Question 1

The liquidity preference theory ________.

Accepted Answer

A) distinguishes between nominal and real quantities 
B) shows that demand for real balances depends on real income 
C) shows that demand for real balances depends on the nominal interest rate 
D) all of the above 
E) none of the above 
A) distinguishes between nominal and real quantities 
B) shows that demand for real balances depends on real income 
C) shows that demand for real balances depends on the nominal interest rate 
D) all of the above 
E) none of the above

Question 2

The AD Curve ________.

Accepted Answer

A) demonstrates how central banks respond to changes in interest rates by changing the inflation rate 
B) shows how changes in equilibrium output affect the inflation rate 
C) explains long run fluctuations in output and inflation 
D) all of the above 
E) none of the above 
A) demonstrates how central banks respond to changes in interest rates by changing the inflation rate 
B) shows how changes in equilibrium output affect the inflation rate 
C) explains long run fluctuations in output and inflation 
D) all of the above 
E) none of the above

Question 3

As the nominal interest rate increases ________.

Accepted Answer

A) it becomes more costly to hold money instead of bonds 
B) the quantity of money demanded falls 
C) the opportunity cost of holding money rises 
D) all of the above 
E) none of the above 
A) it becomes more costly to hold money instead of bonds 
B) the quantity of money demanded falls 
C) the opportunity cost of holding money rises 
D) all of the above 
E) none of the above

Question 4

If government cuts taxes ________.

Accepted Answer

A) after tax income should increase shifting AD to the left to a lower equilibrium level of output 
B) after tax income should increase shifting AD to the right to a higher equilibrium level of output 
C) after tax income and the equilibrium level of output remain unchanged 
D) after tax income remains unchanged but the equilibrium level of output would increase 
E) none of the above 
A) after tax income should increase shifting AD to the left to a lower equilibrium level of output 
B) after tax income should increase shifting AD to the right to a higher equilibrium level of output 
C) after tax income and the equilibrium level of output remain unchanged 
D) after tax income remains unchanged but the equilibrium level of output would increase 
E) none of the above

Question 5

An increase in inflation leads to higher ________.

Accepted Answer

A) output 
B) spending 
C) real interest rate 
D) all of the above 
E) none of the above 
A) output 
B) spending 
C) real interest rate 
D) all of the above 
E) none of the above

Question 6

Why is the demand for real money balances downward sloping?

Accepted Answer

A) because the opportunity cost of holding money decreases as interest rates decrease 
B) because when the interest rate falls the quantity of money demanded increases 
C) because lower interest rates encourage firms and households to increase their money holdings 
D) all of the above 
E) none of the above 
A) because the opportunity cost of holding money decreases as interest rates decrease 
B) because when the interest rate falls the quantity of money demanded increases 
C) because lower interest rates encourage firms and households to increase their money holdings 
D) all of the above 
E) none of the above

Question 7

When the inflation rate falls,what happens,and why,to the MP,IS,and AD curves?

Accepted Answer

A decrease in the inflation rate will,ty

Question 8

The endogenous variable in the liquidity preference function is ________.

Accepted Answer

A) demand for real money balances 
B) the nominal interest rate 
C) real income 
D) the price level 
E) none of the above 
A) demand for real money balances 
B) the nominal interest rate 
C) real income 
D) the price level 
E) none of the above

Question 9

If the nominal interest rate is above the equilibrium level ________.

Accepted Answer

A) purchases of bonds and other assets will cause the interest rate to fall 
B) issuance of bonds and other assets will cause the supply of real money balances to increase 
C) the opportunity cost of holding money is low,and is rising 
D) all of the above 
E) none of the above 
A) purchases of bonds and other assets will cause the interest rate to fall 
B) issuance of bonds and other assets will cause the supply of real money balances to increase 
C) the opportunity cost of holding money is low,and is rising 
D) all of the above 
E) none of the above

Question 10

When people are holding money in excess of their demand for real money balances ________.

Accepted Answer

A) the nominal interest rate will fall 
B) they increase their purchases of goods and services 
C) the central bank buys bonds to correct the imbalance 
D) all of the above 
E) none of the above 
A) the nominal interest rate will fall 
B) they increase their purchases of goods and services 
C) the central bank buys bonds to correct the imbalance 
D) all of the above 
E) none of the above

Question 11

The MP curve may be used to represent ________.

Accepted Answer

A) movements of the real interest rate as a direct policy action of the Federal Reserve 
B) movements of the real interest rate that are independent of direct Federal Reserve action 
C) how the real interest rate is related to the inflation rate 
D) all of the above 
E) none of the above 
A) movements of the real interest rate as a direct policy action of the Federal Reserve 
B) movements of the real interest rate that are independent of direct Federal Reserve action 
C) how the real interest rate is related to the inflation rate 
D) all of the above 
E) none of the above

Question 12

In the very short run ________.

Accepted Answer

A) the real interest rate will be affected by changes in the nominal rate 
B) monetary policy has an immediate effect on inflation 
C) the inflation rate is determined by the federal funds rate 
D) all of the above 
E) none of the above 
A) the real interest rate will be affected by changes in the nominal rate 
B) monetary policy has an immediate effect on inflation 
C) the inflation rate is determined by the federal funds rate 
D) all of the above 
E) none of the above

Question 13

A change in inflation leads to shifts of the ________ curves.

Accepted Answer

A) MP,IS,& AD 
B) MP & IS,but not AD 
C) IS & AD,but not MP 
D) MP,but not IS nor AD 
E) none of the above 
A) MP,IS,& AD 
B) MP & IS,but not AD 
C) IS & AD,but not MP 
D) MP,but not IS nor AD 
E) none of the above

Question 14

Which of the following is true with regard to the supply of money?

Accepted Answer

A) an open market purchase of government securities will increase liquidity 
B) an open market sale of government securities will decrease liquidity 
C) liquidity and the money supply are directly related 
D) all of the above 
E) none of the above 
A) an open market purchase of government securities will increase liquidity 
B) an open market sale of government securities will decrease liquidity 
C) liquidity and the money supply are directly related 
D) all of the above 
E) none of the above

Question 15

If expected inflation rises,monetary policy ________.

Accepted Answer

A) is rendered ineffective 
B) must be tightened,to prevent further increases in inflation and expected inflation 
C) will prevent any increase in the real interest rate 
D) is designed to increase the nominal interest rate by more than the increase in expected inflation 
E) none of the above 
A) is rendered ineffective 
B) must be tightened,to prevent further increases in inflation and expected inflation 
C) will prevent any increase in the real interest rate 
D) is designed to increase the nominal interest rate by more than the increase in expected inflation 
E) none of the above

Question 16

Suppose the nominal interest rate is five percent,and the inflation rate rises from two percent to three percent.Might an increase in the nominal interest rate to 5.5 percent be consistent with the Taylor Principle? If not,what consequences might ensue?

Accepted Answer

Yes,it might be.The Taylor Principle req

Question 17

According to liquidity preference theory,an increase in the price level would ________.

Accepted Answer

A) decrease the demand for real money balances 
B) increase the supply of real money balances 
C) decrease the real interest rate 
D) all of the above 
E) none of the above 
A) decrease the demand for real money balances 
B) increase the supply of real money balances 
C) decrease the real interest rate 
D) all of the above 
E) none of the above

Question 18

The IS curve is Y = 20 - 1.5r,and the aggregate demand curve is Y = 15.5 - 0.3π.When the inflation rate is 3 percent,output is ________.

Accepted Answer

A) 20 
B) 14.6 
C) 9.5 
D) 3.6 
E) none of the above 
A) 20 
B) 14.6 
C) 9.5 
D) 3.6 
E) none of the above

Question 19

Suppose the economy is just recovering from a recession and all signs now point to robust growth.How might this transition from recovery to expansion be reflected in the monetary policy curve?

Accepted Answer

The monetary policy curve will have been

Question 20

"Real money balances" refers to ________.

Accepted Answer

A) the quantity of goods and services that money can buy 
B) gold and silver 
C) money that is actually available to be spent 
D) all of the above 
E) none of the above 
A) the quantity of goods and services that money can buy 
B) gold and silver 
C) money that is actually available to be spent 
D) all of the above 
E) none of the above

Exam 10: Monetary Policy and Aggregate Demand

The liquidity preference theory ________.

The AD Curve ________.

As the nominal interest rate increases ________.

If government cuts taxes ________.

An increase in inflation leads to higher ________.

Why is the demand for real money balances downward sloping?

When the inflation rate falls,what happens,and why,to the MP,IS,and AD curves?

The endogenous variable in the liquidity preference function is ________.

If the nominal interest rate is above the equilibrium level ________.

When people are holding money in excess of their demand for real money balances ________.

The MP curve may be used to represent ________.

In the very short run ________.

A change in inflation leads to shifts of the ________ curves.

Which of the following is true with regard to the supply of money?

If expected inflation rises,monetary policy ________.

Suppose the nominal interest rate is five percent,and the inflation rate rises from two percent to three percent.Might an increase in the nominal interest rate to 5.5 percent be consistent with the Taylor Principle? If not,what consequences might ensue?

According to liquidity preference theory,an increase in the price level would ________.

The IS curve is Y = 20 - 1.5r,and the aggregate demand curve is Y = 15.5 - 0.3π.When the inflation rate is 3 percent,output is ________.

Suppose the economy is just recovering from a recession and all signs now point to robust growth.How might this transition from recovery to expansion be reflected in the monetary policy curve?

"Real money balances" refers to ________.

The Policy and Practice of Macroeconomics

Measuring Macroeconomic Data

Aggregate Production and Productivity

Saving and Investment in Closed and Open Economies

Money and Inflation

The Sources of Growth and the Solow Model

Drivers of Growth: Technology, policy, and Institutions

Business Cycles: an Introduction

The Is Curve

Aggregate Supply and the Phillips Curve

The Aggregate Demand and Supply Model

Macroeconomic Policy and Aggregate Demand and Supply Analysis

The Financial System and Economic Growth

Financial Crises and the Economy

Fiscal Policy and the Government Budget

Exchange Rates and International Economic Policy

Consumption and Saving

Investment

The Labor Market, employment, and Unemployment

The Role of Expectations in Macroeconomic Policy

Modern Business Cycle Theory

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