Question 1

Exhibit 16-5  
-To bring the economy shown in Exhibit 16-5 to its potential output level, the Fed could

Accepted Answer

A) do nothing and the price level would fall to P' 
B) do nothing and the price level would remain at its current level 
C) increase the money supply and increase the price level to P" 
D) increase the money supply and decrease the price level to P' 
E) decrease the money supply and decrease the price level to P' 
A) do nothing and the price level would fall to P' 
B) do nothing and the price level would remain at its current level 
C) increase the money supply and increase the price level to P" 
D) increase the money supply and decrease the price level to P' 
E) decrease the money supply and decrease the price level to P'

Question 2

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be effective in changing aggregate demand.

Accepted Answer

A) responsive; sensitive 
B) responsive; insensitive 
C) not responsive; sensitive 
D) not responsive; insensitive 
E) none of the above 
A) responsive; sensitive 
B) responsive; insensitive 
C) not responsive; sensitive 
D) not responsive; insensitive 
E) none of the above

Question 3

If the short-run aggregate supply curve is positively sloped and the Fed increases the money supply, aggregate demand

Accepted Answer

A) increases, which increases real GDP and the price level 
B) increases, which decreases real GDP and the price level 
C) falls, which decreases real GDP and increases the price level 
D) increases, which decreases real GDP and increases the price level 
E) falls, which increases real GDP and the price level 
A) increases, which increases real GDP and the price level 
B) increases, which decreases real GDP and the price level 
C) falls, which decreases real GDP and increases the price level 
D) increases, which decreases real GDP and increases the price level 
E) falls, which increases real GDP and the price level

Question 4

In the long run, an increase in aggregate demand

Accepted Answer

A) increases the price level and real output, but the effect on the price level is larger 
B) increases the price level and real output, but the effect on output is larger 
C) affects only real output 
D) affects only the price level 
E) has no effect at all 
A) increases the price level and real output, but the effect on the price level is larger 
B) increases the price level and real output, but the effect on output is larger 
C) affects only real output 
D) affects only the price level 
E) has no effect at all

Question 5

Exhibit 16-3  
-In the situation shown in Exhibit 16-3, how could the Fed return the economy to potential output?

Accepted Answer

A) decrease government spending 
B) decrease excess reserves in the banking system 
C) sell U.S. government bonds to banks 
D) increase the discount rate 
E) lower the required reserve ratio 
A) decrease government spending 
B) decrease excess reserves in the banking system 
C) sell U.S. government bonds to banks 
D) increase the discount rate 
E) lower the required reserve ratio

Question 6

A decrease in the interest rate will

Accepted Answer

A) shift the money demand curve to the right 
B) shift the money demand curve to the left 
C) increase the quantity of money people want to hold 
D) decrease the quantity of money people want to hold 
E) have no impact on the money demand curve 
A) shift the money demand curve to the right 
B) shift the money demand curve to the left 
C) increase the quantity of money people want to hold 
D) decrease the quantity of money people want to hold 
E) have no impact on the money demand curve

Question 7

In the quantity theory of money, it is assumed that M and P are the only elements in the equation that are free to fluctuate.

Accepted Answer

A) True 
 B)False

Question 8

Exhibit 16-4  
-In Exhibit 16-4, the Fed can return the economy to its potential output by

Accepted Answer

A) selling US Treasury securities inthe open market 
B) lowering the discount rate 
C) by lowering the reserve requirenment 
D) buying US Treasury securities in the open market 
E) printing money 
A) selling US Treasury securities inthe open market 
B) lowering the discount rate 
C) by lowering the reserve requirenment 
D) buying US Treasury securities in the open market 
E) printing money

Question 9

Hyperinflation

Accepted Answer

A) was primarily a 19th century phenomenon 
B) is always accompanied by extremely rapid growth in the money supply 
C) is always accompanied by rapid shrinkage of the money supply 
D) occurs when an economy grows too rapidly 
E) is really nothing to worry about since it affects only nominal GDP (and not real GDP) 
A) was primarily a 19th century phenomenon 
B) is always accompanied by extremely rapid growth in the money supply 
C) is always accompanied by rapid shrinkage of the money supply 
D) occurs when an economy grows too rapidly 
E) is really nothing to worry about since it affects only nominal GDP (and not real GDP)

Question 10

If the Fed wanted to stimulate the economy, it might

Accepted Answer

A) buy bonds to lower the money supply 
B) sell bonds to lower the money supply 
C) raise the discount rate to increase the money supply 
D) lower the discount rate to increase the money supply 
E) increase the required reserve ratio to lower the money supply 
A) buy bonds to lower the money supply 
B) sell bonds to lower the money supply 
C) raise the discount rate to increase the money supply 
D) lower the discount rate to increase the money supply 
E) increase the required reserve ratio to lower the money supply

Question 11

Exhibit 16-1  
-Referring to Exhibit 16-1, an increase in the level of real GDP will cause a move from

Accepted Answer

A) B to A 
B) A to B 
C) DM to DM' 
D) DM to DM* 
E) E to F 
A) B to A 
B) A to B 
C) DM to DM' 
D) DM to DM* 
E) E to F

Question 12

The demand for money is depicted by a curve downward sloping curve because if the interest rate falls, the opportunity cost of holding assets in the form of money decreases.

Accepted Answer

A) True 
 B)False

Question 13

In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run

Accepted Answer

A) increase in both the price level and real GDP 
B) decrease in both the price level and real GDP 
C) increase in real GDP and a decrease in the price level 
D) decrease in real GDP and an increase in the price level 
E) increase in the price level only 
A) increase in both the price level and real GDP 
B) decrease in both the price level and real GDP 
C) increase in real GDP and a decrease in the price level 
D) decrease in real GDP and an increase in the price level 
E) increase in the price level only

Question 14

Those who argue against interest rate targets for monetary policy claim that

Accepted Answer

A) the necessary changes in money supply reinforce business cycles 
B) the necessary changes in money supply dampen expansions 
C) increased crowding out reduces private investment even more 
D) inflation would fall 
E) monetary policy is too effective 
A) the necessary changes in money supply reinforce business cycles 
B) the necessary changes in money supply dampen expansions 
C) increased crowding out reduces private investment even more 
D) inflation would fall 
E) monetary policy is too effective

Question 15

Which one of the following statements is correct?

Accepted Answer

A) The lower the interest rate, the higher the opportunity cost of holding assets in the form of money. 
B) A vertical money supply curve means that the quantity of money supplied is independent of the interest rate. 
C) The larger the supply of money, the higher the interest rate, all things equal. 
D) Travelers checks and government bonds are equally liquid assets. 
E) The transactions demand for money increases whenever the price level decreases. 
A) The lower the interest rate, the higher the opportunity cost of holding assets in the form of money. 
B) A vertical money supply curve means that the quantity of money supplied is independent of the interest rate. 
C) The larger the supply of money, the higher the interest rate, all things equal. 
D) Travelers checks and government bonds are equally liquid assets. 
E) The transactions demand for money increases whenever the price level decreases.

Question 16

In the long run, increases in the money supply increase the economy's potential output level.

Accepted Answer

A) True 
 B)False

Question 17

The Fed's grip is tightest on the

Accepted Answer

A) prime rate 
B) federal funds rate 
C) mortgage rate 
D) credit card rate 
E) student loan rate 
A) prime rate 
B) federal funds rate 
C) mortgage rate 
D) credit card rate 
E) student loan rate

Question 18

If the interest rate rises, people hold

Accepted Answer

A) less money because its opportunity cost has increased 
B) more money because its opportunity cost has increased 
C) less money because its opportunity cost has declined 
D) more money because its opportunity cost has declined 
E) the same amount of money 
A) less money because its opportunity cost has increased 
B) more money because its opportunity cost has increased 
C) less money because its opportunity cost has declined 
D) more money because its opportunity cost has declined 
E) the same amount of money

Question 19

Exhibit 16-3  
-In the situation shown in Exhibit 16-3, how could the Fed return the economy to potential output?

Accepted Answer

A) decrease government spending 
B) decrease taxes 
C) sell U.S. government bonds to banks 
D) increase the discount rate 
E) increase the required reserve ratio 
A) decrease government spending 
B) decrease taxes 
C) sell U.S. government bonds to banks 
D) increase the discount rate 
E) increase the required reserve ratio

Question 20

For the quantity theory of money to yield useful predictions,

Accepted Answer

A) fiscal policy must be ineffective in altering aggregate demand 
B) fiscal policy must be effective in altering aggregate demand 
C) the economy must be operating at the potential level of real Gross Domestic Product 
D) velocity must be stable or predictable 
E) velocity must be unstable 
A) fiscal policy must be ineffective in altering aggregate demand 
B) fiscal policy must be effective in altering aggregate demand 
C) the economy must be operating at the potential level of real Gross Domestic Product 
D) velocity must be stable or predictable 
E) velocity must be unstable

Exam 16: Monetary Theory and Policy

Exhibit 16-5 -To bring the economy shown in Exhibit 16-5 to its potential output level, the Fed could

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be effective in changing aggregate demand.

If the short-run aggregate supply curve is positively sloped and the Fed increases the money supply, aggregate demand

In the long run, an increase in aggregate demand

Exhibit 16-3 -In the situation shown in Exhibit 16-3, how could the Fed return the economy to potential output?

A decrease in the interest rate will

In the quantity theory of money, it is assumed that M and P are the only elements in the equation that are free to fluctuate.

Exhibit 16-4 -In Exhibit 16-4, the Fed can return the economy to its potential output by

Hyperinflation

If the Fed wanted to stimulate the economy, it might

Exhibit 16-1 -Referring to Exhibit 16-1, an increase in the level of real GDP will cause a move from

The demand for money is depicted by a curve downward sloping curve because if the interest rate falls, the opportunity cost of holding assets in the form of money decreases.

In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run

Those who argue against interest rate targets for monetary policy claim that

Which one of the following statements is correct?

In the long run, increases in the money supply increase the economy's potential output level.

The Fed's grip is tightest on the

If the interest rate rises, people hold

Exhibit 16-3 -In the situation shown in Exhibit 16-3, how could the Fed return the economy to potential output?

For the quantity theory of money to yield useful predictions,

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

If interest rates are to changes in the money supply and planned investment expenditures are to interest rate changes, then monetary policy will be effective in changing aggregate demand.