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True / False
1. The Keynesian transmission mechanism could be blocked by either interest-insensitive investment or by the liquidity
trap.
a.
True
b.
False
2. The price of old (or existing) bonds and interest rates have an inverse relationship.
a.
True
b.
False
3. The money supply curve is usually horizontal.
a.
True
b.
False
4. In the liquidity trap, the demand curve for investment is horizontal.
a.
True
b.
False
5. Nonactivists argue against the use of discretionary monetary policy and rules-based monetary policy.
a.
True
b.
False
6. One argument in favor of activist monetary policy is that the economy does not always equilibrate quickly enough at
Natural Real GDP.
a.
True
b.
False
7. When an economist states that the monetarist transmission mechanism is "direct" it means that a change in the money
supply creates a direct impact on the goods and services market.
a.
True
b.
False
8. People should buy bonds when they think that interest rates are as high as they will go.
a.
True
b.
False
9. The predetermined-money-growth-rate rule states that the annual growth rate in the money supply will be constant at
the average annual growth rate of Real GDP.
a.
True
b.
False
10. Economists who believe that the economy is self-regulating are more likely to be nonactivists than activists.
a.
True
b.
False
11. As the interest rate falls, the quantity supplied of money falls and the quantity demanded of money rises.
a.
True
b.
False
12. In the monetarist transmission mechanism, changes in the money market directly affect aggregate demand.
a.
True
b.
False
13. The quantity demanded of money decreases as the supply of money increases.
a.
True
b.
False
14. Equilibrium in the money market exists when the quantity demanded of money equals the quantity supplied of money.
a.
True
b.
False
15. The supply curve of bonds is graphed as a vertical line.
a.
True
b.
False
16. If people have only two ways of holding their wealth, money or bonds, a surplus in the money market implies a
surplus in the bond market.
a.
True
b.
False
17. Changes in the money market have an impact upon the bond market.
a.
True
b.
False
18. Advocates of a gold standard believe that long-term price stability would be more likely under a gold standard than
under current Fed monetary policy.
a.
True
b.
False
19. The demand-for-money curve illustrates the __________ relationship between the quantity demanded of money and
__________.
a.
inverse; the interest rate
b.
direct; GDP.
c.
direct; the interest rate
d.
inverse; GDP
20. If the interest rate increases, the opportunity cost of holding money __________, and the quantity demanded of money
__________.
a.
does not change; does not change
b.
increases; also increases
c.
decreases; increases
d.
increases; decreases
e.
decreases; also decreases
21. As the interest rate __________, the opportunity cost of holding money __________ and individuals choose to hold
__________ money.
a.
increases; increases; more
b.
increases; decreases; more
c.
increases; decreases; less
d.
decreases; increases; more
e.
decreases; decreases; more
22. As the interest rate falls, the quantity
a.
demanded of money falls.
b.
demanded of money rises.
c.
supplied of money rises.
d.
supplied of money falls.
23. If the interest rate is below the equilibrium interest rate, then the quantity __________ of money exceeds the quantity
__________ of money, and there is a __________ of money.
a.
supplied; demanded; shortage
b.
supplied; demanded; surplus
c.
demanded; supplied; shortage
d.
demanded; supplied; surplus
24. If the interest rate falls, the opportunity cost of holding money __________ and the quantity demanded of money
__________.
a.
rises, rises
b.
rises, falls
c.
falls, rises
d.
falls, falls
25. A general definition of the "transmission mechanism" is: the routes or channels that ripple effects created in the
a.
market for goods and the services travel to affect the money market.
b.
money market travel to affect the market for goods and services.
c.
labor market travel to affect the market for goods and services.
d.
market for goods and services travel to affect the labor market.
e.
none of the above
26. Which best describes the Keynesian transmission mechanism when the money supply increases?
a.
The interest rate rises; this in turn reduces investment spending, which in turn raises total expenditures and
shifts the AD curve rightward.
b.
The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and
shifts the AD curve leftward.
c.
The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and
shifts the AD curve rightward.
d.
The interest rate falls; this in turn stimulates investment spending, which in turn lowers total expenditures and
shifts the AD curve leftward.
27. According to the Keynesian transmission mechanism, an increase in the money supply will __________ the interest
rate, causing a __________ in investment, which then __________ Real GDP.
a.
raise; fall; raises
b.
raise; rise; lowers
c.
raise; fall; lowers
d.
lower; fall; lowers
e.
lower; rise; raises
28. Compared to the Keynesian transmission mechanism, the monetarist transmission mechanism is
a.
direct.
b.
indirect.
c.
inverse.
d.
none of the above
29. The Keynesian transmission mechanism might get blocked if
a.
investment is insensitive to changes in interest rates.
b.
the goods market is not in equilibrium.
c.
the money supply increases too quickly.
d.
interest rates are too high before they fall.
30. Which scenario best explains the Keynesian transmission mechanism when the money supply increases while the
money market is in a liquidity trap?
a.
The interest rate and investment are not affected; there is no shift in the AD curve.
b.
The interest rate falls, investment rises, total expenditures rise, and the AD curve shifts rightward.
c.
The interest rate falls, investment falls instead of rising, and the AD curve ends up shifting leftward.
d.
The interest rate falls, but investment does not respond; there is no change in total expenditures and no shift in
the AD curve.
31. If the money market is in the liquidity trap, it is operating in the __________ segment of the __________ demand
curve.
a.
vertical; investment
b.
vertical; money
c.
horizontal; investment
d.
horizontal; money
32. Which scenario best explains the Keynesian transmission mechanism when the investment demand curve is vertical?
a.
The interest rate falls, investment falls even more, the AD curve shifts rightward, but total expenditures do not
change.
b.
The interest rate falls, investment rises, total expenditures rise, and the AD curve shifts rightward.
c.
The interest rate falls, investment falls instead of rising, and the AD curve ends up shifting leftward.
d.
The interest rate falls, but investment does not respond; there is no change in total expenditures and no shift in
the AD curve.
33. The liquidity trap refers to the
a.
assumption that the money supply curve is vertical as a result of the Fed's control.
b.
problem that occurs when interest rates reach such high levels that no individuals want to hold their wealth in
the form of money.
c.
situation that occurs when an excess supply of money results in people holding more money than they desire.
d.
possibility that interest rates drop so low that people willingly hold all the additions to the money supply,
rather than use it to buy bonds.
34. Suppose the money market is in the liquidity trap and the Fed increases the supply of money. We expect that
a.
people will end up willingly holding more money.
b.
the excess money holdings will flow into the loanable funds market and there will be a decrease in interest
rates.
c.
interest rates will increase, since the demand curve for money is upward sloping in this case.
d.
eventually, via the transmission mechanism, Real GDP will increase.
35. What do Keynesians mean when they say that "you can't push on a string"?
a.
An increase in the supply of goods does not really create its own demand.
b.
If the government reduces taxes in an attempt to increase household consumption, it will not always work.
c.
An increase in the money supply will not always stimulate the economy.
d.
If the government wants to get something done, the best way is not to force the issue, but to offer incentives.
e.
If the government puts too much expansionary pressure on the economy, it will probably "overheat."
36. If market interest rates increase, the prices of existing bonds will
a.
decrease.
b.
not change.
c.
increase.
d.
decrease if Real GDP decreases and increase if Real GDP increases.
37. An individual buys a bond for $1,000 and sells it one year later for $1,050. What is the annual interest rate return that
this individual has received on this bond?
a.
5.0 percent
b.
50.0 percent
c.
7.5 percent
d.
4.0 percent
e.
0.05 percent
38. Suppose that one year ago you purchased a $1,000 bond with an interest payment of $40 per year and, at the time, the
interest rate was 4 percent. One year later the interest rate on bonds has increased to 5 percent, and you still hold the bond
you purchased a year ago. If you were to sell your bond now, the price that you could sell it for would be
a.
higher than it was when you bought it.
b.
lower than it was when you bought it.
c.
the same as it was when you bought it, that is, $1,000.
d.
lower or higher than it was when you bought it, but we cannot determine which.
39. Suppose the money market is in the liquidity trap and the Fed increases the supply of money. Individuals would rather
hold __________ than __________ because they expect that bond prices can go no __________.
a.
bonds; money; higher
b.
bonds; money; lower
c.
money; bonds; higher
d.
money; bonds; lower
40. If a liquidity trap exists, people are likely to be thinking that
a.
bond prices are so low that they have nowhere to go but up; given this, now is a good time to be holding
bonds.
b.
bond prices are so high that they have nowhere to go but down; given this, it is better not to be holding bonds.
c.
bond prices will soon rise so it is better to get out of bonds now.
d.
interest rates will soon fall.
41. If the money market is in the liquidity trap, then people
a.
do not want to hold money because its value is at its lowest.
b.
want to hold bonds because the interest rate is quite high.
c.
do not want to hold bonds because their price is likely to decrease.
d.
want to hold bonds because their price is high.
e.
a, b and d
42. Compared to the Keynesian transmission mechanism, the monetarist transmission mechanism is
a.
indirect and long.
b.
direct and long.
c.
direct and short.
d.
indirect and short.
43. Which of the following statements is true?
a.
In the monetarist transmission mechanism, changes in the money market directly affect aggregate demand.
b.
In the monetarist transmission mechanism, there is no need for the money market to affect the loanable funds
market or investment before aggregate demand is affected.
c.
In the monetarist transmission mechanism, if individuals are faced with an excess supply of money, they spend
that money on a wide variety of goods---not just bonds or other assets, as is the case in the Keynesian
transmission mechanism.
d.
a and b
e.
a, b and c
44. According to the monetarist transmission mechanism, a decrease in the supply of money will result in
a.
individuals initially holding excess bonds.
b.
individuals initially holding excess money.
c.
a leftward shift in the aggregate demand curve.
d.
a and c
45. Monetarists believe that changes in the supply of money
a.
do not affect aggregate demand.
b.
affect aggregate demand through the loanable funds market only.
c.
affect only the investment component of aggregate demand.
d.
affect aggregate demand directly.
46. Monetary policy refers to
a.
actions taken by banks and other financial institutions regarding their approaches to lending, account
management, etc.
b.
changes in the money supply to achieve particular economic goals.
c.
changes in government expenditures and taxation to achieve particular economic goals.
d.
the change in private expenditures that occurs as a consequence of changes in the money supply.
Exhibit 15-1
47. Refer to Exhibit 15-l. A Keynesian monetary policy to eliminate a recessionary gap can be portrayed as a move
between points
a.
A and B.
b.
B and C.
c.
C and D.
d.
D and A.
48. Refer to Exhibit 15-l. A monetarist would claim that in a recessionary gap, the economy would move on its own from
point
a.
B to point C.
b.
B to point A.
c.
A to point B.
d.
D to point C.
49. Refer to Exhibit 15-l. A Keynesian would say that natural market forces work so slowly in a recessionary gap in
taking the economy between point __________ that an activist monetary policy is called for.
a.
B and point D
b.
B and point C
c.
C and point B
d.
B and point A
50. Refer to Exhibit 15-l. A Keynesian monetary policy to eliminate an inflationary gap can be portrayed as a movement
between point
a.
A and point B.
b.
B and point C.
c.
C and point D.
d.
D and point A.
51. Refer to Exhibit 15-l. One argument against the use of activist monetary policy claims that it can destabilize the
economy. For example, suppose we are in a recessionary gap. Expansionary monetary policy is implemented, but there
are so many lags that by the time it has its effect, self-regulation has already closed the gap by itself. The end result is a
movement from point
a.
B to point D.
b.
B to point C.
c.
B to point A.
d.
A to point C.
e.
C to point B
52. Refer to Exhibit 15-1. A Keynesian would say that market forces work more quickly in taking the economy from
point______________ than from point _______________.
a.
A to point D; D to point C
b.
A to point D; A to point B
c.
D to point C; B to point A
d.
C to point D; C to point B
53. Refer to Exhibit 15-1. Keynesians are often accused of having an "inflationary bias." This is due at least in part to their
advocacy of expansionary monetary policy when they believe it is needed to take the economy from point
a.
B to point C.
b.
B to point A.
c.
D to point C.
d.
A to point B.
54. Keynesians are more likely to propose
a.
contractionary monetary policy to eliminate an inflationary gap than expansionary monetary policy to
eliminate a recessionary gap.
b.
contractionary monetary policy to eliminate a recessionary gap than contractionary monetary policy to
eliminate an inflationary gap.
c.
expansionary monetary policy to eliminate a recessionary gap than contractionary monetary policy to
eliminate an inflationary gap.
d.
none of the above; instead, Keynesians are as likely to propose expansionary monetary policy to eliminate a
recessionary gap as they are to propose contractionary monetary policy to eliminate an inflationary gap.
55. Suppose the money market is in the liquidity trap and that the economy is experiencing a recessionary gap. A
Keynesian economist would most likely advocate
a.
expansionary monetary policy.
b.
contractionary monetary policy.
c.
expansionary fiscal policy.
d.
contractionary fiscal policy.
56. A decrease in the money supply will shift the aggregate __________ curve to the __________.
a.
supply; left
b.
supply; right
c.
demand; left
d.
demand; right
57. Which of the following statements is false?
a.
Keynesians would not advocate an expansionary monetary policy to eliminate a recessionary gap if they
believed that investment demand was interest-insensitive.
b.
Keynesians would not advocate an expansionary monetary policy to eliminate a recessionary gap if they
believed the money market was in the liquidity trap.
c.
Keynesians would advocate an expansionary monetary policy to eliminate a recessionary gap if they believed
investment spending was insensitive to changes in the interest rate.
d.
Keynesians believe that money wages are inflexible in the downward direction.
58. Persons who argue that monetary and fiscal policy should be deliberately used to smooth out the business cycle are
called
a.
activists.
b.
disciples.
c.
nonactivists.
d.
controllers.
59. Activists believe that
a.
monetary policy should not be used to smooth out the business cycle.
b.
fiscal policy should not be used to smooth out the business cycle.
c.
the frequent use of fiscal or monetary policy is called for to smooth out the business cycle.
d.
rules should be established for the conduct of both monetary and fiscal policy.
60. A person who opposes the deliberate use of fiscal and monetary policies is called a(n)
a.
Keynesian.
b.
fiscalist.
c.
nonactivist.
d.
activist.
61. Nonactivists favor
a.
the use of fiscal policies to manage the economy.
b.
the use of monetary polices to manage the economy.
c.
fine-tuning.
d.
rules for conducting monetary and fiscal policies.
62. Activists believe that
a.
there is sufficient flexibility in wages and prices to allow the economy to equilibrate at full-employment Real
GDP in a reasonable period of time.
b.
discretionary fiscal policies do not work.
c.
discretionary monetary policies do not work.
d.
fine-tuning to smooth out the business cycle is feasible.
63. Which of the following statements is false?
a.
Activists are more likely to advocate fine-tuning the economy than nonactivists.
b.
Activists believe that monetary and fiscal policies can be and should be deliberately used to smooth out the
business cycle.
c.
Nonactivists believe that monetary and fiscal policies cannot and should not be deliberately used to (try to)
smooth out the business cycle.
d.
Nonactivists favor rules-based monetary policy.
e.
none of the above
64. The rules-based monetary policy that some nonactivists have proposed to maintain price stability reads this way:
a.
The annual growth rate in the money supply will equal the average annual growth rate in Real GDP minus the
growth rate in velocity.
b.
The annual growth rate in the money supply will equal the average annual growth rate in Real GDP plus the
growth rate in velocity.
c.
The annual growth rate in the money supply will equal the average annual growth rate in Real GDP divided by
the growth rate in velocity.
d.
The annual growth rate in the money supply will equal the average annual growth rate in Real GDP times the
growth rate in velocity.
65. Economist Smith favors an activist monetary policy. He says that if the economy is going to be stabilized over time, it
is necessary to fine-tune the money supply to the particular economic conditions that exist. What would economist Jones,
who favors rules-based monetary policy, say to economist Smith?
a.
Because of long lags, activist monetary policy is likely to be destabilizing rather than stabilizing.
b.
There have been times when activist monetary policy has worked well.
c.
There have been times when a constant-money-growth-rate rule has worked poorly.
d.
Flexibility is desirable when it comes to monetary policy.
66. Economist Jones favors a constant-money-growth-rate rule. She says that if the annual money supply growth rate each
year is equal to the average annual growth rate in Real GDP, price stability will exist over time. What would economist
Smith, who favors activist monetary policy, say to economist Jones?
a.
Your analysis assumes that Real GDP is constant over time, and it is not.
b.
Your analysis assumes that velocity is constant, and it is not.
c.
Your analysis assumes that you can correctly define the money supply.
d.
b and c
e.
a, b and c
67. Which of the following statements is likely to be made by an economist who believes in activist monetary policy? (1)
The more closely monetary policy can be designed to meet the particulars of a given economic environment, the better.
(2) Because of long and uncertain time lags, activist monetary policy may be destabilizing rather than stabilizing. (3)
There is sufficient flexibility in wages and prices in modern economies to allow the economy to equilibrate in reasonable
speed at the natural level of Real GDP. (4) The "same-for-all-seasons" monetary policy is the way to proceed. (5) There is
evidence that monetary policy in the mid-1970s caused a recession.
a.
(1), (2), and (3)
b.
(1), (4), and (5)
c.
(1) and (5)
d.
(4) and (5)
e.
(1), (3), and (4)
68. Which of the following statements is likely to be made by an economist who does not believe in activist monetary
policy? (1) The more closely monetary policy can he designed to meet the particulars of a given economic environment,
the better. (2) Because of long and uncertain time lags, activist monetary policy may be destabilizing rather than
stabilizing. (3) There is sufficient flexibility in wages and prices in modern economies to allow the economy to equilibrate
in reasonable speed at the natural level of Real GDP, (4) The "same-for-all-seasons" monetary policy is the way to
proceed. (5) There is evidence that monetary policy in the mid-1970s caused a recession.
a.
(1), (2), and (3)
b.
(1), (4), and (5)
c.
(2), (3), and (4)
d.
(3), (4), and (5)
e.
(1) only
69. Economists who propose a constant-money-growth-rate rule often argue that setting the annual growth rate in the
money supply equal to the average annual growth rate in Real GDP
a.
maintains price level stability over time.
b.
is a way to raise Real GDP.
c.
will cause the price level to fall over time.
d.
a and b
e.
a, b and c
70. Economists who favor activist monetary policy often argue that
a.
during the mid-1970s, money supply growth rates were nearly constant and still the economy went through a
recession.
b.
during the mid-1970s, activist monetary policy was applied and the economy was healthy and stable.
c.
activist monetary policy is inflexible and this is one of its virtues; the money supply doesn't change every year
in response to political considerations.
d.
activist monetary policy is likely to be destabilizing most of the time, but still it is the better way to proceed.
71. Economists who favor activist monetary policy argue that
a.
the economy does not always equilibrate quickly enough at the Natural Real GDP or full-employment output
and therefore needs help.
b.
activist monetary policy is effective at smoothing out the business cycle.
c.
activist monetary policy is flexible and flexibility is a desirable quality in monetary policy.
d.
a and b
e.
a, b and c
