Question 1

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by:

Accepted Answer

A)  M * P = V * Y. 
B)  M * V = P * Y. 
C)  M * Y = P *V. 
D)  M*V = (1/ P) * Y. 
A)  M * P = V * Y. 
B)  M * V = P * Y. 
C)  M * Y = P *V. 
D)  M*V = (1/ P) * Y.

Question 2

The federal funds rate is never targeted by the Fed.

Accepted Answer

A) True 
 B)False

Question 3

Figure 11-4  
-Refer to Figure 11-4. If the Fed acts to close the output gap in Panel (a), it would

Accepted Answer

A)  sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate. 
B)  buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate. 
C)  buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate. 
D)  sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate. 
A)  sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate. 
B)  buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate. 
C)  buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate. 
D)  sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate.

Question 4

The demand for money can be stated as M = (P * Y)/V.

Accepted Answer

A) True 
 B)False

Question 5

Historical actions indicate that the Fed's primary goal of monetary policy over the past 30 years has been to

Accepted Answer

A)  maintain high interest rates. 
B)  keep employment rates low. 
C)  limit the availability of consumer credit. 
D)  prevent high rates of inflation. 
A)  maintain high interest rates. 
B)  keep employment rates low. 
C)  limit the availability of consumer credit. 
D)  prevent high rates of inflation.

Question 6

Figure 11-4  
-Refer to Figure 11-4. Suppose the economy is initially at Y1 in Panel (a). It is experiencing

Accepted Answer

A)  an inflationary gap. 
B)  a recessionary gap. 
C)  an actual unemployment rate that is less than the natural unemployment rate. 
D)  a situation that warrants a decrease in the money supply. 
A)  an inflationary gap. 
B)  a recessionary gap. 
C)  an actual unemployment rate that is less than the natural unemployment rate. 
D)  a situation that warrants a decrease in the money supply.

Question 7

The federal funds rate is determined by demand and supply of bank reserves.

Accepted Answer

A) True 
 B)False

Question 8

Figure 11-2  
-Refer to Figure 11-2. By shifting the demand curve from D1 to D2, the Fed is attempting to

Accepted Answer

A)  contract the economy by increasing interest rates. 
B)  expand the economy by increasing interest rates. 
C)  contract the economy by decreasing interest rates. 
D)  expand the economy by decreasing interest rates. 
A)  contract the economy by increasing interest rates. 
B)  expand the economy by increasing interest rates. 
C)  contract the economy by decreasing interest rates. 
D)  expand the economy by decreasing interest rates.

Question 9

Figure 11-1  
-Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a). What happens to the interest rate?

Accepted Answer

A)  It will increase. 
B)  It will decrease. 
C)  It remains unchanged. 
D)  Short-term interest rates will decrease but long-term interest rates will increase. 
A)  It will increase. 
B)  It will decrease. 
C)  It remains unchanged. 
D)  Short-term interest rates will decrease but long-term interest rates will increase.

Question 10

In the equation of exchange, the variable whose value must be computed from the other variables is the

Accepted Answer

A)  price level. 
B)  quantity of output. 
C)  quantity of money. 
D)  velocity of money. 
A)  price level. 
B)  quantity of output. 
C)  quantity of money. 
D)  velocity of money.

Question 11

In order to move the federal funds rate to the level it desires, the Fed must

Accepted Answer

A)  first change the discount rate to the desired federal funds rate. 
B)  specify the interest rate on previously issued government bonds. 
C)  adjust the money supply to achieve the target federal funds rate. 
D)  limit the amount of bank lending activity. 
A)  first change the discount rate to the desired federal funds rate. 
B)  specify the interest rate on previously issued government bonds. 
C)  adjust the money supply to achieve the target federal funds rate. 
D)  limit the amount of bank lending activity.

Question 12

When the Fed buys bonds in the open market, we can expect

Accepted Answer

A)  bond prices and interest rates to fall. 
B)  bond prices to rise and interest rates to fall. 
C)  bond prices to fall and interest rates to rise. 
D)  bond prices and interest rates to rise. 
A)  bond prices and interest rates to fall. 
B)  bond prices to rise and interest rates to fall. 
C)  bond prices to fall and interest rates to rise. 
D)  bond prices and interest rates to rise.

Question 13

If the demand curve for money were horizontal at some interest rate, an increase in the money supply

Accepted Answer

A)  would lower the interest rate. 
B)  would increase the rate of inflation. 
C)  would be highly effective in reducing inflation. 
D)  would not change the interest rate. 
A)  would lower the interest rate. 
B)  would increase the rate of inflation. 
C)  would be highly effective in reducing inflation. 
D)  would not change the interest rate.

Question 14

All of the following are sources of the impact lag except

Accepted Answer

A)  it takes some time for the deposit multiplier process to work itself out. 
B)  firms need some time to respond to the monetary policy with respect to their investment plans. 
C)  it takes time for the Fed to formulate a policy that best addresses a problem in the economy. 
D)  a monetary change is likely to affect the exchange rate, but that translates into a change in net exports only after some delay. 
A)  it takes some time for the deposit multiplier process to work itself out. 
B)  firms need some time to respond to the monetary policy with respect to their investment plans. 
C)  it takes time for the Fed to formulate a policy that best addresses a problem in the economy. 
D)  a monetary change is likely to affect the exchange rate, but that translates into a change in net exports only after some delay.

Question 15

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will

Accepted Answer

A)  increase interest rates and increase the bond prices. 
B)  increase interest rates and decrease the bond prices 
C)  decrease interest rates and increase the bond prices 
D)  decrease interest rates and decrease the bond prices 
A)  increase interest rates and increase the bond prices. 
B)  increase interest rates and decrease the bond prices 
C)  decrease interest rates and increase the bond prices 
D)  decrease interest rates and decrease the bond prices

Question 16

If you earn and spend $2,000 per month and maintain an average cash balance of $500 per month, your velocity of money is

Accepted Answer

A)  $1,250. 
B)  2. 
C)  4. 
D)  $1,500. 
A)  $1,250. 
B)  2. 
C)  4. 
D)  $1,500.

Question 17

Assume that velocity is constant in the long run. Which of the following equations correctly describes the quantity equation in terms of percentage rate of change? ∆ means "change in."

Accepted Answer

A)  % ∆M ÷ % ∆P = % ∆Y 
B)  % ∆M +- % ∆P = % ∆Y 
C)  % ∆M- % ∆Y = % ∆P 
D)  % ∆M * % ∆Y = % ∆P 
A)  % ∆M ÷ % ∆P = % ∆Y 
B)  % ∆M +- % ∆P = % ∆Y 
C)  % ∆M- % ∆Y = % ∆P 
D)  % ∆M * % ∆Y = % ∆P

Question 18

Which of the following explains why the monetary policy implementation lag is relatively short? 
I. The FOMC meets several times a year and policymakers are easily able to confer in between meetings.
II. Open market operations, one of the Fed's policy instruments can be put into effect
Jimmediately.
III. The Chairman of the Fed works in close collaboration with the President.
IV. Most financial institutions are member banks and will not hesitate to put into effect any new monetary policy.

Accepted Answer

A)  I 
B)  I and II 
C)  I, II, and III 
D)  I, II, III, and IV 
A)  I 
B)  I and II 
C)  I, II, and III 
D)  I, II, III, and IV

Question 19

If the velocity of money is constant, then

Accepted Answer

A)  a change in nominal GDP can be caused only by a change in the money supply. 
B)  a change in the money supply can be caused only by a change in the price level. 
C)  a change in the money supply is negatively related to a change in nominal GDP. 
D)  a change in the money supply would result in no change in nominal GDP. 
A)  a change in nominal GDP can be caused only by a change in the money supply. 
B)  a change in the money supply can be caused only by a change in the price level. 
C)  a change in the money supply is negatively related to a change in nominal GDP. 
D)  a change in the money supply would result in no change in nominal GDP.

Question 20

The federal funds rate is set directly by the Fed.

Accepted Answer

A) True 
 B)False

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by:

The federal funds rate is never targeted by the Fed.

Figure 11-4 -Refer to Figure 11-4. If the Fed acts to close the output gap in Panel (a), it would

The demand for money can be stated as M = (P * Y)/V.

Historical actions indicate that the Fed's primary goal of monetary policy over the past 30 years has been to

Figure 11-4 -Refer to Figure 11-4. Suppose the economy is initially at Y₁ in Panel (a). It is experiencing

The federal funds rate is determined by demand and supply of bank reserves.

Figure 11-2 -Refer to Figure 11-2. By shifting the demand curve from D₁ to D₂, the Fed is attempting to

Figure 11-1 -Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a). What happens to the interest rate?

In the equation of exchange, the variable whose value must be computed from the other variables is the

In order to move the federal funds rate to the level it desires, the Fed must

When the Fed buys bonds in the open market, we can expect

If the demand curve for money were horizontal at some interest rate, an increase in the money supply

All of the following are sources of the impact lag except

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will

If you earn and spend $2,000 per month and maintain an average cash balance of $500 per month, your velocity of money is

Assume that velocity is constant in the long run. Which of the following equations correctly describes the quantity equation in terms of percentage rate of change? ∆ means "change in."

If the velocity of money is constant, then

The federal funds rate is set directly by the Fed.

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Exam 11: Monetary Policy and the Fed

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by:

The federal funds rate is never targeted by the Fed.

Figure 11-4 -Refer to Figure 11-4. If the Fed acts to close the output gap in Panel (a), it would

The demand for money can be stated as M = (P * Y)/V.

Historical actions indicate that the Fed's primary goal of monetary policy over the past 30 years has been to

Figure 11-4 -Refer to Figure 11-4. Suppose the economy is initially at Y1 in Panel (a). It is experiencing

The federal funds rate is determined by demand and supply of bank reserves.

Figure 11-2 -Refer to Figure 11-2. By shifting the demand curve from D1 to D2, the Fed is attempting to

Figure 11-1 -Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a). What happens to the interest rate?

In the equation of exchange, the variable whose value must be computed from the other variables is the

In order to move the federal funds rate to the level it desires, the Fed must

When the Fed buys bonds in the open market, we can expect

If the demand curve for money were horizontal at some interest rate, an increase in the money supply

All of the following are sources of the impact lag except

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will

If you earn and spend $2,000 per month and maintain an average cash balance of $500 per month, your velocity of money is

Assume that velocity is constant in the long run. Which of the following equations correctly describes the quantity equation in terms of percentage rate of change? ∆ means "change in."

If the velocity of money is constant, then

The federal funds rate is set directly by the Fed.

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Figure 11-4 -Refer to Figure 11-4. Suppose the economy is initially at Y₁ in Panel (a). It is experiencing

Figure 11-2 -Refer to Figure 11-2. By shifting the demand curve from D₁ to D₂, the Fed is attempting to