790 Miller Economics Today, 16th Edition
88) Travis always carries $100 in his wallet to pay for groceries. This is an example of the
A) precautionary demand for money. B) asset demand for money.
C) transactions demand for money. D) wealth demand for money.
89) Bertha holds some of her savings as currency and coins placed in her sewing basket. This is an
example of
A) precautionary demand for money. B) asset demand for money.
C) transactions demand for money. D) wealth demand for money.
90) The demand for money is downward sloping, because at higher interest rates,
A) the opportunity cost of holding cash is lower.
B) the opportunity cost of holding money is higher.
C) the opportunity cost of holding money is decreasing.
D) the opportunity cost of holding money is constant.
91) If the interest rate increases, there is a(n)
A) increase in the demand for money.
B) decrease in the demand for money.
C) increase in the quantity of money demanded.
D) decrease in the quantity of money demanded.
92) Suppose Tim has $1,000 in cash on hand to buy collectable baseball cards at a swap meet. Tim
often sells these cards at a profit. This is an example of the
A) asset demand for money. B) transaction demand for money
C) precautionary demand for money. D) wealth demand for money.
93) The asset demand for money is
A) greater at high interest rates as investors can earn more on their investments.
B) greater at low interest rates, because the opportunity cost of holding money is low.
C) greater at low interest rates, because the opportunity cost of holding money is high.
D) lower at low interest rates, because the opportunity cost of holding money is high.
94) As interest rates rise, the quantity of money demanded
A) falls. B) rises.
C) stays the same. D) does not react to interest rate changes.
95) What is meant by the demand for money?
96) The demand for money is infinite since everyone wants more money. Do you agree or
disagree with this statement? Why?
97) What are three reasons people want to hold money balances?
98) What does the demand curve for money look like? Why?
16.2 How the Fed Influences Interest Rates
1) Which of the following actions by the Fed would lead to an increase in the money supply?
A) An increase in the required reserve ratio
B) An increase in the differential between the discount rate and the federal funds rate
C) An increase in tax rates
D) The purchase of government securities
2) An increase in bond prices will most likely result in
A) an increase in interest rates.
B) a decrease in the quantity demanded of money.
C) an increase in the quantity demanded of money.
D) an increase in the opportunity cost of holding money.
3) If a bond sells for $2,000 and pays $200 per year in interest, the interest rate on the bond is
A) 20 percent. B) 10 percent. C) 5 percent. D) 100 percent.
4) If you initially pay $1,000 for a bond with an annual interest rate of 5 percent, but then the
market interest rate rises to 6 percent,
A) the market price of the bond is still $1,000.
B) the bond s annual interest payment remains equal to $50.
C) the market price of the bond has increased.
D) the market price of the bond has decreased.
5) The price of bonds and the interest rate are
A) inversely related. B) positively related.
C) unrelated. D) related, but we are not sure how.
6) An excess quantity of money demanded will lead to a rise in
A) the interest rate. B) investment.
C) income. D)
b
ond prices.
7) Which of the following will lead to a decrease in the price of existing bonds?
A) A decrease in the rate of interest
B) An inward shift in money demand
C) A decrease in planned investment spending
D) A reduction in the money supply
8) An increase in the money supply typically leads to
A) a reduction in the rate of interest. B) a decrease in the price level.
C) a reduction in the velocity of money. D) an inward shift in money demand.
9) If the Fed purchases U.S. government securities in the open market, all of the following would
occur EXCEPT
A) an expansion of the money supply.
B) an increase in investment.
C) a fall in bond prices.
D) an increase in real Gross Domestic Product (GDP).
10) If the Fed sells bonds through its open market operations, then there is
A) an increase in the demand for bonds and a rise in the price of existing bonds.
B) an increase in the supply of bonds and a fall in the price of existing bonds.
C) a decrease in interest rates because of the increase in the supply of bonds.
D) a decrease in interest rates because of the decrease in the demand for bonds.
11) If the Fed decides to buy bonds, the result will be
A) lower bond prices and lower interest rates.
B) lower bond prices and higher interest rates.
C) higher bond prices and lower interest rates.
D) higher bond prices and higher interest rates.
12) The market prices of existing bonds are
A) not related to the interest rate. B) directly related to the interest rate.
C) inversely related to the interest rate. D) stated in terms of the interest rate.
13) Interest rates typically rise when
A)
b
ond prices increase.
B)
b
ond prices decrease.
C) the coupon payout on existing bonds increase.
D) the maturity date on existing bonds extends farther into the future.
14) Which of the following is NOT a reason the Fed changes the rate of growth of the money
supply?
A) To influence aggregate demand
B) To shift the demand for money curve
C) To influence the amount of consumption
D) To influence the amount of investment
15) The market price of existing bonds is ________ to the rate of interest prevailing in the economy.
A) inversely related B) directly related
C) totally unrelated D) synonymous
16) Open market operations by the Fed cause
A) changes in the difference between the discount rate. and the federal funds rate.
B) aggregate supply to change.
C) the prices of bonds to change.
D) changes in the required reserve ratio.
17) When the Fed conducts open market operations, it
A) purchases or sells government bonds issued by the U.S. Treasury.
B) is engaging in fiscal policy.
C) also raises taxes at the same time.
D) shifts the demand for money curve.
18) A sale of bonds by the Fed generates
A) an increase in the demand for money balances.
B) a decrease in the demand for money balances.
C) an increase in the demand for bonds and a rise in bond prices.
D) an increase in the supply of bonds and a fall in bond prices.
19) The purchase of government bonds by the Fed leads to a(n)
A) increase in the supply of bonds and a decrease in bond prices.
B) decrease in the supply of bonds and an increase in bond prices.
C) increase in the demand of bonds and a decrease in the price of bonds.
D) decrease in the demand of bonds and an increase in the price of bonds.
20) An increase in the interest rate will
A) decrease the price of bonds.
B) increase the price of bonds.
C) increase or decrease the price of bonds depending upon whether the money supply has
increased or decreased.
D) leave the price of bonds unchanged.
21) Refer to the above figure. Which panel is consistent with the Fed selling bonds?
A) Panel A B) Panel B C) Panel C D) Panel D
22) Refer to the above figure. Which panel is consistent with the Fed buying bonds?
A) Panel A B) Panel B C) Panel C D) Panel D
23) Refer to the above figure. Which panels could represent the situation if the Fed had engaged in
open market operations?
A) Panels A and B B) Panels A and C
C) Panels B and C D) Panels C and D
24) A bond that pays a yearly interest rate of $100 is for sale. The interest rate was 10 percent and
now is 5 percent. The price of the bond was
A) $1000 and now is $500. B) $1000 and now is $2000.
C) $500 and now is $2000. D) $2000 and now is $1000.
25) A bond is selling for $1000 and it pays $150 in interest a year. If the interest rate changes to 20
percent, then
A) the interest payment rises to $200. B) the interest payment falls to $75.
C) the price of the bond falls to $750. D) the price of the bond rises to $1500.
26) Which of the following is a true statement about the relationship between the price of bonds and
the interest rate?
A) The prices of bonds are directly related to the interest rate.
B) The prices of bonds increase when the interest rates rise.
C) The prices of bonds are unrelated to the interest rate.
D) The prices of bonds are inversely related to the interest rate.
27) The Fed engages in open market operations and sells government securities. The result is
A) lower interest rates.
B) higher interest rates.
C) interest rates remain unchanged since there is no reason to think bond prices changed.
D) uncertain since more information is needed.
28) Which of the following is associated with a contractionary monetary policy?
A) Lowering the differential between the discount rate and the federal funds rate
B) Selling bonds
C) Lowering the required reserve ratio
D) Raising bond prices
29) The Fed would be pursuing a contractionary monetary policy if it was
A) lowering the differential between the discount rate and the federal funds rate.
B) lowering the reserve requirement.
C) selling dollars in foreign exchange markets.
D) selling bonds in the open market.
30) How does the Fed increase the level of reserves in the banking system?
A)
b
y lowering interest rates B)
b
y raising interest rates
C)
b
y selling bonds D)
b
y buying bonds
31) When the Fed purchases federal government bonds in the open market,
A) there is no change in the money supply. B) the money supply expands.
C) the money supply contracts. D) the demand for money expands.
32) When interest rates in the bond market go up,
A) there is no impact on the price of existing bonds.
B) the price of existing bonds goes up.
C) the price of stocks goes up.
D) the price of existing bonds goes down.
33) The prices of all fixed income assets (bonds)
A) vary directly with the interest rate. B) are independent of the interest rate.
C) vary inversely with the interest rate. D) are determined by the U.S. Treasury.
34) The asset demand for money is
A) greater at high interest rates as investors can earn more on their investments.
B) greater at low interest rates, because the opportunity cost of holding money is low.
C) greater at low interest rates, because the opportunity cost of holding money is high.
D) lower at low interest rates, because the opportunity cost of holding money is high.
35) In the above figure, if we begin at S1and the Fed sells bonds,
A) the price of bonds falls, and the interest rate rises.
B) the price of bonds falls, and so does the interest rate.
C) the price of bonds rises, and so does the interest rate.
D) the price of bonds rises, and the interest rate falls.
36) In the above figure, if we begin at S2and the Fed buys bonds,
A) the price of bonds falls, and the interest rate rises.
B) the price of bonds falls, and so does the interest rate.
C) the price of bonds rises, and so does the interest rate.
D) the price of bonds rises, and the interest rate falls.
37) Suppose the Fed conducts an open market sale of bonds. This monetary policy action will tend
to cause
A) the price of bonds to increase and the interest rate to increase.
B) the price of bonds to increase and the interest rate to decrease.
C) the price of bonds to decrease and the interest rate to increase.
D) the price of bonds to decrease and the interest rate to decrease.
38) If the Fed sells U.S. government securities , the
A) money supply increases, and the money supply curve shifts to the right.
B) money supply increases, and the money supply curve shifts to the left.
C) money supply decreases, and the money supply curve shifts to the right.
D) money supply decreases, and the money supply curve shifts to the left.
39) Suppose the Fed conducts an open market purchase of bonds. This monetary policy action will
tend to cause
A) the price of bonds to increase, and the interest rate to increase.
B) the price of bonds to increase, and the interest rate to decrease.
C) the price of bonds to decrease, and the interest rate to increase.
D) the price of bonds to decrease, and the interest rate to decrease.
40) The Federal Open Market Committee engages in contractionary monetary policy by
A) lowering interest rates. B) creating excess reserves.
C) selling bonds. D)
b
uying bonds.
41) What happens to the price of bonds when the Fed is selling bonds? What happens to the interest
rate? What happens to the money supply?
42) Describe and explain the relationship between the price of bonds and the interest rate.
16.3 Effects of an Increase in the Money Supply
1) An increase in the supply of money, other things constant,
A) stimulates an increase in demand for money.
B) reduces the purchasing power of money.
C) reduces the rate of growth of the price level.
D) generates significant changes in relative prices.
2) The direct effect of an increase in the money supply is to
A) raise interest rates as people increase their saving.
B) increase interest rates as people anticipate higher inflation in the future.
C) increase aggregate demand as people try to spend their excess money balances.
D) decrease aggregate demand as people anticipate future economic problems.
3) The short run effect of an increase in the supply of money is
A) an increase in both real Gross Domestic Product (GDP) and the price level.
B) an increase in the price level but not in real Gross Domestic Product (GDP).
C) an increase in real Gross Domestic Product (GDP) but not in the price level.
D) an increase in the price level, a decrease in real Gross Domestic Product (GDP), but an
increase in nominal national income.
4) The indirect effect of an increase in the money supply is to
A) raise interest rates so people will save more.
B) lower interest rates, which stimulates both investment and consumption spending.
C) put more cash in people s pockets, thereby increasing aggregate demand.
D) pay off a portion of the public debt.
5) Look at the above figure. Suppose the economy was initially in equilibrium at point A. What
point would represent the short run equilibrium if the Fed makes an open market purchase of
bonds?
A) A B) B C) C D) D
6) In the long run, the effect of a reduction in the money supply is to
A) decrease the price level only.
B) decrease real Gross Domestic Product (GDP) only.
C) decrease both the price level and real Gross Domestic Product (GDP).
D) decrease the price level and increase real Gross Domestic Product (GDP).
7) To close a recessionary gap, the Fed would
A) decrease the money supply. B) increase interest rates.
C) sell bonds. D) increase the money supply.
8) Expansionary monetary policy during periods of underutilized resources can cause
A) real Gross Domestic Product (GDP) to increase without an increase in the price level.
B) real Gross Domestic Product (GDP) to increase with a decrease in the price level.
C) real Gross Domestic Product (GDP) to increase with an increase in the price level.
D) nominal Gross Domestic Product (GDP) to increase but cannot affect real Gross Domestic
Product (GDP).
9) If the economy is underutilizing its economic resources, the Fed should
A) discourage investment spending.
B) expand the money supply to increase aggregate demand.
C) decrease aggregate supply.
D) contract the money supply to decrease aggregate demand.
10) In the above figure, assume the economy starts out in equilibrium at point d. If the Fed increases
the money supply so that the new aggregate demand curve is AD 3, then the new short run
equilibrium will be at point
A) a. B)
b
. C) c. D) i.
11) In the above figure, assume the economy starts out in equilibrium at point d. If the Fed increases
the money supply so that the new aggregate demand curve is AD 3, then the long run
equilibrium will be at point
A) a. B)
b
. C) c. D) i.
12) In the above figure, assume the aggregate demand of the economy is AD2and the Fed actions
move aggregate demand to AD1. In this situation, the Fed has practiced
A) contractionary monetary policy. B) expansionary monetary policy.
C) irresponsible fiscal policy. D) Keynesian fiscal policy.
13) In the above figure, assume the economy is in equilibrium at point d. Then the Fed decreases the
money supply so that the new aggregate demand curve is AD1. In the long run, the new price
level will be
A) 100. B) 120. C) 130. D) 110.
14) In the above figure, if the economy is in equilibrium at E1
,
then
A) the economy is producing below its potential long run equilibrium at full employment.
B) the economy is producing above its potential long run equilibrium at full employment.
C) there is an inflationary gap in the economy.
D) the economy is in a period of high inflation.
15) In the above figure, if the economy is at equilibrium at E1
,
the Fed would most likely
A) adopt a contractionary monetary policy.
B) adopt an expansionary monetary policy.
C) attempt to lower the aggregate demand in the economy.
D) attempt to lower the price level below 120.
16) In the long run, a decrease in the money supply will
A) decrease real Gross Domestic Product (GDP).
B) increase real Gross Domestic Product (GDP).
C) increase the price level.
D) decrease the price level.
17) One result of a contractionary monetary policy would be
A) a decline in the price level. B) an increase in the money supply.
C) an increase in business investment. D) lower interest rates.
18) The direct effect of an increase in the money supply is to
A) increase aggregate demand as people spend their excess money balances.
B) increase aggregate demand as interest rates fall and investment spending increases.
C) increase aggregate supply as producers anticipate higher future profits.
D) decrease the rate of inflation.
19) The indirect effect of an increase in the money supply is to
A) increase aggregate demand as people try to spend their excess money balances.
B) increase aggregate demand as interest rates fall and investment spending increases.
C) increase aggregate supply as firms anticipate future profits.
D) decrease the price level.
20) Which of the following will NOT occur in the short run when the money supply decreases?
A) People will buy fewer goods and services.
B) The interest rate will increase.
C) Aggregate supply decreases.
D) The price level decreases.
21) An increase in the money supply will
A) increase aggregate supply. B) decrease aggregate supply.
C) increase aggregate demand. D) decrease aggregate demand.
22) The short run effect of an increase in the money supply is to
A) increase real GDP only.
B) increase the price level only.
C) increase both real GDP and the price level.
D) increase nominal GDP but decrease the price level.