Deck 16: Monetary Policy

Question 1

The purchase of existing government bonds by the Federal Reserve will:

A) have no effect on the money supply.
B) decrease the money supply.
C) increase the money supply.
D) decrease the reserves at banks.
E) increase the amount of government bonds held at banks.

Answer 1

increase the money supply.

Question 2

Central banks can use monetary policy to:

A) reduce interest rates.
B) decrease taxes.
C) increase government spending.
D) steer the economy out of every recession.
E) prevent recessions.

Answer 2

reduce interest rates.

Question 3

The two types of monetary policy are:

A) monetary and fiscal.
B) expansionary and contractionary.
C) countercyclical and pro-cyclical.
D) positive and negative.
E) pro and con.

Answer 3

expansionary and contractionary.

Question 4

To decrease the money supply,the Federal Reserve could do which of the following?

A) increase the discount rate
B) decrease the required reserve ratio
C) forbid the reselling of government bonds
D) encourage banks to lend money to borrowers
E) conduct an open market purchase of government bonds

Question 5

The sale of existing government bonds by the Federal Reserve will:

A) have no effect on the money supply.
B) increase the money supply.
C) increase the reserves at banks.
D) decrease the amount of government bonds held at banks.
E) decrease the money supply.

Question 6

The use of the money supply to influence the economy is:

A) called fiscal policy.
B) called countercyclical policy.
C) called monetary policy.
D) initiated through actions of Congress.
E) part of automatic stabilization.

Question 7

________ policy is when a central bank acts to increase the money supply in an effort to stimulate the economy.

A) Expansionary monetary
B) Expansionary fiscal
C) Contractionary monetary
D) Contractionary fiscal
E) Countercyclical monetary

Question 8

By shifting aggregate demand,monetary policy can affect ________ and ________.

A) real gross domestic product (GDP); unemployment
B) real GDP; interest rates
C) interest rates; unemployment
D) money supply; real GDP
E) money supply; unemployment

Question 9

Central banks can use monetary policy to:

A) turn prices from inflexible to flexible.
B) force private banks to lend out reserves.
C) make it easier for people and businesses to borrow.
D) print money.
E) steer the economy out of overexpansion.

Question 10

Expansionary monetary policy occurs when ________in an effort to stimulate the economy.

A) a central bank acts to decrease the money supply
B) Congress and the president increase taxes
C) Congress and the president decrease taxes
D) a central bank acts to increase the money supply
E) a central bank acts to increase government spending

Question 11

Which of the following statements best describes monetary policy during the Great Recession?

A) During the wake of the Great Recession, there were significant expansionary monetary policy interventions.
B) During the wake of the Great Recession, there were significant contractionary monetary policy interventions.
C) During the wake of the Great Recession, there was a lack of monetary policy interventions.
D) Monetary policy during the Great Recession was completely unexpected.
E) Monetary policy during the Great Recession had no impact in the short run.

Question 12

If the interest rate on a loan is lower than the expected return from an investment:

A) a rational firm will take out a loan for the investment.
B) the Federal Reserve will conduct contractionary monetary policy.
C) a rational firm will not take out a loan for the investment.
D) the Federal Reserve will conduct expansionary monetary policy.
E) the government will conduct expansionary fiscal policy.

Question 13

To increase the money supply,the Federal Reserve could do which of the following?

A) increase the discount rate
B) increase the required reserve ratio
C) conduct an open market sale of government bonds
D) discourage banks from lending money to borrowers
E) conduct an open market purchase of government bonds

Question 14

The Federal Reserve's response to the Great Recession was an attempt to:

A) increase aggregate demand.
B) decrease aggregate demand.
C) decrease the price level.
D) increase short-run aggregate supply.
E) decrease short-run aggregate supply.

Question 15

If the interest rate on a loan is higher than the expected return from an investment:

A) a rational firm will take out a loan for the investment.
B) the Federal Reserve will conduct contractionary monetary policy.
C) a rational firm will not take out a loan for the investment.
D) the Federal Reserve will conduct expansionary monetary policy.
E) the government will conduct expansionary fiscal policy.

Question 16

From 1982 to 2008,the economy experienced only two recessions,and they were neither lengthy nor severe.This time period is known as the:

A) Great Depression.
B) Great Recession.
C) great expansion.
D) great moderation.
E) great economy.

Question 17

What did the Federal Reserve do in response to the Great Recession?

A) It conducted open market purchases to drive up interest rates.
B) It conducted open market selling to drive up interest rates.
C) It conducted open market purchases to drive down interest rates.
D) It conducted open market selling to drive down interest rates.
E) It decreased the reserve requirements to drive up interest rates.

Question 18

A bond is a paper IOU that allows the bearer to earn interest.The bond buyer would be best described as:

A) a demander of loanable funds.
B) a supplier of loanable funds.
C) a financial intermediary.
D) one who borrows.
E) both a financial intermediary and a borrower.

Question 19

The Federal Reserve generally uses ________ to implement monetary policy.

A) reserve requirements
B) open market operations
C) fiscal policy
D) discount policies
E) government spending and taxes

Question 20

Monetary policy is:

A) the use of the money supply to influence the economy.
B) action taken by Congress to influence the economy.
C) only used during times of recession.
D) only used during times of expansion.
E) the use of government spending and taxes to influence the economy.

Question 21

Expansionary monetary policy ________ interest rates,causing ________ to shift to the ________.

A) lowers; aggregate demand; right
B) lowers; aggregate demand; left
C) raises; aggregate demand; right
D) raises; aggregate demand; left
E) lowers; short-run aggregate supply; right

Question 22

Expansionary monetary policy ________ interest rates,which can be shown in the ________.

A) raises; loanable funds market
B) raises; aggregate demand-aggregate supply model
C) lowers; aggregate demand-aggregate supply model
D) lowers; loanable funds market
E) raises; money market

Question 23

Which of the following figures illustrates the effects of expansionary monetary policy on the loanable funds market?

A)
B)B.
C)
D)
E)

Question 24

As the prices of goods and services increase,the value of money:

A) stays the same.
B) increases.
C) decreases.
D) increases initially and then decreases.
E) decreases initially and then increases.

Question 25

Refer to the following figure to answer the questions that follow.

According to the figure,contractionary monetary policy will cause an economy that is initially at full employment output to go from equilibrium ________ to equilibrium ________ in the short run.

A) A; C
B) A; B
C) A; D
D) C; B
E) C; D

Question 26

When the Fed buys bonds from financial institutions,new money moves directly:

A) out of the loanable funds market.
B) into the hands of consumers.
C) into the loanable funds market.
D) out of the hands of consumers.
E) into short-run aggregate supply.

Question 27

Expansionary monetary policy can have immediate real short-run effects; initially,no prices have adjusted.But as prices adjust in the long run,the real impact of monetary policy:

A) is multiplied.
B) is negative.
C) is cut in half.
D) dissipates completely.
E) is unknown.

Question 28

Changes in the quantity of money lead to real changes in the economy.If this is the case,why would the central bank ever stop increasing the money supply?

A) Although there is a short-run incentive to increase the money supply, these effects wear off in the long run as prices adjust and then drive up the value of money.
B) The government has rules in place on the maximum amount the money supply can be increased in a given fiscal year.
C) Although there is a short-run incentive to increase the money supply, these effects wear off in the long run as prices adjust and then drive down the value of money.
D) Increasing the money supply is not a politically popular action and may lead to leaders of the central bank not getting re-elected.
E) The short-run benefits are outweighed by the short-run costs of increases in the money supply.

Question 29

As the prices of goods and services decrease,the value of money:

A) stays the same.
B) increases.
C) decreases.
D) increases initially and then decreases.
E) decreases initially and then increases.

Question 30

According to the Fisher equation,if a bank extends a loan for 3% and the inflation rate ends up being 5%,the:

A) nominal interest rate is 2%.
B) real interest rate is 2%.
C) nominal interest rate is -2%.
D) real interest rate is -2%.
E) nominal interest rate is 8%.

Question 31

Expansionary monetary policy makes the aggregate demand curve:

A) shift to the left.
B) become flatter.
C) become steeper.
D) shift to the right.
E) stay static.

Question 32

________ would be helped by unexpected inflation.

A) Someone who loaned money out at a fixed interest rate
B) Someone who signed a two-year contract at a fixed wage
C) Someone who borrowed money at a fixed interest rate
D) A worker whose wage increases with expected inflation
E) Elderly individuals on a fixed income

Question 33

Refer to the following figure to answer the questions that follow.

According to the figure,expansionary monetary policy will cause an economy that is initially at full employment output to go from equilibrium ________ to equilibrium ________ in the short run.

A) A; C
B) A; B
C) A; D
D) C; B
E) C; D

Question 34

Injecting new money into the economy eventually causes:

A) a recession.
B) deflation.
C) stagflation.
D) unemployment.
E) inflation.

Question 35

Refer to the following figure to answer the questions that follow.

According to the figure,if the economy started at full employment output,expansionary monetary policy would cause real gross domestic product (GDP)to ________ in the short run.

A) increase from Y1 to Y2
B) increase from Y1 to Y3
C) decrease from Y2 to Y1
D) decrease from Y3 to Y2
E) increase from Y2 to Y3

Question 36

Which of the following best describes how expansionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

A) Expansionary monetary policy directly pulls money out of the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
B) Expansionary monetary policy directly puts money into the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
C) Expansionary monetary policy directly puts money into the loanable funds market.This raises the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
D) Expansionary monetary policy directly puts money into the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the left.
E) Expansionary monetary policy directly pulls money out of the loanable funds market.This raises the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the left.

Question 37

Holding all else constant,in the short run,an increase in the money supply can cause a(n):

A) increase in unemployment.
B) lower rate of inflation.
C) decrease in the price level.
D) decrease in real gross domestic product (GDP).
E) increase in real GDP.

Question 38

In the short run,expansionary monetary policy ________ real gross domestic product (GDP),________ unemployment,and ________ the price level.

A) raises; lowers; raises
B) raises; raises; raises
C) lowers; lowers; raises
D) lowers; lowers; lowers
E) raises; lowers; lowers

Question 39

Refer to the following figure to answer the questions that follow.

According to the figure,if the economy started at full employment output,contractionary monetary policy would cause real gross domestic product (GDP)to ________ in the short run.

A) increase from Y1 to Y2
B) increase from Y1 to Y3
C) decrease from Y2 to Y1
D) decrease from Y3 to Y2
E) increase from Y2 to Y3

Question 40

Which of the following aggregate demand-aggregate supply models illustrates the short-run effects of expansionary monetary policy?

A)
B)
C)
D)
E)

Question 41

Which of the following best explains how the money supply changed during the early part of the Great Depression?

A) In the early part of the Great Depression, the money supply increased due to uncertainty and unemployment.
B) In the early part of the Great Depression, the money supply decreased due to individuals withdrawing funds and holding more currency.
C) In the early part of the Great Depression, the money supply increased due to individuals withdrawing funds and holding more currency.
D) In the early part of the Great Depression, the money supply increased due to huge bond-buying programs by the Federal Reserve.
E) In the early part of the Great Depression, the money supply decreased due to huge bond-buying programs by the Federal Reserve.

Question 42

________ would be hurt by unexpected inflation.

A) Someone who borrowed money at a fixed interest rate
B) A firm who hired a worker on a two-year wage contract
C) A worker who signed a two-year wage contract
D) A worker whose wage increases with inflation
E) A firm that purchased inputs with a two-year contract

Question 43

Which of the following figures illustrates the effects of contractionary monetary policy on the loanable funds market?

A)
B)
C)
D)
E)

Question 44

During a financial crisis hit hard by bank failures,the money supply:

A) decreases because people start putting money into savings accounts.
B) increases because people start putting money into savings accounts.
C) increases because people start withdrawing their money from banks.
D) decreases because people start withdrawing their money from banks.
E) increases because people spend more instead of saving more.

Question 45

Contractionary monetary policy occurs when:

A) a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly.
B) Congress and the president increase taxes in an effort to control an economy that is expanding too quickly.
C) Congress and the president decrease taxes in an effort to stimulate the economy.
D) a central bank acts to increase the money supply in an effort to stimulate the economy.
E) a central bank acts to increase government spending in an effort to stimulate the economy.

Question 46

What will economists today likely state should have been done to limit the severity of the Great Depression?

A) The Fed should have done more to decrease the money supply at the onset.
B) The Fed should have done more to decrease the inflation at the onset.
C) The Fed should have reacted more quickly to decrease the money supply.
D) The Fed should have waited longer before trying to raise the money supply.
E) The Fed should have done more to offset the decline in the money supply at the onset.

Question 47

In the short run,some prices are inflexible.Most often,the prices that are inflexible are:

A) output prices.
B) energy prices.
C) food prices.
D) product prices.
E) wages for workers.

Question 48

Which of the following explains why the money supply is NOT completely controlled by the Federal Reserve?

A) The actions of private individuals and banks can increase or decrease the money supply via the money multiplier.
B) The president can issue an executive order that can increase or decrease the money supply.
C) The treasury has say over when the Federal Reserve can increase or decrease the money supply.
D) The actions of private individuals and banks can increase or decrease the money supply via the spending multiplier.
E) Congress has authority to veto any monetary policy enacted by the Federal Reserve.

Question 49

________ would be hurt by unexpected inflation.

A) Someone who loaned money out at a fixed interest rate
B) A firm that hired a worker on a two-year wage contract
C) Someone who borrowed money at a fixed interest rate
D) A worker whose wage increases with inflation
E) A firm that purchased inputs with a two-year contract

Question 50

Which of the following statements regarding the relationship between input prices and output prices is true?

A) Input prices adjust slower than output prices.
B) Output prices adjust slower than input prices.
C) Input prices and output prices adjust at the same rate.
D) Input prices adjust before output prices.
E) Input prices and output prices adjust at random times.

Question 51

In the short run,contractionary monetary policy ________ real gross domestic product (GDP),________ unemployment,and ________ the price level.

A) raises; lowers; raises
B) raises; raises; raises
C) lowers; lowers; raises
D) lowers; raises; lowers
E) raises; lowers; lowers

Question 52

Holding all else constant,in the short run,a decrease in the money supply can cause a(n):

A) decrease in unemployment.
B) high rate of inflation.
C) increase in the price level.
D) decrease in real gross domestic product (GDP).
E) increase in real GDP.

Question 53

Which of the following aggregate demand-aggregate supply models illustrates the short-run effects of contractionary monetary policy?

A)A.
B)
C)
D)
E)

Question 54

Contractionary monetary policy ________ interest rates,which can be shown in the ________.

A) raises; loanable funds market
B) raises; aggregate demand-aggregate supply model
C) lowers; aggregate demand-aggregate supply model
D) lowers; loanable funds market
E) raises; money market

Question 55

Contractionary monetary policy makes the aggregate demand curve:

A) shift to the left.
B) become flatter.
C) become steeper.
D) shift to the right.
E) remain static.

Question 56

When the Fed sells bonds to financial institutions,new money moves directly:

A) out of the loanable funds market.
B) into the hands of consumers.
C) into the loanable funds market.
D) out of the hands of consumers.
E) into short-run aggregate supply.

Question 57

________ policy is when a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly.

A) Expansionary monetary
B) Expansionary fiscal
C) Contractionary monetary
D) Contractionary fiscal
E) Countercyclical monetary

Question 58

Contractionary monetary policy ________ interest rates,causing ________ to shift to the ________.

A) lowers; aggregate demand; right
B) lowers; aggregate demand; left
C) raises; aggregate demand; right
D) raises; aggregate demand; left
E) lowers; short-run aggregate supply; right

Question 59

According to the Fisher equation,if a bank extends a loan for 3% and the inflation rate ends up being 2%,the:

A) nominal interest rate is 1%.
B) real interest rate is 1%.
C) nominal interest rate is -1%.
D) real interest rate is -1%.
E) nominal interest rate is 5%.

Question 60

Which of the following best describes how contractionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

A) Contractionary monetary policy directly pulls money out of the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
B) Contractionary monetary policy directly puts money into the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
C) Contractionary monetary policy directly puts money into the loanable funds market.This raises the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
D) Contractionary monetary policy directly puts money into the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the left.
E) Contractionary monetary policy directly pulls money out of the loanable funds market.This raises the interest rate, which provides a lesser incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the left.

Question 61

Which of the following economic statements would a Keynesian economist tend to support?

A) Government central bank intervention in the economy is unnecessary.
B) The short run deserves more attention than the long run.
C) The key determinant of economic growth is long-run aggregate supply.
D) Savings is a crucial component of economic growth.
E) The economy tends to be stable and at full employment.

Question 62

If prompted to describe fundamental beliefs about the economy,a Keynesian economist would state that:

A) the long run is more important than the short run.
B) prices are flexible.
C) more focus should be placed on the short run than the long run.
D) savings is crucial to growth.
E) the market tends toward stability and full employment.

Question 63

Economists who discount the short-run expansionary effects of monetary policy focus on the problems of:

A) inflation.
B) government intervention.
C) fiscal policy.
D) unemployment.
E) disinflation.

Question 64

A primary cause of inflation is:

A) businesses' quest for higher profits via higher prices.
B) workers' need for higher wages to cover higher prices.
C) the government central bank printing excess money.
D) the government borrowing money to distribute for entitlements.
E) a growing economy influencing purchasing power.

Question 65

When considering how the economy works,classical economists hold that:

A) prices are sticky.
B) savings is a drain on demand.
C) the market tends toward instability and cyclical unemployment.
D) the long run is more significant than the short run.
E) the economy needs help in moving back to full employment.

Question 66

To avoid the negative effects of unexpected inflation,workers have an incentive to:

A) lock in their current wages for years.
B) stay unemployed during years of inflation.
C) never negotiate wage contracts.
D) change jobs regularly.
E) expect a certain level of inflation and to negotiate their contracts accordingly.

Question 67

Which of the following explains why resource prices are often the slowest prices to adjust?

A) Resource prices are not affected by inflation.
B) Resource prices are often set by lengthy contracts.
C) Resource prices are often set by governments.
D) Resource prices are not reported in the consumer price index (CPI).
E) Resource prices are all tied to inflation.

Question 68

Printing more paper money does not affect the economy's long-run productivity or its ability to produce; these outcomes are determined by:

A) resources only.
B) technology only.
C) institutions only.
D) resources, technology, and institutions.
E) resources and technology only.

Question 69

If a Keynesian economist were asked to make a statement about the relationship between the government and the economy,what might he or she say?

A) "Government intervention is the only solution for economic problems."
B) "It is never a good idea for the government to intervene in the economy."
C) "The government's only role is to provide defense and protect property rights."
D) "The government should be primarily concerned with public safety and health."
E) "Government intervention in the economy is sometimes necessary."

Question 70

Based on the belief that prices are very flexible,classical economists conclude that:

A) the economy can become stuck at high levels of unemployment for long periods of time.
B) government intervention in the economy is unnecessary.
C) the economy will experience wild swings in output and employment.
D) the best type of economy is centrally planned and run by the state.
E) government intervention in the economy is very necessary.

Question 71

A cost-of-living adjustment clause:

A) is required in all government employee contracts.
B) forces an employer to increase wages at the same rate of inflation.
C) states that no raise can be less than the rate of inflation.
D) is not allowed for private employees.
E) forces an employer to increase wages at a rate higher than inflation.

Question 72

If you asked a classical economist which economic time frame he or she prioritized,how might he or she respond?

A) "Prices tend to be sticky when supply or demand changes."
B) "Savings is a drain on aggregate demand."
C) "The economy tends toward instability and cyclical unemployment."
D) "The long run is key."
E) "The short run is key."

Question 73

Monetary neutrality is:

A) when a central bank acts to increase the money supply.
B) when a central bank acts to decrease the money supply.
C) the short-run inverse relationship between inflation and unemployment rates.
D) the combination of high unemployment and high inflation.
E) the idea that the money supply does not affect real economic variables.

Question 74

According to the theory of monetary neutrality,in the long run:

A) monetary policy is always more effective than fiscal policy.
B) fiscal policy is always more effective than monetary policy.
C) expansionary monetary policy is more effective than contractionary monetary policy.
D) contractionary monetary policy is more effective than expansionary monetary policy.
E) there is a lack of real economic effects from monetary policy.

Question 75

Keynesian economists believe that prices are sticky and do not adjust quickly,from which they concluded that:

A) the long run deserves more focus than the short run.
B) savings is a crucial component of economic growth.
C) the most important determinant of economic growth is long-run aggregate supply.
D) government central bank intervention is sometimes necessary to stimulate the economy.
E) government central bank intervention is never necessary to stimulate the economy.

Question 76

The Federal Reserve actively worked to keep the federal funds rate at nearly ________ for several years following the Great Recession.

A) 2.5%
B) 25%
C) 7%
D) 0%
E) 5%

Question 77

It has been shown that increases in the money supply are directly related to the rate of inflation.If the previous statement is true,then:

A) nations that increase their money supply most rapidly will be the most prosperous.
B) high inflation will normally be associated with large increases in the money supply.
C) high inflation will normally be associated with large decreases in the money supply.
D) costs to print money will rise when the money supply falls.
E) real GDP rises whenever the money supply increases.

Question 78

An active monetary policy that attempts to smooth out the business cycle would involve conducting ________ monetary policy during recessions and ________ monetary policy during expansions.

A) contractionary; contractionary
B) expansionary; expansionary
C) contractionary; expansionary
D) expansionary; contractionary
E) countercyclical; expansionary

Question 79

The idea that the money supply does NOT affect real economic variables is called:

A) expectations theory.
B) monetary neutrality.
C) the Bernanke effect.
D) contractionary monetary policy.
E) expansionary monetary policy.

Question 80

Which of the following policy statements would a Keynesian economist tend to support?

A) The government central bank should encourage savings as a means of promoting economic growth.
B) The government central bank should never intervene in the economy.
C) The government central bank should intervene in the economy to stimulate the economy.
D) The government central bank should intervene in the economy only when aggregate supply changes.
E) The government central bank should focus on long-run aggregate supply, not aggregate demand.