Question 1

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 2

Exhibit 15-5  
-If the economy pictured in Exhibit 15-5 is in equilibrium where AD = SRAS,then it

Accepted Answer

A) is experiencing a contractionary gap 
B) will experience an increase in the price level if no government action is taken 
C) is operating at the potential level of output 
D) will experience a stable price level if no government action is taken 
E) is operating at less than the economy's potential level of output 
A) is experiencing a contractionary gap 
B) will experience an increase in the price level if no government action is taken 
C) is operating at the potential level of output 
D) will experience a stable price level if no government action is taken 
E) is operating at less than the economy's potential level of output

Question 3

Which of the following best explains why the demand for money depends upon the interest rate?

Accepted Answer

A) Money is an interest-earning asset. 
B) Money is not an interest-earning asset. 
C) The alternatives to holding money are not interest-earning assets. 
D) The alternatives to holding money earn more interest than money does. 
E) People must pay interest on loans. 
A) Money is an interest-earning asset. 
B) Money is not an interest-earning asset. 
C) The alternatives to holding money are not interest-earning assets. 
D) The alternatives to holding money earn more interest than money does. 
E) People must pay interest on loans.

Question 4

If there is a decrease in the supply of money,which one of the following is most likely to happen?

Accepted Answer

A) the demand for money will increase 
B) planned investment spending will increase 
C) interest rates will rise 
D) aggregate expenditure will increase 
E) the demand for money will decrease 
A) the demand for money will increase 
B) planned investment spending will increase 
C) interest rates will rise 
D) aggregate expenditure will increase 
E) the demand for money will decrease

Question 5

If the Fed changes the federal funds rate

Accepted Answer

A) inflation is brought to an immediate halt 
B) the inflation rate increases for several months,but then begins to decreases 
C) major banks try to offset this change by lowering the interest rates they charge on loans 
D) major banks try to offset this change by lowering the interest rates they pay on savings deposits 
E) major banks raise the prime interest rate that they charge to their best customers 
A) inflation is brought to an immediate halt 
B) the inflation rate increases for several months,but then begins to decreases 
C) major banks try to offset this change by lowering the interest rates they charge on loans 
D) major banks try to offset this change by lowering the interest rates they pay on savings deposits 
E) major banks raise the prime interest rate that they charge to their best customers

Question 6

Exhibit 15-6  
-If the Fed is targeting interest rates and money demand shifts from Dm to Dm' in Exhibit 15-6,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 7

In a macroeconomic model,increases in the money supply decrease the interest rate,increase investment,and thus raise employment and real GDP.

Accepted Answer

A) True 
 B)False

Question 8

Historical evidence has shown that the M1 velocity of money in the United States

Accepted Answer

A) has remained constant 
B) has remained predictable but not constant 
C) has varied over the century but is currently near constant 
D) has varied over the century and has recently fluctuated a quite a bit 
E) is not correctly placed within the equation of exchange 
A) has remained constant 
B) has remained predictable but not constant 
C) has varied over the century but is currently near constant 
D) has varied over the century and has recently fluctuated a quite a bit 
E) is not correctly placed within the equation of exchange

Question 9

When an increase in the money supply reduces the interest rate,investment and nominal GDP increase.

Accepted Answer

A) True 
 B)False

Question 10

When calculating by how much changes in the money supply will change nominal GDP,we use the money multiplier instead of the spending multiplier.

Accepted Answer

A) True 
 B)False

Question 11

The money demand curve shifts to the right whenever there is a decrease in the interest rate.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

For monetary policy to be effective in changing planned investment spending,

Accepted Answer

A) interest rates must not be responsive to changes in the money supply 
B) interest rates must be sensitive to changes in Gross Domestic Product 
C) investment must be sensitive to changes in interest rates 
D) investment must be sensitive to changes in the spending multiplier 
E) the spending multiplier must be stable 
A) interest rates must not be responsive to changes in the money supply 
B) interest rates must be sensitive to changes in Gross Domestic Product 
C) investment must be sensitive to changes in interest rates 
D) investment must be sensitive to changes in the spending multiplier 
E) the spending multiplier must be stable

Question 15

As the interest rate increases,

Accepted Answer

A) the demand for investment curve shifts to the right 
B) the demand for investment curve shifts to the left 
C) there is a movement downward along the demand for investment curve 
D) there is a movement upward along the demand for investment curve 
E) GDP increases 
A) the demand for investment curve shifts to the right 
B) the demand for investment curve shifts to the left 
C) there is a movement downward along the demand for investment curve 
D) there is a movement upward along the demand for investment curve 
E) GDP increases

Question 16

An increase in the money supply will cause a decrease in planned investment spending.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is not considered to be a nonbank financial institution.

Accepted Answer

A) credit unions 
B) mortgage companies 
C) insurance companies 
D) brokerage firms 
E) money market mutual funds 
A) credit unions 
B) mortgage companies 
C) insurance companies 
D) brokerage firms 
E) money market mutual funds

Question 18

Exhibit 15-8  
-In Exhibit 15-8,the demand for money is represented by D1 and the supply by S1.If the Fed lowers the discount rate,the equilibrium will move from

Accepted Answer

A) A to B 
B) A to C 
C) A to E 
D) A to H 
E) A to I 
A) A to B 
B) A to C 
C) A to E 
D) A to H 
E) A to I

Question 19

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 20

The velocity of money is defined as

Accepted Answer

A) the time it takes the average worker to get to the bank with his/her paycheck 
B) the time it takes banks to clear checks 
C) the average number of times per year each dollar is used to purchase final goods and services 
D) M $\times$ P ÷ Y 
E) the average number of times per year each dollar is spent for goods,payrolls,Social Security payments,etc. 
A) the time it takes the average worker to get to the bank with his/her paycheck 
B) the time it takes banks to clear checks 
C) the average number of times per year each dollar is used to purchase final goods and services 
D) M $\times$ P ÷ Y 
E) the average number of times per year each dollar is spent for goods,payrolls,Social Security payments,etc.

Exam 16: Monetary Theory and Policy

The equation of exchange

Exhibit 15-5 -If the economy pictured in Exhibit 15-5 is in equilibrium where AD = SRAS,then it

Which of the following best explains why the demand for money depends upon the interest rate?

If there is a decrease in the supply of money,which one of the following is most likely to happen?

If the Fed changes the federal funds rate

Exhibit 15-6 -If the Fed is targeting interest rates and money demand shifts from Dm to Dm' in Exhibit 15-6,the Fed will

In a macroeconomic model,increases in the money supply decrease the interest rate,increase investment,and thus raise employment and real GDP.

Historical evidence has shown that the M1 velocity of money in the United States

When an increase in the money supply reduces the interest rate,investment and nominal GDP increase.

When calculating by how much changes in the money supply will change nominal GDP,we use the money multiplier instead of the spending multiplier.

The money demand curve shifts to the right whenever there is a decrease in the interest rate.

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

Which one of the following statements is correct?

For monetary policy to be effective in changing planned investment spending,

As the interest rate increases,

An increase in the money supply will cause a decrease in planned investment spending.

Which of the following is not considered to be a nonbank financial institution.

Exhibit 15-8 -In Exhibit 15-8,the demand for money is represented by D1 and the supply by S1.If the Fed lowers the discount rate,the equilibrium will move from

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.

The velocity of money is defined as

The Art and Science of Economic Analysis

Economic Tools and Economics Systems

Economic Decision Makers

Demand, supply, and Markets

Introduction to Macroeconomics

Tracking the Useconomy

Unemployment and Inflation

Productivity and Growth

Aaggregate Expenditure and Aggregate Demand

Baggregate Expenditure and Aggregate Demand

Aggregate Supply

Fiscal Policy

Federal Budgets and Public Policy

Money and the Financial System

Banking and the Money Supply

Macro Policy Debate: Active or Passive

International Trade

Externalities and the Environment

International Finance

Economic Development

understanding Graphs

National Income Accounts

The Algebra of Demand-Side Equilibrium

Filters

Exhibit 15-6 -If the Fed is targeting interest rates and money demand shifts from D_m to D_m' in Exhibit 15-6,the Fed will

Exhibit 15-8 -In Exhibit 15-8,the demand for money is represented by D₁ and the supply by S₁.If the Fed lowers the discount rate,the equilibrium will move from

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.