Question 1

Adam Smith listed three types of motives for people holding money--transaction, precautionary, and speculative.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

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

Question 3

When the Fed reduces the money supply, it will cause a decrease in aggregate demand because:

Accepted Answer

A)  real rates will rise, lowering business investment and consumer spending. 
B)  the dollar will depreciate on the foreign exchange market, leading to an increase in net exports. 
C)  lower interest rates will cause the value of assets (for example, stocks) to rise. 
D)  the national debt will increase, causing consumers to reduce their spending. 
A)  real rates will rise, lowering business investment and consumer spending. 
B)  the dollar will depreciate on the foreign exchange market, leading to an increase in net exports. 
C)  lower interest rates will cause the value of assets (for example, stocks) to rise. 
D)  the national debt will increase, causing consumers to reduce their spending.

Question 4

Which of the following is true ?

Accepted Answer

A)  Keynesians advocate increasing the money supply during economic recessions but decreasing the money supply during economic expansions. 
B)  Monetarists advocate increasing the money supply by a constant rate year after year. 
C)  Keynesians argue that the crowding-out effect is rather insignificant. 
D)  Monetarists argue that the crowding-out effect is rather large. 
E)  All of the above. 
A)  Keynesians advocate increasing the money supply during economic recessions but decreasing the money supply during economic expansions. 
B)  Monetarists advocate increasing the money supply by a constant rate year after year. 
C)  Keynesians argue that the crowding-out effect is rather insignificant. 
D)  Monetarists argue that the crowding-out effect is rather large. 
E)  All of the above.

Question 5

The money that households might hold either as money or in interest-bearing assets, depending on the interest rate, is called the:

Accepted Answer

A)  precautionary demand. 
B)  transactions demand. 
C)  speculative demand. 
D)  liquidity motive. 
E)  investment motive. 
A)  precautionary demand. 
B)  transactions demand. 
C)  speculative demand. 
D)  liquidity motive. 
E)  investment motive.

Question 6

The equation of exchange states:

Accepted Answer

A)  MV = PQ. 
B)  MP = VQ. 
C)  MP = V/Q. 
D)  V = M/PQ. 
A)  MV = PQ. 
B)  MP = VQ. 
C)  MP = V/Q. 
D)  V = M/PQ.

Question 7

If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money?

Accepted Answer

A)  14. 
B)  7. 
C)  3.5. 
D)  2. 
A)  14. 
B)  7. 
C)  3.5. 
D)  2.

Question 8

The precautionary demand for holding money is when people hold money:

Accepted Answer

A)  instead of near money. 
B)  to transact purchases they expect to make. 
C)  as insurance against unexpected needs. 
D)  to speculate in the stock market. 
E)  to take advantage of changes in interest rates. 
A)  instead of near money. 
B)  to transact purchases they expect to make. 
C)  as insurance against unexpected needs. 
D)  to speculate in the stock market. 
E)  to take advantage of changes in interest rates.

Question 9

Keynesians reject the influence of monetary policy on the economy. One argument supporting this Keynesian view is that the:

Accepted Answer

A)  money demand curve is horizontal at any interest rate. 
B)  aggregate demand curve is nearly flat. 
C)  investment demand curve is nearly vertical. 
D)  money demand curve is vertical. 
A)  money demand curve is horizontal at any interest rate. 
B)  aggregate demand curve is nearly flat. 
C)  investment demand curve is nearly vertical. 
D)  money demand curve is vertical.

Question 10

If at the prevailing interest rate the quantity of money demanded is $2 trillion, and the supply of money is $1.5 trillion, then which of the following is true ?

Accepted Answer

A)  There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
B)  There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
C)  There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
D)  There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
A)  There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
B)  There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
C)  There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
D)  There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market.

Question 11

The Monetarists advocate the monetary rule in order to stabilize the business cycle which states that the money supply should be increased by a constant rate year after year.

Accepted Answer

A) True 
 B)False

Question 12

An increase in the supply of money will:

Accepted Answer

A)  reduce the rate of interest and, thereby, trigger an increase in current spending by households and businesses. 
B)  reduce aggregate demand and real output. 
C)  increase only the general level of prices. 
D)  lead to a higher rate of unemployment. 
A)  reduce the rate of interest and, thereby, trigger an increase in current spending by households and businesses. 
B)  reduce aggregate demand and real output. 
C)  increase only the general level of prices. 
D)  lead to a higher rate of unemployment.

Question 13

The equation of exchange states that:

Accepted Answer

A)  money supply multiplied by real output equals velocity. 
B)  velocity multiplied by money supply equals the selling price times the quantity of actual output. 
C)  money supply divided by velocity equals nominal GDP. 
D)  money supply divided by velocity equals real GDP. 
A)  money supply multiplied by real output equals velocity. 
B)  velocity multiplied by money supply equals the selling price times the quantity of actual output. 
C)  money supply divided by velocity equals nominal GDP. 
D)  money supply divided by velocity equals real GDP.

Question 14

The velocity of money is the:

Accepted Answer

A)  number of times per year each dollar is used to transact an exchange. 
B)  rapidity of price increases during inflation. 
C)  number of times the price level increases during a year. 
D)  time it takes for checks to clear banks. 
E)  number of times per year each product is purchased during the year. 
A)  number of times per year each dollar is used to transact an exchange. 
B)  rapidity of price increases during inflation. 
C)  number of times the price level increases during a year. 
D)  time it takes for checks to clear banks. 
E)  number of times per year each product is purchased during the year.

Question 15

Keynesian economists argue that the velocity of money is unstable and has unpredictable variations.

Accepted Answer

A) True 
 B)False

Question 16

The opportunity cost of holding money balances increases when:

Accepted Answer

A)  the inflation rate decreases. 
B)  the interest rate increases. 
C)  the interest rate decreases. 
D)  GDP is far from full employment. 
A)  the inflation rate decreases. 
B)  the interest rate increases. 
C)  the interest rate decreases. 
D)  GDP is far from full employment.

Question 17

In the quantity theory of money:

Accepted Answer

A)  the price level is a function of the supply of money. 
B)  the supply of money is a function of the price level. 
C)  the money supply and the price level are inversely related. 
D)  the money supply is controlled by the government. 
A)  the price level is a function of the supply of money. 
B)  the supply of money is a function of the price level. 
C)  the money supply and the price level are inversely related. 
D)  the money supply is controlled by the government.

Question 18

Exhibit 20A-2  Macro AD/AS Models   In Panel (a) of Exhibit 20A-2, an expansionary Keynesian government stabilization policy designed to move the economy from Y1 to Yp would shift the:

Accepted Answer

A)  aggregate demand curve (A
D) to the left. 
B)  aggregate demand curve (A
D)  to the right. 
C)  SRAS rightward. 
D)  LRAS rightward. 
A)  aggregate demand curve (A
D) to the left. 
B)  aggregate demand curve (A
D)  to the right. 
C)  SRAS rightward. 
D)  LRAS rightward.

Question 19

If M = 200, P = 100, and Q = 10, then V is:

Accepted Answer

A)  20. 
B)  2. 
C)  10. 
D)  5. 
E)  2,000. 
A)  20. 
B)  2. 
C)  10. 
D)  5. 
E)  2,000.

Question 20

People react to an excess supply of money by:

Accepted Answer

A)  selling bonds, thus driving up the interest rate. 
B)  selling bonds, thus driving down the interest rate. 
C)  buying bonds, thus driving up the interest rate. 
D)  buying bonds, thus driving down the interest rate. 
A)  selling bonds, thus driving up the interest rate. 
B)  selling bonds, thus driving down the interest rate. 
C)  buying bonds, thus driving up the interest rate. 
D)  buying bonds, thus driving down the interest rate.

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

Adam Smith listed three types of motives for people holding money--transaction, precautionary, and speculative.

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

When the Fed reduces the money supply, it will cause a decrease in aggregate demand because:

Which of the following is true ?

The money that households might hold either as money or in interest-bearing assets, depending on the interest rate, is called the:

The equation of exchange states:

If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money?

The precautionary demand for holding money is when people hold money:

Keynesians reject the influence of monetary policy on the economy. One argument supporting this Keynesian view is that the:

If at the prevailing interest rate the quantity of money demanded is $2 trillion, and the supply of money is $1.5 trillion, then which of the following is true ?

The Monetarists advocate the monetary rule in order to stabilize the business cycle which states that the money supply should be increased by a constant rate year after year.

An increase in the supply of money will:

The equation of exchange states that:

The velocity of money is the:

Keynesian economists argue that the velocity of money is unstable and has unpredictable variations.

The opportunity cost of holding money balances increases when:

In the quantity theory of money:

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, an expansionary Keynesian government stabilization policy designed to move the economy from Y1 to Yp would shift the:

If M = 200, P = 100, and Q = 10, then V is:

People react to an excess supply of money by:

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-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, an expansionary Keynesian government stabilization policy designed to move the economy from Y₁ to Y_p would shift the: