Question 1

Which of the following statements is true ?

Accepted Answer

A)  The speculative demand for money at possible interest rates gives the demand for money curve its upward slope. 
B)  There is an inverse relationship between the quantity of money demanded and the interest rate. 
C)  According to the quantity theory of money, any change in the money supply will have no effect on the price level. 
D)  All of the above. 
A)  The speculative demand for money at possible interest rates gives the demand for money curve its upward slope. 
B)  There is an inverse relationship between the quantity of money demanded and the interest rate. 
C)  According to the quantity theory of money, any change in the money supply will have no effect on the price level. 
D)  All of the above.

Question 2

If the Federal Reserve increases the money supply, ceteris paribus, the:

Accepted Answer

A)  rate of interest decreases. 
B)  rate of interest increases. 
C)  rate of interest is unaffected. 
D)  Fed sell bonds. 
A)  rate of interest decreases. 
B)  rate of interest increases. 
C)  rate of interest is unaffected. 
D)  Fed sell bonds.

Question 3

A graph illustrating the relationship between the quantity of money demanded and the interest rate would have a slope that is:

Accepted Answer

A)  positive. 
B)  negative. 
C)  horizontal. 
D)  vertical. 
A)  positive. 
B)  negative. 
C)  horizontal. 
D)  vertical.

Question 4

Exhibit 20A-1  Policy Alternatives   Assume that the economy depicted in Panel (b) of Exhibit 20A-1 is in short-run equilibrium where AD1 equals SRAS1. Keynesian theory argues:

Accepted Answer

A)  nominal wages will fall as long as employment remains above the natural level of unemployment. 
B)  lower wages will result in a shift from SRAS1 to SRAS2. 
C)  long-run equilibrium will be established at Yp and P1. 
D)  government intervention must shift AD1 rightward to AD2. 
A)  nominal wages will fall as long as employment remains above the natural level of unemployment. 
B)  lower wages will result in a shift from SRAS1 to SRAS2. 
C)  long-run equilibrium will be established at Yp and P1. 
D)  government intervention must shift AD1 rightward to AD2.

Question 5

Assume a fixed demand for money curve and the Fed decreases the money supply. In response, people will:

Accepted Answer

A)  sell bonds, thus driving up the interest rate. 
B)  sell bonds, thus driving down the interest rate. 
C)  buy bonds, thus driving up the interest rate. 
D)  buy bonds, thus driving down the interest rate. 
A)  sell bonds, thus driving up the interest rate. 
B)  sell bonds, thus driving down the interest rate. 
C)  buy bonds, thus driving up the interest rate. 
D)  buy bonds, thus driving down the interest rate.

Question 6

The quantity theory of money assumes that the velocity of money:

Accepted Answer

A)  is constant. 
B)  will rise if the money supply rises and fall if the money supply falls. 
C)  will rise if the money supply rises, but it will not change if the money supply falls. 
D)  will fall if the money supply rises, and it will rise if the money supply falls. 
E)  will fall if the money supply rises, but it will not change if the money supply falls. 
A)  is constant. 
B)  will rise if the money supply rises and fall if the money supply falls. 
C)  will rise if the money supply rises, but it will not change if the money supply falls. 
D)  will fall if the money supply rises, and it will rise if the money supply falls. 
E)  will fall if the money supply rises, but it will not change if the money supply falls.

Question 7

Exhibit 20A-2  Macro AD/AS Models   As shown in Panel (a) of Exhibit 20A-2, assume the economy adopts a classical nonintervention policy. Which of the following would cause the economy to self-correct?

Accepted Answer

A)  Competition among firms for workers increases the nominal wage and SRAS shifts rightward. 
B)  Long-run equilibrium will be established at Y1 and P2. 
C)  Long-run equilibrium will be established at Y1 and P3. 
D)  Competition among unemployed workers decreases nominal wages and SRAS shifts rightward. 
A)  Competition among firms for workers increases the nominal wage and SRAS shifts rightward. 
B)  Long-run equilibrium will be established at Y1 and P2. 
C)  Long-run equilibrium will be established at Y1 and P3. 
D)  Competition among unemployed workers decreases nominal wages and SRAS shifts rightward.

Question 8

Speculative demand for money is a:

Accepted Answer

A)  positive function of prices. 
B)  inverse function of prices. 
C)  positive function of interest rates. 
D)  inverse function of interest rates. 
E)  function of unexpected needs. 
A)  positive function of prices. 
B)  inverse function of prices. 
C)  positive function of interest rates. 
D)  inverse function of interest rates. 
E)  function of unexpected needs.

Question 9

Exhibit 20-5  Money, Investment and product markets   In Exhibit 20-5, when the money supply increases from MS1 to MS2, the equilibrium interest rate:

Accepted Answer

A)  remains unchanged. 
B)  increases from i2 to i1, increasing investment spending from I1 to I2. 
C)  increases from i2 to i1, decreasing investment spending from I2 to I1. 
D)  decreases from i1 to i2, increasing investment spending from I1 to I2. 
E)  decreases from i1 to i2, decreasing investment spending from I2 to I1. 
A)  remains unchanged. 
B)  increases from i2 to i1, increasing investment spending from I1 to I2. 
C)  increases from i2 to i1, decreasing investment spending from I2 to I1. 
D)  decreases from i1 to i2, increasing investment spending from I1 to I2. 
E)  decreases from i1 to i2, decreasing investment spending from I2 to I1.

Question 10

Suppose nominal GDP equaled $10,988 billion while the M2 money supply was $6,063 billion. What was the velocity of the M2 money stock?

Accepted Answer

A)  0.45 
B)  0.55 
C)  1.81 
D)  2.36 
A)  0.45 
B)  0.55 
C)  1.81 
D)  2.36

Question 11

If the economy is inflationary, the Fed would most likely:

Accepted Answer

A)  encourage banks to provide loans by buying government securities. 
B)  encourage banks to provide loans by raising the discount rate. 
C)  encourage banks to provide loans by selling government securities. 
D)  restrict bank lending by selling government securities. 
E)  restrict bank lending by lowering the federal funds rate. 
A)  encourage banks to provide loans by buying government securities. 
B)  encourage banks to provide loans by raising the discount rate. 
C)  encourage banks to provide loans by selling government securities. 
D)  restrict bank lending by selling government securities. 
E)  restrict bank lending by lowering the federal funds rate.

Question 12

Starting from a position of macroeconomic equilibrium at below the full-employment level of real GDP, an increase in the money supply will:

Accepted Answer

A)  raise interest rates, prices, and reduce real GDP. 
B)  raise interest rates, lower prices, and leave real GDP unchanged 
C)  raise interest rates, lower prices, and leave real GDP unchanged. 
D)  lower interest rates, raise prices, and increase real GDP. 
A)  raise interest rates, prices, and reduce real GDP. 
B)  raise interest rates, lower prices, and leave real GDP unchanged 
C)  raise interest rates, lower prices, and leave real GDP unchanged. 
D)  lower interest rates, raise prices, and increase real GDP.

Question 13

Investment is lowered by expansionary monetary policy.

Accepted Answer

A) True 
 B)False

Question 14

When the Fed increases the money supply, interest rates:

Accepted Answer

A)  rise. 
B)  fall. 
C)  are unaffected. 
D)  rise and then fall. 
E)  fall and then rise. 
A)  rise. 
B)  fall. 
C)  are unaffected. 
D)  rise and then fall. 
E)  fall and then rise.

Question 15

Exhibit 20A-2  Macro AD/AS Models   In Panel (b) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. Classical theory argues that:

Accepted Answer

A)  SRAS will shift to leftward and establish full employment at P3Yp without government intervention. 
B)  higher wages will result in a leftward shift of SRAS. 
C)  long-run equilibrium will be established at Yp and P3. 
D)  all of the above will take place. 
A)  SRAS will shift to leftward and establish full employment at P3Yp without government intervention. 
B)  higher wages will result in a leftward shift of SRAS. 
C)  long-run equilibrium will be established at Yp and P3. 
D)  all of the above will take place.

Question 16

A decrease in the supply of money, other things being equal, will raise the equilibrium interest rate.

Accepted Answer

A) True 
 B)False

Question 17

Assuming the economy is in a recession, Keynesian economists predict that:

Accepted Answer

A)  wages will remain fixed. 
B)  monetary policy will sell government securities. 
C)  higher wages will shift the short-run aggregate supply curve leftward. 
D)  lower wages will shift the short-run aggregate supply curve rightward. 
A)  wages will remain fixed. 
B)  monetary policy will sell government securities. 
C)  higher wages will shift the short-run aggregate supply curve leftward. 
D)  lower wages will shift the short-run aggregate supply curve rightward.

Question 18

If the Fed wants to raise interest rates, then it can use its open market operations to:

Accepted Answer

A)  increase the money supply. 
B)  decrease the money supply. 
C)  increase money demand. 
D)  decrease money demand. 
A)  increase the money supply. 
B)  decrease the money supply. 
C)  increase money demand. 
D)  decrease money demand.

Question 19

Exhibit 20A-1  Policy Alternatives   In Panel (a) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. Classical theory argues:

Accepted Answer

A)  the federal government must shift AD1 to AD2 as shown in Panel (b). 
B)  the federal government must shift SRAS1 to SRAS2. 
C)  that SRAS1 will shift to SRAS2 without government intervention. 
D)  that AD will shift rightward without government intervention. 
A)  the federal government must shift AD1 to AD2 as shown in Panel (b). 
B)  the federal government must shift SRAS1 to SRAS2. 
C)  that SRAS1 will shift to SRAS2 without government intervention. 
D)  that AD will shift rightward without government intervention.

Question 20

Exhibit 20-1  Money market demand and supply curves   Starting from an equilibrium at E1 in Exhibit 20-1, a leftward shift of the money supply curve from MS1 to MS2 would cause an excess:

Accepted Answer

A)  demand for money, leading people to sell bonds. 
B)  demand for money, leading people to buy bonds. 
C)  supply of money, leading people to sell bonds. 
D)  supply of money, leading people to buy bonds. 
A)  demand for money, leading people to sell bonds. 
B)  demand for money, leading people to buy bonds. 
C)  supply of money, leading people to sell bonds. 
D)  supply of money, leading people to buy bonds.

Exam 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Which of the following statements is true ?

If the Federal Reserve increases the money supply, ceteris paribus, the:

A graph illustrating the relationship between the quantity of money demanded and the interest rate would have a slope that is:

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (b) of Exhibit 20A-1 is in short-run equilibrium where AD1 equals SRAS1. Keynesian theory argues:

Assume a fixed demand for money curve and the Fed decreases the money supply. In response, people will:

The quantity theory of money assumes that the velocity of money:

Exhibit 20A-2 Macro AD/AS Models As shown in Panel (a) of Exhibit 20A-2, assume the economy adopts a classical nonintervention policy. Which of the following would cause the economy to self-correct?

Speculative demand for money is a:

Exhibit 20-5 Money, Investment and product markets In Exhibit 20-5, when the money supply increases from MS1 to MS2, the equilibrium interest rate:

Suppose nominal GDP equaled $10,988 billion while the M2 money supply was $6,063 billion. What was the velocity of the M2 money stock?

If the economy is inflationary, the Fed would most likely:

Starting from a position of macroeconomic equilibrium at below the full-employment level of real GDP, an increase in the money supply will:

Investment is lowered by expansionary monetary policy.

When the Fed increases the money supply, interest rates:

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. Classical theory argues that:

A decrease in the supply of money, other things being equal, will raise the equilibrium interest rate.

Assuming the economy is in a recession, Keynesian economists predict that:

If the Fed wants to raise interest rates, then it can use its open market operations to:

Exhibit 20A-1 Policy Alternatives In Panel (a) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. Classical theory argues:

Exhibit 20-1 Money market demand and supply curves Starting from an equilibrium at E1 in Exhibit 20-1, a leftward shift of the money supply curve from MS1 to MS2 would cause an excess:

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Inflation

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Filters

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (b) of Exhibit 20A-1 is in short-run equilibrium where AD₁ equals SRAS₁. Keynesian theory argues:

Exhibit 20-5 Money, Investment and product markets In Exhibit 20-5, when the money supply increases from MS₁ to MS₂, the equilibrium interest rate:

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues that:

Exhibit 20A-1 Policy Alternatives In Panel (a) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues:

Exhibit 20-1 Money market demand and supply curves Starting from an equilibrium at E₁ in Exhibit 20-1, a leftward shift of the money supply curve from MS₁ to MS₂ would cause an excess: