Question 1

The higher the interest rate, the more of their wealth people will hold as money.

Accepted Answer

A) True 
 B)False

Question 2

In order to become more transparent, the Fed

Accepted Answer

A) began announcing immediately after each meeting its target for the federal funds rate 
B) announces after meetings the probable "bias" of policy in the near term 
C) releases the minutes three weeks after each meeting 
D) publicizes its decisions and policy "bias" in the news media 
E) All of the answers are correct 
A) began announcing immediately after each meeting its target for the federal funds rate 
B) announces after meetings the probable "bias" of policy in the near term 
C) releases the minutes three weeks after each meeting 
D) publicizes its decisions and policy "bias" in the news media 
E) All of the answers are correct

Question 3

If the Fed sells government securities to banks, eventually we expect

Accepted Answer

A) the price level to increase 
B) planned investment expenditures to increase 
C) aggregate demand to increase 
D) short-run aggregate supply to increase 
E) interest rates to increase 
A) the price level to increase 
B) planned investment expenditures to increase 
C) aggregate demand to increase 
D) short-run aggregate supply to increase 
E) interest rates to increase

Question 4

The demand for money varies

Accepted Answer

A) directly with both the price level and the level of real GDP 
B) inversely with both the price level and the level of real GDP 
C) inversely with the price level and directly with the level of real GDP 
D) directly with the price level and inversely with the level of real GDP 
E) inversely with the level of nominal GDP 
A) directly with both the price level and the level of real GDP 
B) inversely with both the price level and the level of real GDP 
C) inversely with the price level and directly with the level of real GDP 
D) directly with the price level and inversely with the level of real GDP 
E) inversely with the level of nominal GDP

Question 5

According to the equation of exchange, if real GDP is $2 trillion and the money supply is $0.5 trillion, the velocity of money

Accepted Answer

A) must be 4 
B) must be 1/4 
C) must be 4 trillion 
D) must be 1/4 trillion 
E) cannot be determined unless we know the price level 
A) must be 4 
B) must be 1/4 
C) must be 4 trillion 
D) must be 1/4 trillion 
E) cannot be determined unless we know the price level

Question 6

Because __________ the federal funds rate __________ the cost of covering any reserve shortfall, banks are __________ willing to lend to the public.

Accepted Answer

A) lowering, reduces, less 
B) raising, increases, more 
C) lowering, reduces, more 
D) raising, decreases, more 
E) lowering, increases, more 
A) lowering, reduces, less 
B) raising, increases, more 
C) lowering, reduces, more 
D) raising, decreases, more 
E) lowering, increases, more

Question 7

What would be the ultimate effect of a reduction in the money supply?

Accepted Answer

A) a leftward shift of the aggregate demand curve 
B) a rightward shift of the short-run aggregate supply curve 
C) a movement upward along the aggregate demand curve 
D) a movement downward along the aggregate demand curve 
E) such a monetary policy would have no impact at all 
A) a leftward shift of the aggregate demand curve 
B) a rightward shift of the short-run aggregate supply curve 
C) a movement upward along the aggregate demand curve 
D) a movement downward along the aggregate demand curve 
E) such a monetary policy would have no impact at all

Question 8

Velocity will be higher

Accepted Answer

A) the less frequently workers are paid 
B) the fewer transactions there are to make 
C) the less effective money is as a store of value 
D) the less people use credit cards to make purchases 
E) the slower the physical transportation of money between one person and another 
A) the less frequently workers are paid 
B) the fewer transactions there are to make 
C) the less effective money is as a store of value 
D) the less people use credit cards to make purchases 
E) the slower the physical transportation of money between one person and another

Question 9

According to the equation of exchange, if nominal GDP equals $6 trillion and the money supply equals $1 trillion, the velocity of money

Accepted Answer

A) must be 6 
B) must be 1/6 
C) must be 6 trillion 
D) must be 1/6 trillion 
E) cannot be determined unless we know the price level 
A) must be 6 
B) must be 1/6 
C) must be 6 trillion 
D) must be 1/6 trillion 
E) cannot be determined unless we know the price level

Question 10

The demand curve for investment is graphed with __________ on the vertical axis and __________ on the horizontal axis.

Accepted Answer

A) the interest rate; investment 
B) investment; the interest rate 
C) the price level; investment 
D) investment; the price level 
E) real GDP; investment 
A) the interest rate; investment 
B) investment; the interest rate 
C) the price level; investment 
D) investment; the price level 
E) real GDP; investment

Question 11

According to the equation of exchange, if the amount of money in the economy of Monetania times the velocity of money equals 800 million Monetanian dollars ($), then Monetania's

Accepted Answer

A) real GDP equals $800 million 
B) nominal GDP equals $800 million 
C) real GDP equals $800 million times the price level 
D) nominal GDP equals $800 million times the price level 
E) price level equals 8 Monetanian dollars 
A) real GDP equals $800 million 
B) nominal GDP equals $800 million 
C) real GDP equals $800 million times the price level 
D) nominal GDP equals $800 million times the price level 
E) price level equals 8 Monetanian dollars

Question 12

Which of the following would most likely lower the velocity of money?

Accepted Answer

A) commercial innovations that facilitate exchange 
B) a lower inflation rate 
C) a decline in the effectiveness of money as a store of wealth 
D) a higher inflation rate 
E) paying workers once a week instead of once a month 
A) commercial innovations that facilitate exchange 
B) a lower inflation rate 
C) a decline in the effectiveness of money as a store of wealth 
D) a higher inflation rate 
E) paying workers once a week instead of once a month

Question 13

If the money supply decreases, the opportunity cost of holding money __________ and people will want to hold __________ quantity of money.

Accepted Answer

A) rises; a greater 
B) rises; a smaller 
C) does not change; the same 
D) falls; a greater 
E) falls; a smaller 
A) rises; a greater 
B) rises; a smaller 
C) does not change; the same 
D) falls; a greater 
E) falls; a smaller

Question 14

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rates, then monetary policy will be __________ in changing Gross Domestic Product.

Accepted Answer

A) sensitive; sensitive; effective 
B) responsive; insensitive; ineffective 
C) responsive; insensitive; effective 
D) not responsive; sensitive; effective 
E) not responsive; insensitive; effective 
A) sensitive; sensitive; effective 
B) responsive; insensitive; ineffective 
C) responsive; insensitive; effective 
D) not responsive; sensitive; effective 
E) not responsive; insensitive; effective

Question 15

Suppose that the demand and supply of money are initially in equilibrium, and that the demand for money increases. A monetary authority interested in keeping the money supply constant and the interest rate low must

Accepted Answer

A) increase the money supply 
B) decrease the money supply 
C) increase the demand for money 
D) decrease the demand for money 
E) give up pursuing both goals at the same time and choose one or the other 
A) increase the money supply 
B) decrease the money supply 
C) increase the demand for money 
D) decrease the demand for money 
E) give up pursuing both goals at the same time and choose one or the other

Question 16

If the situation is serious enough, the FOMC may act between regular meetings.

Accepted Answer

A) True 
 B)False

Question 17

A movement upward and to the left along the money demand curve is caused by

Accepted Answer

A) an increase in the interest rate 
B) a decrease in the interest rate 
C) a decrease in real GDP 
D) an increase in real GDP 
E) an increase in the average price level 
A) an increase in the interest rate 
B) a decrease in the interest rate 
C) a decrease in real GDP 
D) an increase in real GDP 
E) an increase in the average price level

Question 18

The equation of exchange

Accepted Answer

A) states that the price level times velocity equals GDP divided by the interest rate 
B) states that total spending equals real GDP 
C) states that money supply times velocity equals real GDP 
D) is an identity, not a theory 
E) becomes the quantity theory of money on the assumption that the price level is always constant 
A) states that the price level times velocity equals GDP divided by the interest rate 
B) states that total spending equals real GDP 
C) states that money supply times velocity equals real GDP 
D) is an identity, not a theory 
E) becomes the quantity theory of money on the assumption that the price level is always constant

Question 19

Exhibit 16-6  
-If the Fed is targeting interest rates and money demand shifts from Dm to Dm' in Exhibit 16-6, the Fed will

Accepted Answer

A) do nothing and the interest rate will rise to i' 
B) do nothing and the interest rate will settle at i 
C) decrease the money supply to restore its target of i 
D) increase the money supply to restore its target of i 
E) decrease money demand back to Dm to restore its target of i 
A) do nothing and the interest rate will rise to i' 
B) do nothing and the interest rate will settle at i 
C) decrease the money supply to restore its target of i 
D) increase the money supply to restore its target of i 
E) decrease money demand back to Dm to restore its target of i

Question 20

If the money supply increases, the interest rate will __________ and people will want to hold a __________ quantity of money.

Accepted Answer

A) rise; greater 
B) rise; smaller 
C) not change; greater 
D) fall; greater 
E) fall; smaller 
A) rise; greater 
B) rise; smaller 
C) not change; greater 
D) fall; greater 
E) fall; smaller

Exam 16: Monetary Theory and Policy

The higher the interest rate, the more of their wealth people will hold as money.

In order to become more transparent, the Fed

If the Fed sells government securities to banks, eventually we expect

The demand for money varies

According to the equation of exchange, if real GDP is $2 trillion and the money supply is $0.5 trillion, the velocity of money

Because __________ the federal funds rate __________ the cost of covering any reserve shortfall, banks are __________ willing to lend to the public.

What would be the ultimate effect of a reduction in the money supply?

Velocity will be higher

According to the equation of exchange, if nominal GDP equals $6 trillion and the money supply equals $1 trillion, the velocity of money

The demand curve for investment is graphed with __________ on the vertical axis and __________ on the horizontal axis.

According to the equation of exchange, if the amount of money in the economy of Monetania times the velocity of money equals 800 million Monetanian dollars ($), then Monetania's

Which of the following would most likely lower the velocity of money?

If the money supply decreases, the opportunity cost of holding money __________ and people will want to hold __________ quantity of money.

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rates, then monetary policy will be __________ in changing Gross Domestic Product.

Suppose that the demand and supply of money are initially in equilibrium, and that the demand for money increases. A monetary authority interested in keeping the money supply constant and the interest rate low must

If the situation is serious enough, the FOMC may act between regular meetings.

A movement upward and to the left along the money demand curve is caused by

The equation of exchange

Exhibit 16-6 -If the Fed is targeting interest rates and money demand shifts from Dm to Dm' in Exhibit 16-6, the Fed will

If the money supply increases, the interest rate will __________ and people will want to hold a __________ quantity of money.

The Art and Science of Economic Analysis

Economic Tools and Economics Systems

Economic Decision Makers

Demand Supply and Markets

Introduction to Macroeconomics

Tracking the Us Economy

Unemployment and Inflation

Productivity and Growth

Aggregate Expenditure

Aggregate Expenditure and Aggregate Demand

Aggregate Supply

Fiscal Policy

Federal Budgets and Public Policy

Money and the Financial System

Banking and the Money Supply

The Algebra of Income and Expenditure

Macro Policy Debate: Active or Passive

The Algebra of Demand-Side Equilibrium

International Trade

International Finance

Economic Development

National Income Accounts

Understanding Graphs

Variable Net Exports

Variable Net Exports Revisited

Filters

Because the federal funds rate the cost of covering any reserve shortfall, banks are __ willing to lend to the public.

The demand curve for investment is graphed with on the vertical axis and on the horizontal axis.

If the money supply decreases, the opportunity cost of holding money and people will want to hold quantity of money.

If interest rates are to changes in the money supply and planned investment expenditures are to interest rates, then monetary policy will be __ in changing Gross Domestic Product.

Exhibit 16-6 -If the Fed is targeting interest rates and money demand shifts from D_m to D_m' in Exhibit 16-6, the Fed will

If the money supply increases, the interest rate will and people will want to hold a quantity of money.