Deck 14: Modern Macroeconomics and Monetary Policy

Question 1

The velocity of money is the

A) rate at which the price index for consumer goods rises.
B) multiple by which an increase in government expenditures will cause output to expand.
C) average number of times a dollar is used to buy goods and services included in GDP.
D) number of times a dollar is taken out of the country during a year.

Answer 1

average number of times a dollar is used to buy goods and services included in GDP.

Question 2

Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would

A) fall by 50 percent.
B) rise by 50 percent.
C) increase by 100 percent.
D) decrease by 100 percent.

Answer 2

fall by 50 percent.

Question 3

In an economy in which velocity is constant and real output grows at an average rate of 3 percent per year, a 5 percent average rate of growth in the money supply would result in a

A) constant price level.
B) low (approximately 2 percent) rate of inflation.
C) decline in the general level of prices at an annual rate of approximately 2 percent.
D) rate of inflation of approximately 8 percent.

Answer 3

low (approximately 2 percent) rate of inflation.

Question 4

The velocity of money is

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 5

Suppose the velocity of money is 6, the amount of money in circulation is $600 billion, the index of prices is 180, and real GDP is $20 billion. According to the strict quantity theory of money, if the money supply decreased to $300 billion,

A) the velocity of money would rise to 12.
B) the index of prices would fall to 90.
C) real GDP would decrease to $10 billion.
D) the velocity of money would decline to 3.

Question 6

If the amount of money in circulation is $50 billion and the nominal GDP is $200 billion, the velocity of money is

A) 0.25
B) 0.75.
C) 2.
D) 4.

Question 7

The primary cause of inflation is

A) large budget deficits.
B) high taxes.
C) rapid expansion of the money supply.
D) government expenditures that are large relative to the size of the economy.

Question 8

According to the modern view, the impact of expansionary monetary policy will

A) be the same in the long run as in the short run.
B) be the same regardless of whether the effects of the policy are anticipated or unanticipated.
C) initially be an increase in real output if the policy is unanticipated, but in the long run, the primary result will be a higher price level (inflation).
D) initially be an increase in prices if the policy is unanticipated, but in the long run, the primary result will be larger real output.

Question 9

Suppose the velocity of money is 8, the amount of money in circulation is $200 billion, the index of prices is 150, and real GDP is $10 billion. According to the strict quantity theory of money, if the money supply doubled to $400 billion,

A) the velocity of money would fall to 4.
B) the index of prices would increase to 300.
C) real GDP would increase to $20 billion.
D) the velocity of money would rise to 16.

Question 10

According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?

A) prices
B) real income
C) velocity
D) employment

Question 11

In an economy in which real output grows at an average rate of 3 percent per year, a 7 percent average rate of growth in the money supply would result in

A) an inflation rate of 4 percent, if velocity were constant.
B) an inflation rate of −4 percent, if velocity were constant.
C) a $4 increase in the price level per year.
D) a $4 decrease in the price level per year.

Question 12

Which of the following best describes the relationship between the velocity of money and the demand for money?

A) The demand for money is not related to the velocity of money.
B) When the demand for money increases, the velocity of money increases.
C) The demand for money must be stable for the velocity of money to increase.
D) When the demand for money declines, the velocity of money increases.

Question 13

If the monetary authorities persistently expand the money supply at a rapid rate, the probable result will be

A) inflation.
B) high nominal interest rates.
C) rapid growth of real GDP.
D) both a and b.

Question 14

In the long run, the primary effect of rapid monetary growth is

A) lower nominal interest rates.
B) reduced unemployment.
C) inflation.
D) an increase in real output.

Question 15

The equation of exchange states that

A) money supply multiplied by real output equals velocity.
B) velocity multiplied by money supply equals real output times the price level.
C) money supply divided by velocity equals nominal GDP.
D) money supply divided by velocity equals real GDP.

Question 16

If the amount of money in circulation is $400 billion and the nominal GDP is $800 billion, the velocity of money is

A) 0.5.
B) 2.
C) 4.
D) 8.

Question 17

Which of the following developments will most likely lead to an increase in the velocity of money?

A) a decrease in the expected inflation rate
B) an increase in money interest rates
C) a sharp decline in using credit cards
D) a decrease in real income

Question 18

Empirical studies indicate that the velocity of money tends to increase when interest rates rise. Which of the following best explains why this is true?

A) When the velocity of money is high, banks will increase their lending interest rates.
B) An increase in the growth rate of GDP will cause the velocity of money to increase.
C) The higher interest rates increase the cost of holding money balances and, thereby, increase the velocity of money.
D) Both the velocity of money and interest rates will rise when the inflation rate falls.

Question 19

Equilibrium in the loanable funds market is initially present at a stable price level (zero inflation) and a nominal (and real) interest rate of 4 percent. If a shift to expansionary monetary policy eventually leads to actual and expected inflation of 6 percent,

A) both the nominal and real interest rates will rise to 10 percent.
B) the nominal interest rate will rise to 10 percent, but the real interest rate will remain at 4 percent.
C) the real interest rate will rise to 10 percent, but the nominal interest rate will remain at 4 percent.
D) both the real and nominal interest rates will remain at 4 percent.

Question 20

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

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

Question 21

An analysis of countries experiencing rapid inflation indicates that inflation is generally

A) caused by strong labor unions.
B) the result of restrictive macroeconomic policy, which pushes up interest rates.
C) caused by the impulse buying of consumers, who continue to buy the same goods even when prices rise.
D) the result of rapid growth in the money supply.

Question 22

Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?

A) a higher price level
B) a higher level of real output
C) both a higher price level and a higher level of real output
D) a lower price level
E) a lower level of real output

Question 23

In the long run, changes in the money supply affect only the price level because

A) the aggregate demand curve is vertical.
B) the aggregate demand curve is downward sloping.
C) the long-run aggregate supply curve is vertical.
D) the long-run aggregate supply curve is upward sloping.
E) current real GDP is less than the economy's potential GDP.

Question 24

When continued for several years, rapid growth in the money supply relative to the growth of real output will likely lead to an extended period of

A) low unemployment.
B) high inflation.
C) low nominal interest rates.
D) high rates of real economic growth.

Question 25

Which of the following is true?

A) Monetary policy influences long-term real interest rates more than short-term interest rates.
B) Short-term interest rates are primarily determined by real factors and the expected inflation.
C) A shift to a more expansionary monetary policy will tend to reduce short-term interest rates.
D) A shift to a more expansionary monetary policy will tend to reduce the expected rate of inflation in the future.

Question 26

According to modern analysis, what is the link between the long-run growth rate of the money supply and inflation?

A) there is little correlation between money growth and inflation
B) there is a positive link between money growth and inflation, contrary to the quantity theory of money
C) there is a strong, positive link between rapid money growth and inflation
D) there is an inverse relationship between rapid money growth and inflation

Question 27

If the U.S. government decided to pay off the national debt by creating money, what would be the most likely effect?

A) a substantial reduction in real GDP
B) a deflationary collapse
C) rapid inflation
D) an increase in the trade surplus

Question 28

Comparisons of the link between the growth of the money supply and inflation indicate that

A) countries with high rates of monetary growth also experience high inflation.
B) countries with high rates of monetary growth experience low inflation.
C) monetary growth rates and inflation are unrelated.
D) inflation is primarily the result of restrictive monetary policy.

Question 29

If the Fed shifts to a more restrictive monetary policy in order to help control inflation, the policy shift will generally

A) stimulate aggregate demand and real output as soon as the policy is instituted.
B) reduce aggregate demand immediately and quickly bring the inflation under control.
C) reduce aggregate demand and help bring the inflation under control, but the primary effects may not be felt for several months (or quarters).
D) lower real interest rates in the short run, but in the long run, real interest rates will rise.

Question 30

Countries that persistently expand the supply of money at a rapid rate can expect to experience

A) high rates of inflation
B) rapid economic growth.
C) lower interest rates.
D) low rates of unemployment.

Question 31

Large or persistent inflation is almost always caused by

A) excessive government spending.
B) excessive growth in the quantity of money.
C) foreign competition.
D) higher-than-normal levels of productivity.

Question 32

When the Fed increases the money supply by buying Treasury securities, it will

A) decrease short-term interest rates to a greater degree than long-term interest rates.
B) decrease long-term interest rates to a greater degree than short-term interest rates.
C) increase short-term interest rates to a greater degree than long-term interest rates.
D) increase long-term interest rates to a greater degree than short-term interest rates.

Question 33

An analysis of countries experiencing rapid inflation indicates that inflation is generally

A) caused by strong labor unions that push wages up rapidly.
B) caused by rapid growth in the money supply.
C) the result of restrictive macroeconomic policy, which pushes up interest rates.
D) the result of bad weather conditions that reduce the supply of agriculture products.

Question 34

A shift to a more expansionary monetary policy will have its greatest effect on

A) the interest rate on a 30-year fixed-rate mortgage.
B) the interest rate on 10-year government bonds.
C) short-term interest rates.
D) the 15-year corporate bond interest rate.

Question 35

Expansionary monetary policy will

A) often raise real interest rates in the short run.
B) generally reduce aggregate demand in the short run.
C) lead to higher nominal interest rates if the expansionary policy persists over a lengthy time period.
D) lead to a rapid growth of real GDP if the expansionary policy persists over a lengthy time period.

Question 36

Monetarists reject using discretionary monetary policy as an effective stabilization tool because

A) it would require the money supply to grow at a rate equal to the economy's long-run rate of economic growth.
B) they do not believe that changes in the money stock affect output or prices.
C) they believe that there are lengthy and variable time lags between when a change in monetary policy is instituted and when the change exerts its primary impact on output and prices.
D) they believe monetary policy can stimulate aggregate demand, but it cannot control inflation.

Question 37

Which of the following is true?

A) Monetary policy influences long-term real interest rates more than short-term interest rates.
B) Short-term interest rates are primarily determined by real factors and the expected inflation.
C) A shift to a more expansionary monetary policy will tend to raise short-term interest rates.
D) A shift to expansionary monetary policy that increases the fear of future inflation will tend to increase long-term interest rates.

Question 38

An unexpected shift to a more expansionary monetary policy will generally

A) stimulate aggregate demand and real output as soon as the policy is instituted.
B) exert its primary impact on aggregate demand and real output 6 to 15 months in the future.
C) cause inflation in the short run, but expand real output in the long run.
D) increase real interest rates in the short run.

Question 39

Low rates of inflation are generally associated with

A) low rates of government spending.
B) small or nonexistent government budget deficits.
C) low rates of productivity growth.
D) low rates of growth of the quantity of money.

Question 40

When the Fed sells bonds and drains reserves from the banking system, thereby reducing the supply of money, this policy will

A) decrease short-term interest rates to a greater degree than long-term interest rates.
B) decrease long-term interest rates to a greater degree than short-term interest rates.
C) increase short-term interest rates to a greater degree than long-term interest rates.
D) increase long-term interest rates to a greater degree than short-term interest rates.

Question 41

A shift to a more expansionary monetary policy will

A) increase the long-term growth rate of the economy.
B) reduce the future rate of inflation.
C) Stimulate output and employment almost immediately.
D) Stimulate output and employment, but only after a time lag that is generally long and variable.

Question 42

A study of countries with high inflation rates indicates that the inflation is generally

A) caused by strong labor unions.
B) the result of restrictive macroeconomic policy, which pushes up interest rates.
C) caused by supply shocks.
D) the result of rapid growth in the money supply.

Question 43

Which of the following interest rates will be least affected by a shift in monetary policy that alters the money supply?

A) a three-month certificate of deposit
B) interest on checking accounts
C) a one-year bank loan
D) a thirty-year home mortgage

Question 44

Which of the following was true of the actions of the Federal Reserve in response to the recession of 2008?

A) The Fed shifted toward a highly restrictive monetary policy in 2008, which was a major cause of the recession.
B) The Fed continued to focus only on price stability and therefore it expanded the money supply at a slow and steady rate throughout the recession.
C) The Fed introduced several new procedures for the conduct of monetary policy and substantially increased bank reserves as the recession worsened.
D) The Fed continued to purchase and sell only U.S. Treasury bonds when conducting open market operations to control the money supply.

Question 45

Since 1980, changes in the nature of both the M1 and M2 money supply have

A) increased their reliability as indicators of monetary policy.
B) decreased their reliability as indicators of monetary policy.
C) had no effect on their reliability as indicators of monetary policy.
D) decreased their reliability as indicators of fiscal policy.

Question 46

In 2008, nominal GDP was equal to $14,265 billion while the M1 money supply was $1,423 billion. What was the velocity of the M1 money stock?

A) 1.0
B) 10.0
C) 1.8
D) 0.1

Question 47

Which of the following contributed to the strong auto sales and soaring housing prices during 2002-2004?

A) The Fed's high-interest rate policy during the period.
B) The tightening of loan standards by commercial lenders.
C) The increasing popularity of fixed-rate, long-term loans to lock in low interest rates.
D) The Fed's low-interest rate policy during the period.

Question 48

The coefficient that represents the average number of times a dollar is used to buy goods and services is called

A) the demand for money.
B) the quantity theory of money.
C) the price level.
D) the velocity of money.

Question 49

Since the mid-1980s, the primary indicator of monetary policy has been

A) movement of short-term interest rates.
B) the growth rate of real government expenditures.
C) the growth of the M1 money supply.
D) changes in the nominal (dollar) size of budget deficits or surpluses.

Question 50

When the Fed conducts expansionary monetary policy, lower short-term interest rates will tend to stimulate the economy. How will the change in the velocity of money affect this result?

A) Velocity will decline, enhancing the stimulus effect.
B) Velocity will increase, somewhat dampening the stimulus effect.
C) Velocity will increase, enhancing the stimulus effect.
D) Velocity will decline, somewhat dampening the stimulus effect.

Question 51

When the Fed purchases additional securities and shifts to a more expansionary monetary policy,

A) the inflation rate will rise almost immediately.
B) the growth of output and employment will increase quickly.
C) several months will typically pass before the shift in policy exerts much impact on output and employment.
D) this policy will eventually lead to a decline in the general level  of prices if it is continued for a prolonged period of time.

Question 52

If changes in monetary policy are going to help stabilize the economy, they must

A) be expansionary.
B) be restrictive.
C) reduce the real rate of interest.
D) be properly timed.
E) stimulate aggregate demand.

Question 53

Which of the following contributed to the dramatic rise in housing prices between 2002 and mid-year 2006?

A) Government policy made credit for housing abundant and easily available.
B) The Fed's restrictive monetary policy, which led to high interest rates.
C) The tightening of loan standards by commercial lenders.
D) The large amounts of reserves and equity capital being held by financial institutions in order to back new mortgages.

Question 54

Which of the following contributed to the financial crisis of 2008?

A) The housing price boom (2002-2005), followed by a housing price bust (2007-2008).
B) A sharp reduction in stock prices in 2008.
C) A sharp increase in the price of crude oil from January 2007 to mid-year 2008.
D) All of the above.

Question 55

Cross-country figures indicate that

A) countries with high rates of monetary growth also experience high inflation.
B) countries with high rates of monetary growth experience low inflation.
C) monetary growth rates and inflation are unrelated.
D) inflation is primarily the result of restrictive monetary policy.

Question 56

Shifts in monetary policy will

A) stimulate output and employment almost immediately, and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.
B) stimulate output and employment almost immediately, and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.
C) stimulate output and employment with time lags that are long and variable and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.
D) stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.

Question 57

A shift to a more  expansionary  monetary policy will generally  _________ in the short run, but if the rapid monetary expansion persists, the  long-run result will be  ______.(fill in the blanks.)

A) expand output and employment; inflation
B) increase the general level of prices; expand  output and employment
C) increase the rate of unemployment; reduce the rate of inflation
D) reduce the rate of inflation;  increase the rate of unemployment

Question 58

If the Fed wanted to shift to a more restrictive monetary policy, it would

A) expand the reserves available to the banking system, which would drive down short term interest rates.
B) reduce the reserves available to the banking system, which would drive down short term interest rates.
C) expand the reserves available to the banking system, which would drive up short term interest rates.
D) reduce the reserves available to the banking system, which would drive up short term interest rates.

Question 59

Which of the following is true of home mortgage loans since the late 1990s?

A) Government regulations required homebuyers to make larger down payments in order to obtain a mortgage.
B) Traditional fixed-rate, long-term mortgages grew in popularity.
C) There was a substantial increase in the volume of mortgage loans extended with little or no down payment.
D) High interest rates made it less attractive to lock in to a fixed-rate, long-term loan.

Question 60

Continuous rapid growth of the money supply relative to the growth of real output will most likely lead to

A) persistent inflation.
B) low nominal interest rates.
C) high rates of real economic growth.
D) low unemployment.

Question 61

Which of the following would be most indicative of a shift to a more restrictive monetary policy?

A) Rapid expansion in the monetary base, higher  short-term interest rates, and  a decline in the growth rate of the M1 money supply.
B) Rapid expansion in the monetary base, declining  short-term  interest rates, and  an increase in the growth rate of the M2 money supply.
C) A reduction in the monetary base, higher  short-term  interest rates, and a decline in the growth rate of the M2 money supply.
D) A reduction in the monetary base, lower short-term interest rates, and a decline in the growth rate of the M1 money supply.

Question 62

Which of the following would be most indicative of a shift to a more expansionary monetary policy?

A) Rapid expansion in the monetary base, higher  short-term interest rates, and  a decline in the growth rate of the M1 money supply
B) Rapid expansion in the monetary base, declining  short-term  interest rates, and  an increase in the growth rate of the M2 money supply
C) A reduction in the monetary   base, higher  short-term  interest rates, and a decline in the growth rate of the M1 money supply
D) A reduction in the monetary base, lower short-term interest rates, and a decline in the growth rate of the M2 money supply

Question 63

Which of the following reduced the demand stimulus effects of the Fed's low interest rate policy pursued during, and after, the financial crisis of 2008-2009?

A) Declining stock prices during 2010-2012.
B) A reduction in the velocity of money.
C) An increase in earnings derived from money market accounts, saving deposits, and similar saving instruments.
D) A sharp increase in the rate of inflation during 2009-2012.

Question 64

Why didn't the Fed's quantitative easing policies exert a stronger impact on aggregate demand and lead to a more rapid recovery during 2010-2012?

A) The low interest rates accompanying the policy failed to increase stock prices.
B) Even though the Fed made additional reserves available to the banking system, the policy did not result in lower interest rates.
C) The velocity of money increased, partially offsetting the impact of the Fed's low interest rate policy.
D) The earnings of senior citizens and others from money market accounts, saving deposits, and other forms of savings fell, reducing their incentive to spend and thereby increasing aggregate demand.

Question 65

Monetary policy pushed interest rates to historically low levels during 2002-2004, but was more restrictive during 2005-2006. Economic analysis indicates that this policy

A) helped to smooth the ups and downs of the business cycle during this era.
B) contributed to the boom and bust of the housing market, and thereby the instability of this era.
C) contributed to the housing bust of 2002-2004, but helped to restore stability to the housing market in 2006-2008.
D) helped to bring inflation under control during 2002-2004, and thereby established a foundation for a strong recovery during 2007-2010

Question 66

As the Fed maintained interest rates at near zero during 2008-2012,

A) the economy recovered and the unemployment rate fell to normal levels.
B) households and businesses held larger money balances and the velocity of money fell substantially.
C) stock prices declined during 2010-2012, causing the economy to remain weak.
D) the earnings senior citizens derived from saving deposits and other forms of savings rose substantially, leading to higher incomes and a strong increase in aggregate demand.

Question 67

The "quantitative easing" policies of the Fed during, and following, the financial crisis of 2008-2009,

A) expanded the reserves available to the banking system, leading to a rapid increase in the M1 money supply as banks used the reserves to extend additional loans.
B) reduced the reserves available to the banking system, leading to a sharp reduction in outstanding loans and a decline in the M1 money supply.
C) expanded the reserves available to the banking system, but the M1 money supply increased slowly because the banks enlarged their excess reserves.
D) reduced the reserves available to the banking system, leading to a substantial increase in outstanding loans and the M1 money supply.

Question 68

Why will it difficult for the Fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?

A) The Fed does not have the tools needed to alter the supply of money.
B) Monetary policy is unable to alter short-term interest rates.
C) The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable.
D) It takes the Fed a long time to change the direction of monetary policy.

Question 69

During the second half of 2008 the monetary base was growing far more rapidly than the money supply because

A) banks were using most of their excess reserves to extend loans and make investments.
B) the Fed quickly shifted from expansionary monetary policy to restrictive monetary policy.
C) banks were using their excess reserves to make foreign investments.
D) banks were maintaining huge excess reserves.

Question 70

Which of the following is inconsistent with the view that Fed monetary policy was excessively expansionary during 2010-2013?

A) Short-term interest rates that were near zero throughout these years.
B) A rapid increase in the monetary base throughout these years.
C) A tripling of Fed asset holdings from less than $1 trillion in 2008 to approximately $3 trillion in 2012.
D) Growth of nominal GDP during 2010-2012 at a rate similar to that of recent decades.

Question 71

Which of the following weakened the demand stimulus effects of the fed's low interest rate policy during the years following the 2008-2009 recession?

A) Rising stock prices in response to the low-interest rate policy.
B) The lower cost of borrowing to undertake business investment.
C) An increase in the velocity of money.
D) A reduction in earnings of senior citizens and others from money market accounts, saving deposits, and similar forms of savings.

Question 72

As the Fed increased the volume of loans to financial institutions in response to the 2008 financial crisis, this resulted in

A) a vast increase in the monetary base and the excess reserves of the commercial banking system.
B) a substantial increase in short term interest rates.
C) a sharp decrease in the monetary base and a contraction in the excess reserves of the commercial banking system.
D) an increase in the volume of loans extended by commercial banks and a sharp increase in the inflation rate.

Question 73

During 2008-2013, the Fed initiated several rounds of "quantitative easing."  Under this policy, the Fed

A) increased its purchases of financial assets and thereby injected additional reserves into the banking system.
B) increased its purchases of financial assets, which reduced the reserves available to the banking system.
C) reduced its purchases of financial assets and thereby injected additional reserves into the banking system.
D) reduced its purchases of financial assets and thereby reduced the quantity of reserves available to the banking system.

Question 74

Which of the following about monetary policy is true?

A) If the Fed wants to increase the money supply, it should increase the interest rate it pays banks on their excess reserves.
B) When the Fed reduces the interest rate paid on excess reserves, it increases the incentive of commercial banks to hold excess reserves.
C) If the Fed wants to reduce the future growth rate of the money supply, it could do so by increasing the interest rate it pays banks on excess reserves.
D) When the Fed increases the interest rate it pays on excess reserves, this encourages banks to extend more loans and thereby increase the money supply.

Question 75

As the Fed shifted to a highly expansionary monetary policy during the second half of 2008, why were banks reluctant to extend loans and make investments?

A) Banks did not have enough excess reserves to extend loans and make investments.
B) The demand for loans was weak and the business climate was uncertain.
C) The rate of return on short-term investments was high, so banks were reluctant to make long-term investments.
D) The interest rate that the Fed pays on excess reserves was maintained at a high rate.

Question 76

Which of the following reduced the demand stimulus effects of the Fed's low interest rate policy pursued during, and after, the financial crisis of 2008-2009?

A) Declining stock prices during 2010-2012.
B) An increase in the velocity of money.
C) A reduction in earnings derived from money market accounts, saving deposits, and similar saving instruments.
D) A sharp increase in the rate of inflation during 2009-2012.

Question 77

The "quantitative easing" policies of the Fed during, and following, the financial crisis of 2008-2009, resulted in

A) rapid growth of both the money supply and nominal GDP.
B) rapid growth of the money supply and a substantial increase in the rate of inflation.
C) low interest rates and a sharp decline in the velocity of the money supply.
D) low interest rates and a sharp increase in the velocity of the money supply.

Question 78

The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for

A) a sharp contraction in the money supply, which is likely to increase the length and severity of the recession.
B) a rapid increase in the money supply, potentially leading to inflation.
C) a gradual increase in the money supply, following the trend of the previous decade.
D) a reduction in the ability of banks to extend additional loans.

Question 79

In response to the severe recession of 2008-2009, the Fed

A) expanded the monetary base and pushed  short-term interest rates sharply higher.
B) reduced the size of the monetary base and pushed short-term interest rates sharply higher.
C) more than doubled the size of the monetary base and pushed short-term interest rates  to near zero.
D) more than doubled the size of the monetary base and pushed short-term interest rates to a historic high.

Question 80

When expansionary monetary policy pushes interest rates downward to a low level,

A) the velocity of money will decline, which will weaken the expansionary impact on demand and nominal GDP.
B) the velocity of money will increase, which will strengthen the expansionary impact on demand and nominal GDP.
C) the prices of stocks and other real assets can be expected to fall, which will weaken the impact of the expansionary policy on demand and nominal GDP.
D) the earnings derived from savings accounts will increase, which will stimulate demand and nominal GDP.