Question 1

The transmission mechanism is the effect of changes in monetary policy on prices, real GDP, and employment.

Accepted Answer

A) True 
 B)False

Question 2

The quantity of money demanded to satisfy transactions needs:

Accepted Answer

A)  is intended for unexpected expenditures. 
B)  increases with the level of real GDP. 
C)  decreases with the level of real GDP. 
D)  is unrelated to either national income or the interest rate. 
E)  varies inversely with the liquidity demand for money. 
A)  is intended for unexpected expenditures. 
B)  increases with the level of real GDP. 
C)  decreases with the level of real GDP. 
D)  is unrelated to either national income or the interest rate. 
E)  varies inversely with the liquidity demand for money.

Question 3

The speculative 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 4

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess supply of money, leading people to buy bonds.

Accepted Answer

A) True 
 B)False

Question 5

The transactions demand for money is the demand for money by households for:

Accepted Answer

A)  rainy day spending. 
B)  predictable spending purposes. 
C)  liquidity purposes. 
D)  investing purposes. 
A)  rainy day spending. 
B)  predictable spending purposes. 
C)  liquidity purposes. 
D)  investing purposes.

Question 6

The velocity of money is:

Accepted Answer

A)  money supply divided by prices. 
B)  spending divided by output. 
C)  required monetary reserves divided by income. 
D)  GDP divided by the money supply. 
A)  money supply divided by prices. 
B)  spending divided by output. 
C)  required monetary reserves divided by income. 
D)  GDP divided by the money supply.

Question 7

"Monetary instability has been the major cause of economic instability in this country. Expansion in the money supply has been the source of every major inflation. Every major recession has been either caused or perpetuated by monetary contraction." Who among the following would most likely adhere to this view?

Accepted Answer

A)  Monetarists. 
B)  Keynesians. 
C)  Demand-side economists. 
D)  Quantity theorists. 
A)  Monetarists. 
B)  Keynesians. 
C)  Demand-side economists. 
D)  Quantity theorists.

Question 8

If M stands for the money supply, V for the velocity of money, P for the average selling price, and Q for the output of goods and services, the equation of exchange is:

Accepted Answer

A)  MP = VQ. 
B)  MV = PQ. 
C)  MQ = VP. 
D)  MP = PQ. 
A)  MP = VQ. 
B)  MV = PQ. 
C)  MQ = VP. 
D)  MP = PQ.

Question 9

According to Keynesians, an increase in the money supply will have its greatest impact on GDP when the aggregate demand curve intersects:

Accepted Answer

A)  the vertical portion of the aggregate supply curve. 
B)  the upward sloping portion of the aggregate supply curve. 
C)  the horizontal portion of the aggregate supply curve. 
D)  either the upward sloping or the vertical portions of the aggregate supply curve. 
E)  either the horizontal or vertical portions of the aggregate supply curve. 
A)  the vertical portion of the aggregate supply curve. 
B)  the upward sloping portion of the aggregate supply curve. 
C)  the horizontal portion of the aggregate supply curve. 
D)  either the upward sloping or the vertical portions of the aggregate supply curve. 
E)  either the horizontal or vertical portions of the aggregate supply curve.

Question 10

Given the strict quantity theory of money, if the quantity of money doubled, prices would:

Accepted Answer

A)  fall by half. 
B)  double. 
C)  remain constant. 
D)  increase somewhat but less than double. 
A)  fall by half. 
B)  double. 
C)  remain constant. 
D)  increase somewhat but less than double.

Question 11

According to the equation of exchange, if M = 200, P = 100, and Q = 10, the 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 12

Exhibit 20-1  Money market demand and supply curves   Beginning from an equilibrium at E1 in Exhibit 20-1, a decrease in the money supply from $150 billion to $100 billion causes people to:

Accepted Answer

A)  sell bonds and drive the price of bonds down. 
B)  sell bonds and drive the price of bonds up. 
C)  buy bonds and drive the price of bonds down. 
D)  buy bonds and drive the price of bonds up. 
A)  sell bonds and drive the price of bonds down. 
B)  sell bonds and drive the price of bonds up. 
C)  buy bonds and drive the price of bonds down. 
D)  buy bonds and drive the price of bonds up.

Question 13

If the money supply is $250 billion and nominal GDP is $1 trillion, the velocity of money is:

Accepted Answer

A)  0.25. 
B)  0.40. 
C)  2.50. 
D)  4.00. 
A)  0.25. 
B)  0.40. 
C)  2.50. 
D)  4.00.

Question 14

Monetarists believe that:

Accepted Answer

A)  velocity is constant. 
B)  velocity is highly predictable. 
C)  there are three motives for demanding money. 
D)  changes in the money supply cause changes in velocity. 
E)  a change in the money supply can affect real GDP. 
A)  velocity is constant. 
B)  velocity is highly predictable. 
C)  there are three motives for demanding money. 
D)  changes in the money supply cause changes in velocity. 
E)  a change in the money supply can affect real GDP.

Question 15

Bond prices and interest rates are directly related.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is the objective of expansionary monetary policy?

Accepted Answer

A)  An increase in employment. 
B)  A decrease in employment. 
C)  An increase in the velocity of money. 
D)  An increase in prices proportional to the rise in the money supply. 
A)  An increase in employment. 
B)  A decrease in employment. 
C)  An increase in the velocity of money. 
D)  An increase in prices proportional to the rise in the money supply.

Question 17

Which of the following explains why the demand for money curve has an inverse relationship between the interest rates and the quantity of money demanded?

Accepted Answer

A)  As the interest rate rises, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
B)  As the interest rate rises, people find it advantageous to borrow money, which increases the quantity of money demanded. 
C)  As the interest rate falls, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
D)  As the interest rate rises, the demand for money curve shifts outward to the right. 
A)  As the interest rate rises, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
B)  As the interest rate rises, people find it advantageous to borrow money, which increases the quantity of money demanded. 
C)  As the interest rate falls, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
D)  As the interest rate rises, the demand for money curve shifts outward to the right.

Question 18

As the interest rate decreases, the quantity of money people will hold:

Accepted Answer

A)  decreases. 
B)  increases. 
C)  stays the same. 
D)  rises and then falls. 
E)  falls and then rises. 
A)  decreases. 
B)  increases. 
C)  stays the same. 
D)  rises and then falls. 
E)  falls and then rises.

Question 19

The number of times per year each dollar is used to transact an exchange is the:

Accepted Answer

A)  quantity theory of money. 
B)  velocity of money. 
C)  equation of exchange. 
D)  turnover rate. 
E)  expenditure rate. 
A)  quantity theory of money. 
B)  velocity of money. 
C)  equation of exchange. 
D)  turnover rate. 
E)  expenditure rate.

Question 20

The speculative demand for money is the stock of money that people hold to:

Accepted Answer

A)  pay their predictable, everyday expenses. 
B)  pay for any unexpected expenses that may occur. 
C)  buy stocks, bonds, and other financial assets. 
D)  buy the foreign currencies needed to purchase imports. 
A)  pay their predictable, everyday expenses. 
B)  pay for any unexpected expenses that may occur. 
C)  buy stocks, bonds, and other financial assets. 
D)  buy the foreign currencies needed to purchase imports.

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

The transmission mechanism is the effect of changes in monetary policy on prices, real GDP, and employment.

The quantity of money demanded to satisfy transactions needs:

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

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess supply of money, leading people to buy bonds.

The transactions demand for money is the demand for money by households for:

The velocity of money is:

If M stands for the money supply, V for the velocity of money, P for the average selling price, and Q for the output of goods and services, the equation of exchange is:

According to Keynesians, an increase in the money supply will have its greatest impact on GDP when the aggregate demand curve intersects:

Given the strict quantity theory of money, if the quantity of money doubled, prices would:

According to the equation of exchange, if M = 200, P = 100, and Q = 10, the V is:

Exhibit 20-1 Money market demand and supply curves Beginning from an equilibrium at E1 in Exhibit 20-1, a decrease in the money supply from $150 billion to $100 billion causes people to:

If the money supply is $250 billion and nominal GDP is $1 trillion, the velocity of money is:

Monetarists believe that:

Bond prices and interest rates are directly related.

Which of the following is the objective of expansionary monetary policy?

Which of the following explains why the demand for money curve has an inverse relationship between the interest rates and the quantity of money demanded?

As the interest rate decreases, the quantity of money people will hold:

The number of times per year each dollar is used to transact an exchange is the:

The speculative demand for money is the stock of money that people hold to:

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 20-1 Money market demand and supply curves Beginning from an equilibrium at E₁ in Exhibit 20-1, a decrease in the money supply from $150 billion to $100 billion causes people to: