1) The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate
B) is a less accurate measure of the incentives to borrow and lend than is the nominal
interest rate
C) is a less accurate indicator of the tightness of credit market conditions than is the
nominal interest rate
D) defines the discount rate
2) The velocity of money is defined as
A) real GDP divided by the money supply
B) nominal GDP divided by the money supply
C) real GDP times the money supply
D) nominal GDP times the money supply
3) An increase in an asset’s expected return relative to that of an alternative asset,
holding everything else constant, ________ the quantity demanded of the asset
A) increases
B) decreases
C) has no effect on
D) erases
4) Which of the following is an example of an intermediate-term debt?
A) A thirty-year mortgage
B) A sixty-month car loan
C) A six month loan from a finance company
D) A Treasury bond
5) When a $10 check written on the First National Bank of Chicago is deposited in an
account at Citibank, then
A) the liabilities of the First National Bank decrease by $10
B) the reserves of the First National Bank increase by $10
C) the liabilities of Citibank decrease by $10
D) the assets of Citibank decrease by $10
6) The Fed can engage in preemptive strikes against a rise in inflation by ________ the
federal funds interest rate; it can act preemptively against negative demand shocks by
________ the federal funds interest rate
A) raising; lowering
B) raising; raising
C) lowering; lowering
D) lowering; raising
7) Holding the expected return on bonds constant, an increase in the expected return on
common stocks would ________ the demand for bonds, shifting the demand curve to
the ________
A) decrease; left
B) decrease; right
C) increase; left
D) increase; right
8) Everything else held constant, an autonomous easing of monetary policy will cause
A) the quantity of aggregate demand to increase
B) the quantity of aggregate demand to decrease
C) aggregate demand to decrease
D) aggregate demand to increase
9) Well-functioning financial markets promote
A) inflation
B) deflation
C) unemployment
D) growth
10) In the long-run ISLM model and with everything else held constant, the long-run
effect of an expansionary fiscal policy is to ________ real output and ________ the
interest rate
A) increase; increase
B) not change; not change
C) increase; not change
D) not change; increase
11) 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
12) According to the household liquidity effect, higher stock prices lead to increased
consumption expenditures because consumers
A) feel more secure about their financial position
B) want to sell stocks and spend the proceeds before stock prices fall
C) believe that their wages will increase due to increased profitability of firms
D) can now afford more expensive imports
13) Compared to interest rates on long-term US government bonds, interest rates on
three-month Treasury bills fluctuate ________ and are ________ on average
A) more; lower
B) less; lower
C) more; higher
D) less; higher
14) Under a fixed exchange rate regime, if a central bank must intervene to purchase
the domestic currency by selling foreign assets, then, like an open market sale, this
action ________ the monetary base and the money supply, causing the interest rate on
domestic assets to ________
A) increases; rise
B) increases; fall
C) reduces; rise
D) reduces; fall
15) In the long-run ISLM model and with everything else held constant, the long-run
effect of a contractionary fiscal policy is to ________ real output and ________ the
interest rate
A) not change; not change
B) decrease; decrease
C) decrease; not change
D) not change; decrease
16) In the long run, a rise in a country’s price level (relative to the foreign price level)
causes its currency to ________, while a fall in the country’s relative price level causes
its currency to ________
A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; appreciate
D) depreciate; depreciate
17) Banks that suffered significant losses in the 1980s made the mistake of
A) holding too many liquid assets
B) minimizing default risk
C) failing to diversify their loan portfolio
D) holding only safe securities