth rate is 3 percent, the Fed would need to increase the
money supply by ______________ percent in order to achieve their GDP target.
a.
8
b.
2
c.
4
d.
5
Exhibit 15-5
173. Refer to Exhibit 15-5. At short-run equilibrium, this economy is in a(n) ___________________ gap. An economist
who believes that the economy is self-regulating would assert that _____________________________.
a.
inflationary; the SRAS curve will shift leftward sufficiently to close the inflationary gap
b.
recessionary; the SRAS curve will shift rightward sufficiently to close the recessionary gap
c.
inflationary; the AD curve will shift leftward sufficiently to close the inflationary gap
d.
recessionary; the AD curve will shift rightward sufficiently to close the recessionary gap
174. Refer to Exhibit 15-5. Assume that the economy starts out in short-run equilibrium. An economist who believes that
the economy is not self-regulating would assert that the government should use _________________ fiscal policy to close
the existing ___________________ gap.
a.
expansionary; inflationary
b.
expansionary; recessionary
c.
contractionary; recessionary
d.
contractionary; inflationary
Exhibit 15-6
175. Refer to Exhibit 15-6. At Q1, this economy is in a(n) ___________________ gap. An economist who believes that
the economy is self-regulating would assert that the ________________ curve will shift rightward to push the economy to
point _____________.
a.
inflationary; SRAS; A
b.
recessionary; SRAS; A
c.
inflationary; AD; B
d.
recessionary; AD; B
176. Refer to Exhibit 15-6. Assume that the economy starts out producing Q1. An economist who believes that the
economy is not self-regulating would assert that the government should use _________________ fiscal policy to close the
existing ___________________ gap.
a.
expansionary; inflationary
b.
expansionary; recessionary
c.
contractionary; recessionary
d.
contractionary; inflationary
177. Under a gold standard, if the market price of gold is above the official price of gold (set by the monetary authority)
members of the public would likely buy gold _______________ and sell it __________________, causing the market
price of gold to ____________________.
a.
from the monetary authority; in the gold market; fall
b.
from the monetary authority; in the gold market; rise
c.
in the gold market; to the monetary authority; fall
d.
in the gold market; to the monetary authority; rise
178. Under a gold standard, if the market price of gold is below the official price of gold (set by the monetary authority)
members of the public would likely buy gold _______________ and sell it __________________, causing the market
price of gold to ____________________.
a.
from the monetary authority; in the gold market; fall
b.
from the monetary authority; in the gold market; rise
c.
in the gold market; to the monetary authority; fall
d.
in the gold market; to the monetary authority; rise
179. Under a gold standard, if the market price of gold is below the official price of gold (set by the monetary authority),
people will be more likely to sell gold __________________, which will cause the money supply to _______________
and the price level.to _______________.
a.
to the monetary authority; fall; fall
b.
to the monetary authority; rise; rise
c.
in the gold market; fall; fall
d.
in the gold market; rise; rise
180. Under a gold standard, if the market price of gold is above the official price of gold (set by the monetary authority),
people will be more likely to sell gold __________________, which will cause the money supply to _______________
and the price level.to _______________.
a.
to the monetary authority; fall; fall
b.
to the monetary authority; rise; rise
c.
in the gold market; fall; fall
d.
in the gold market; rise; rise
181. Describe the Keynesian transmission mechanism for a decrease in the money supply. Assuming that no liquidity trap
exists, that investment is interest-sensitive, and that the economy is in the horizontal portion of the AS curve, what
happens to Real GDP and the price level? How can you tell if this is a direct transmission mechanism or an indirect one?
182. What are the two assumptions made in the nonactivist constant-money-growth-rate rule? Describe the alternative rule
known as the predetermined-money-growth-rate rule and explain why some nonactivists prefer this rule.
183. Describe the monetary policy known as inflation targeting. What are the three major issues that surround this
practice?
184. Suppose that the bond market and the money market start out in equilibrium. Explain the process by which the
interest rate and the price of bonds will change as a result of the Fed increasing the money supply.
185. Explain how, according to the theory of PSST (patterns of specialization and sustainable trade), economic activity
can decline in the face of unchanged aggregate demand. Give a hypothetical example to help support your answer.
