Question 1

According to the Monetarists, the primary cause of inflation is:

Accepted Answer

A)  large budget deficits. 
B)  high taxes. 
C)  rapid expansion of the money supply. 
D)  government expenditures that are large relative to the size of the economy. 
A)  large budget deficits. 
B)  high taxes. 
C)  rapid expansion of the money supply. 
D)  government expenditures that are large relative to the size of the economy.

Question 2

The downward slope of the demand for money curve is created by the:

Accepted Answer

A)  transactions demand for money. 
B)  precautionary demand for money. 
C)  speculative demand for money. 
D)  all of the above. 
A)  transactions demand for money. 
B)  precautionary demand for money. 
C)  speculative demand for money. 
D)  all of the above.

Question 3

According to classical economists,

Accepted Answer

A)  prices are rigid. 
B)  both V and Q are variable for an economy in short-run equilibrium. 
C)  changes in M cause changes in V. 
D)  the velocity of money is constant. 
A)  prices are rigid. 
B)  both V and Q are variable for an economy in short-run equilibrium. 
C)  changes in M cause changes in V. 
D)  the velocity of money is constant.

Question 4

Exhibit 20-6  Money, investment and product markets   In Exhibit 20-6, a move from MS1 to MS2:

Accepted Answer

A)  increases the money supply, causing the interest rate to rise from i2 to i1. 
B)  increases the money supply, causing the interest rate to fall from i1 to i2. 
C)  decreases the money supply, causing the interest rate to rise from i2 to i1. 
D)  decreases the money supply, causing the interest rate to fall from i1 to i2. 
E)  has no effect on the money supply or the interest rate. 
A)  increases the money supply, causing the interest rate to rise from i2 to i1. 
B)  increases the money supply, causing the interest rate to fall from i1 to i2. 
C)  decreases the money supply, causing the interest rate to rise from i2 to i1. 
D)  decreases the money supply, causing the interest rate to fall from i1 to i2. 
E)  has no effect on the money supply or the interest rate.

Question 5

Which of the following falls when bond prices rise?

Accepted Answer

A)  Stock prices. 
B)  Interest rates. 
C)  Money demand. 
D)  Money supply. 
A)  Stock prices. 
B)  Interest rates. 
C)  Money demand. 
D)  Money supply.

Question 6

Exhibit 20A-4  Macro AD/AS Model   As shown in Exhibit 20A-4, assume the marginal propensity to consume MPC equals 0.80. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E1 to full employment.

Accepted Answer

A)  increased by $1.6 trillion 
B)  decreased by $1.6 trillion 
C)  increased by $.20 trillion 
D)  increased by $.20 trillion. 
E)  increased by $.80 trillion 
A)  increased by $1.6 trillion 
B)  decreased by $1.6 trillion 
C)  increased by $.20 trillion 
D)  increased by $.20 trillion. 
E)  increased by $.80 trillion

Question 7

The demand for money curve shows that there is an inverse relationship between the quantity of money demanded and the:

Accepted Answer

A)  quantity of money supplied. 
B)  gross domestic product (GDP). 
C)  price level. 
D)  interest rate. 
A)  quantity of money supplied. 
B)  gross domestic product (GDP). 
C)  price level. 
D)  interest rate.

Question 8

If you hold money in anticipation of household emergency expense, this represents the::

Accepted Answer

A)  speculative demand for holding money. 
B)  transactions demand for holding money. 
C)  opportunity cost motive for holding money. 
D)  precautionary demand for holding money. 
E)  regressive cost of holding money. 
A)  speculative demand for holding money. 
B)  transactions demand for holding money. 
C)  opportunity cost motive for holding money. 
D)  precautionary demand for holding money. 
E)  regressive cost of holding money.

Question 9

The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other nonmoney financial assets is the:

Accepted Answer

A)  unit-of-account motive for holding money. 
B)  precautionary motive for holding money. 
C)  speculative motive for holding money. 
D)  transactions motive for holding money. 
A)  unit-of-account motive for holding money. 
B)  precautionary motive for holding money. 
C)  speculative motive for holding money. 
D)  transactions motive for holding money.

Question 10

A rightward shift in the money supply curve is likely to produce a rightward shift in the money demand curve.

Accepted Answer

A) True 
 B)False

Question 11

An increase in the money supply:

Accepted Answer

A)  raises the interest rate, causing an increase in investment and an increase in GDP. 
B)  lowers the interest rate, causing an increase in investment and an increase in GDP. 
C)  raises the interest rate, causing a decrease in investment and an increase in GDP. 
D)  lowers the interest rate, causing a decrease in investment and an increase in GDP. 
E)  lowers the interest rate, causing a decrease in investment and a decrease in GDP. 
A)  raises the interest rate, causing an increase in investment and an increase in GDP. 
B)  lowers the interest rate, causing an increase in investment and an increase in GDP. 
C)  raises the interest rate, causing a decrease in investment and an increase in GDP. 
D)  lowers the interest rate, causing a decrease in investment and an increase in GDP. 
E)  lowers the interest rate, causing a decrease in investment and a decrease in GDP.

Question 12

Causality is clear and mechanical with the quantity theory of money. If M increases because:

Accepted Answer

A)  V and Q are variable, the price level, P, increases. 
B)  V and Q are variable, the price level, P, decreases. 
C)  V and Q are constant, the price level, P, increases. 
D)  V and Q are constant, the price level, P, decreases. 
E)  P and Q are constant, velocity, V, increases. 
A)  V and Q are variable, the price level, P, increases. 
B)  V and Q are variable, the price level, P, decreases. 
C)  V and Q are constant, the price level, P, increases. 
D)  V and Q are constant, the price level, P, decreases. 
E)  P and Q are constant, velocity, V, increases.

Question 13

If the Fed uses its tools to expand the money supply, bond prices will be bid up and interest rates will fall.

Accepted Answer

A) True 
 B)False

Question 14

Exhibit 20-2  Money market demand and supply curves   Starting from an equilibrium at E1 in Exhibit 20-2, a rightward 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)  supply of money, leading people to buy bonds. 
C)  supply of money, leading people to sell bonds. 
D)  demand for money, leading people to buy bonds. 
A)  demand for money, leading people to sell bonds. 
B)  supply of money, leading people to buy bonds. 
C)  supply of money, leading people to sell bonds. 
D)  demand for money, leading people to buy bonds.

Question 15

Which economic theory argues that changes in velocity are predictable and the crowding-out effect is substantial?

Accepted Answer

A)  Classical theory. 
B)  Keynesian theory. 
C)  Monetarist theory. 
D)  Marxist theory. 
A)  Classical theory. 
B)  Keynesian theory. 
C)  Monetarist theory. 
D)  Marxist theory.

Question 16

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion. If the Fed raises the discount rate, which of the following is most likely to be the new money market equilibrium?

Accepted Answer

A)  An interest rate of 6 percent and a quantity of $1.5 trillion. 
B)  An interest rate of 5 percent and a quantity of $2 trillion. 
C)  An interest rate of 4 percent and a quantity of $2.5 trillion. 
D)  None of the above. 
A)  An interest rate of 6 percent and a quantity of $1.5 trillion. 
B)  An interest rate of 5 percent and a quantity of $2 trillion. 
C)  An interest rate of 4 percent and a quantity of $2.5 trillion. 
D)  None of the above.

Question 17

Monetarists believe:

Accepted Answer

A)  the cause-and-effect relationship hypothesized by the Keynesians understates the impact of stimulative monetary policy. 
B)  the cause-and-effect relationship hypothesized by the Keynesians is an accurate description of how monetary policy works. 
C)  since the economy is operating at full employment, any stimulative monetary policy will cause the inflation rate to rise. 
D)  the cause-and-effect relationship hypothesized by the Keynesians is backwards, and decreases in the money supply actually stimulate economic activity. 
E)  the cause-and-effect relationship hypothesized by Keynesians will not work because investment does not respond to changes in interest rates. 
A)  the cause-and-effect relationship hypothesized by the Keynesians understates the impact of stimulative monetary policy. 
B)  the cause-and-effect relationship hypothesized by the Keynesians is an accurate description of how monetary policy works. 
C)  since the economy is operating at full employment, any stimulative monetary policy will cause the inflation rate to rise. 
D)  the cause-and-effect relationship hypothesized by the Keynesians is backwards, and decreases in the money supply actually stimulate economic activity. 
E)  the cause-and-effect relationship hypothesized by Keynesians will not work because investment does not respond to changes in interest rates.

Question 18

​ Assume the economy is experiencing an inflationary gap, Keynesian economists would believe that:

Accepted Answer

A)  ​flexible wages will restore full employment. 
B)  ​the federal government should decrease spending to shift the aggregate demand   curve leftward. 
C)  ​the Federal Reserve should lower the interest rate. 
D)  ​the federal government should increase spending to shift the aggregate demand curve rightward. 
A)  ​flexible wages will restore full employment. 
B)  ​the federal government should decrease spending to shift the aggregate demand   curve leftward. 
C)  ​the Federal Reserve should lower the interest rate. 
D)  ​the federal government should increase spending to shift the aggregate demand curve rightward.

Question 19

Exhibit 20-4  Aggregate demand and supply model   In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD3 to AD2?

Accepted Answer

A)  Lower the discount rate. 
B)  Lower the federal funds rate 
C)  Raise the federal funds rate. 
D)  Raise the legal reserve requirement 
E)  Buy government securities. 
A)  Lower the discount rate. 
B)  Lower the federal funds rate 
C)  Raise the federal funds rate. 
D)  Raise the legal reserve requirement 
E)  Buy government securities.

Question 20

Exhibit 20-4  Aggregate demand and supply model   In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD1 to AD2?

Accepted Answer

A)  Lower the legal reserve requirement. 
B)  Lower the federal funds rate. 
C)  Print currency. 
D)  Raise the discount rate. 
E)  Sell government securities. 
A)  Lower the legal reserve requirement. 
B)  Lower the federal funds rate. 
C)  Print currency. 
D)  Raise the discount rate. 
E)  Sell government securities.

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

According to the Monetarists, the primary cause of inflation is:

The downward slope of the demand for money curve is created by the:

According to classical economists,

Exhibit 20-6 Money, investment and product markets In Exhibit 20-6, a move from MS1 to MS2:

Which of the following falls when bond prices rise?

Exhibit 20A-4 Macro AD/AS Model As shown in Exhibit 20A-4, assume the marginal propensity to consume MPC equals 0.80. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E1 to full employment.

The demand for money curve shows that there is an inverse relationship between the quantity of money demanded and the:

If you hold money in anticipation of household emergency expense, this represents the::

The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other nonmoney financial assets is the:

A rightward shift in the money supply curve is likely to produce a rightward shift in the money demand curve.

An increase in the money supply:

Causality is clear and mechanical with the quantity theory of money. If M increases because:

If the Fed uses its tools to expand the money supply, bond prices will be bid up and interest rates will fall.

Exhibit 20-2 Money market demand and supply curves Starting from an equilibrium at E1 in Exhibit 20-2, a rightward shift of the money supply curve from MS1 to MS2 would cause an excess:

Which economic theory argues that changes in velocity are predictable and the crowding-out effect is substantial?

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion. If the Fed raises the discount rate, which of the following is most likely to be the new money market equilibrium?

Monetarists believe:

​ Assume the economy is experiencing an inflationary gap, Keynesian economists would believe that:

Exhibit 20-4 Aggregate demand and supply model In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD3 to AD2?

Exhibit 20-4 Aggregate demand and supply model In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD1 to AD2?

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 20-6 Money, investment and product markets In Exhibit 20-6, a move from MS₁ to MS₂:

Exhibit 20A-4 Macro AD/AS Model As shown in Exhibit 20A-4, assume the marginal propensity to consume MPC equals 0.80. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E₁ to full employment.

Exhibit 20-2 Money market demand and supply curves Starting from an equilibrium at E₁ in Exhibit 20-2, a rightward shift of the money supply curve from MS₁ to MS₂ would cause an excess:

Assume the economy is experiencing an inflationary gap, Keynesian economists would believe that:

Exhibit 20-4 Aggregate demand and supply model In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD₃ to AD₂?

Exhibit 20-4 Aggregate demand and supply model In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD₁ to AD₂?