Deck 15: Monetary Policy

Question 1

Carolina holds $2,000 in her savings account in case of a medical emergency.This represents the

A)Medical savings account.
B)Transaction demand for money.
C)Precautionary demand for money.
D)Income demand for money.

Answer 1

C

Question 2

During periods of hyperinflation,money does not hold its value long enough to make everyday market purchases; therefore,people hold as little as possible for as short a time as possible.This description implies that the

A)Transactions demand for money has decreased.
B)Precautionary demand for money has increased.
C)Speculative demand for money has decreased.
D)Portfolio demand for money has decreaseD.Holding money for everyday purchases refers to the transactions demand for money,which will be lower when money rapidly loses its value during periods of hyperinflation.

Answer 2

A

Question 3

The choice to hold money in the form of cash

A)Has no opportunity cost.
B)Results in forgone interest.
C)Results in increased interest income.
D)Results in greater outstanding debt.

Answer 3

B

Question 4

The use of money and credit controls to change the macroeconomy is

A)Monetary policy.
B)Considered ineffective by most economists.
C)No longer used in the United States.
D)Fiscal policy.

Question 5

Mark holds $100 in cash in his wallet to make purchases for gas and groceries.This represents the

A)Precautionary demand for money.
B)Transactions demand for money.
C)Speculative demand for money.
D)Market demand for money.

Question 6

Money held for making everyday market purchases represents the

A)Crisis demand for money.
B)Speculative demand for money.
C)Transactions demand for money.
D)Precautionary demand for money.

Question 7

The speculative,transactions,and precautionary demands for money added together give the

A)Market demand curve for money.
B)Monetarist demand-for-money curve.
C)Keynesian liquidity trap.
D)Market supply curve for money.

Question 8

Money held to take advantage of future financial opportunities is the

A)Transactions demand for money.
B)Precautionary demand for money.
C)Speculative demand for money.
D)Portfolio demand for money.

Question 9

The transactions demand for money is most closely associated with which of the following functions of money?

A)Standard of deferred payment.
B)Store of value.
C)Standard of value.
D)Medium of exchange.

Question 10

The cost of holding money in the form of cash is

A)Higher during the holidays.
B)Always considered by noneconomists when deciding how much money to hold.
C)Equal to whatever interest you would have received at the bank or other investment alternatives.
D)Nonexistent.

Question 11

Individuals hold precautionary balances in order to

A)Take advantage of future changes in bond prices.
B)Make anticipated expenditures.
C)Pay for emergency purchases.
D)Make speculative purchases.

Question 12

The speculative demand for money is related to money functioning as a

A)Store of value.
B)Standard of value.
C)Medium of exchange.
D)Unit of account.

Question 13

Currency held by the public,balances in transactions accounts,plus balances in most savings accounts and money market mutual funds are the

A)Money demand.
B)Federal funds.
C)Money supply (M1).
D)Money supply (M2).

Question 14

Which of the following causes the opportunity cost of holding money in the form of cash to decrease?

A)Lower interest rates.
B)Higher short-term yields.
C)Higher reserve requirement.
D)Higher long-term yields.

Question 15

The money supply M2 includes M1

A)Plus balances in savings accounts and money market mutual funds.
B)Plus balances in savings accounts,money market mutual funds,and currency in private bank vaults and in the Federal Reserve vaults.
C)Minus balances in savings accounts and money market mutual funds.
D)Minus balances in savings accounts,money market mutual funds,and short-term certificates of deposit (six months or less).

Question 16

____________ is the price paid for the use of money.

A)Gold
B)Monetary policy
C)Fiscal policy
D)The interest rate

Question 17

Ceteris paribus,the quantities of money people are willing and able to hold

A)Decrease as interest rates fall.
B)Increase as interest rates fall.
C)Increase as the money supply decreases.
D)Decrease when the speculative demand increases.

Question 18

The choice about how and where to hold idle funds is the

A)Precautionary decision.
B)Transactions decision.
C)Speculative decision.
D)Portfolio decision.

Question 19

Money held to buy bonds in the future represents the

A)Transactions demand for money.
B)Bond broker demand for money.
C)Interest earning demand for money.
D)Speculative demand for money.

Question 20

Currency held by the public plus balances in transactions accounts are the

A)Total reserves.
B)Money supply (M1).
C)Required reserves.
D)Money supply (M2).

Question 21

A monetary stimulus is designed to shift the

A)AS curve to the right.
B)AS curve to the left.
C)AD curve to the right.
D)AD curve to the left.

Question 22

If the Fed's objective is to stimulate the economy,which of the following gives the correct sequence of events?

A)The money supply increases,interest rates decrease,investment increases,and AD increases.
B)The money supply increases,interest rates decrease,investment increases,and AS decreases.
C)The money supply decreases,interest rates increase,investment decreases,and AD decreases.
D)The money supply decreases,interest rates increase,investment increases,and AD increases.

Question 23

The money supply curve is determined by all of the following except

A)Federal Reserve policy.
B)The lending behavior of private banks.
C)The willingness of individuals to borrow money.
D)The demand for money.

Question 24

The money supply curve as determined by current Federal Reserve policy is

A)Vertical since it's not determined by the interest rate.
B)Horizontal since it's not determined by the interest rate.
C)Upward-sloping to the right.
D)Downward-sloping to the right.

Question 25

The equilibrium rate of interest is determined by

A)Money demand and money supply.
B)The U.S.Treasury.
C)The president of the Federal Reserve Bank of New York.
D)The Federal Closed Market Committee.

Question 26

An increase in the money supply will

A)Reduce interest rates and increase aggregate demand.
B)Reduce interest rates and decrease aggregate demand.
C)Raise interest rates and increase aggregate demand.
D)Raise interest rates and decrease aggregate demanD.A lower interest rate will spur additional spending by businesses through investment,as well as increased consumption of interest-sensitive durable consumer goods.

Question 27

The Fed could sell bonds in the open market in an effort to keep interest rates constant when

A)The discount rate increases.
B)Money demand increases.
C)The reserve requirement increases.
D)Money demand decreases.

Question 28

The market demand curve for money is

A)Vertical because it is a fixed amount regardless of changes in the interest rate.
B)Horizontal because it is determined by the individual.
C)Upward-sloping to the right because people wish to hold more money at higher interest rates and less money at lower interest rates.
D)Downward-sloping to the right because people wish to hold less money at higher interest rates and more money at lower interest rates.

Question 29

Ceteris paribus,if the Fed sells bonds through open market operations,the money

A)Supply curve should shift rightward.
B)Supply curve should shift leftward.
C)Demand curve should shift rightward.
D)Demand curve should shift leftwarD.An open market sale decreases the money supply and shifts the curve to the left,resulting in a higher equilibrium interest rate.

Question 30

The most visible market signal of the Fed's activity is the

A)Equilibrium interest rate.
B)Federal funds rate.
C)Discount rate.
D)Prime lending rate.

Question 31

The federal funds rate is the interest rate for

A)Reserves borrowed from the Fed.
B)Money lent to a bank's best business customers.
C)Reserves lent by banks to the Fed.
D)Interbank reserve loans.

Question 32

According to Bernanke's policy guide,a full-point decrease in long-term interest rates results in a

A)$10 billion stimulus for the economy.
B)$20 billion stimulus for the economy.
C)$200 billion stimulus for the economy.
D)$1,000 billion stimulus for the economy.

Question 33

Which of the following is not true at the equilibrium rate of interest?

A)The quantity of money demanded is equal to the quantity of money supplied.
B)People are willing to hold as much money as is currently supplied.
C)There is no incentive for money owners to adjust their portfolios.
D)There is a tendency for the money demand curve to shift to the right.

Question 34

The normal market demand curve for money is

A)A horizontal curve at very high interest rates,where the quantity demanded changes but the interest rate is constant.
B)An upward-sloping demand curve,where more money is held when interest rates are higher.
C)A vertical demand curve,where the same amount of money is held regardless of the interest rate.
D)A downward-sloping demand curve,where more money is held at lower interest rates.

Question 35

Which shift should occur if the Fed raises the discount rate?

A)The investment demand curve should shift rightward.
B)The aggregate supply curve should shift rightward.
C)The aggregate demand curve should shift leftward.
D)The aggregate demand curve should shift rightwarD.The AD will decrease because higher interest rates reduce investment spending by businesses.

Question 36

The Fed can change the equilibrium rate of interest by changing

A)Government spending.
B)Taxes.
C)Reserve requirements or the discount rate,or through open market operations.
D)Tariffs.

Question 37

Which of the following shifts in the demand for money or the supply of money is most likely to occur as the result of a recession?

A)The demand curve shifts leftward.
B)The demand curve shifts rightward.
C)The supply curve shifts rightward.
D)Both the demand and supply curves shift rightwarD.The demand curve is most likely to shift leftward because incomes typically fall during recessions.

Question 38

What should happen to the equilibrium interest rate and the corresponding rate of investment if the Fed decreases the discount rate?

A)The equilibrium interest rate and the equilibrium rate of investment should both increase.
B)The equilibrium interest rate should increase,and the equilibrium rate of investment should decrease.
C)The equilibrium interest rate should decrease,and the equilibrium rate of investment should increase.
D)The equilibrium interest rate and the equilibrium rate of investment should both decrease.

Question 39

According to Bernanke's policy guide,a 1/4 point decrease in long-term interest rates results in a

A)$10 billion stimulus for the economy.
B)$50 billion stimulus for the economy.
C)$10 billion decrease for the economy.
D)$50 billion decrease for the economy.

Question 40

Which of the following is true about the equilibrium rate of interest?

A)It is constant because of structural forces.
B)At this rate,money demand exceeds money supply.
C)At this rate,money supply exceeds money demand.
D)The Fed can change it by changing the money supply.

Question 41

Monetary restraint is associated with all of the following except

A)A decrease in interest rates.
B)A decrease in the money supply.
C)An increase in the reserve requirement.
D)A decrease in aggregate demanD.Lower interest rates are associated with monetary stimulus.

Question 42

All of the following impact the effectiveness of Fed policy except

A)How well the Treasury follows the Fed's directions for releasing money.
B)The willingness or reluctance of banks to lend funds.
C)Global sources of money.
D)The responsiveness of interest rates to changes in the money supply.

Question 43

A decrease in aggregate demand could be caused by

A)A decrease in the value of the domestic currency.
B)A booming economy.
C)Contractionary monetary policy.
D)Expansionary monetary policy.

Question 44

Monetary stimulus may be ineffective because

A)The investment demand curve is inelastic.
B)Expectations of a boom cause the investment demand curve to shift to the right,offsetting interest rate effects that would stimulate the economy.
C)The investment demand curve is horizontal.
D)People usually respond to lower interest rates by consuming more goods and services.

Question 45

In which of the following situations is expansionary monetary policy most effective?

A)The Fed prints more currency.
B)The Fed raises the discount rate and the reserve requirement.
C)The Fed sells more securities.
D)Banks are willing to lend excess reserves.

Question 46

Which of the following is likely to cause monetary restraint to be effective?

A)High expectations overwhelm high interest rates.
B)Businesses have the ability to borrow funds from foreign banks.
C)People behave rationally and borrow less when interest rates rise.
D)None of the choices are correct.

Question 47

Monetary policy will never be effective if interest rates

A)Change quickly.
B)Respond to a change in the money supply,and investment spending responds to a change in the interest rate.
C)Do not respond to a change in the money supply,and investment spending does not respond to changes in the interest rate.
D)Change slowly.

Question 48

Which of the following is a series of events that accurately describes the steps by which restrictive monetary policy is effective?

A)Decrease in interest rate,decrease in M1,and increase in investment.
B)Decrease in M1,increase in interest rate,and decrease in investment.
C)Increase in M1,decrease in investment,and decrease in interest rate.
D)Increase in M1,increase in interest rate,and increase in investment.

Question 49

The effectiveness of monetary policy is increased

A)In the liquidity trap.
B)When investment demand becomes more responsive to changes in the interest rate.
C)If the velocity of money is constant.
D)If the money demand curve is elastic.

Question 50

Monetary stimulus will fail if

A)Banks lend too much money.
B)Short-term interest rates are affected but long-term interest rates are not.
C)Consumers spend too much money,creating a shortage of money.
D)Lower interest rates cause households to not refinance mortgages and not apply for new consumer loans.

Question 51

The liquidity trap

A)Refers to the vertical portion of the money demand curve.
B)Refers to the possibility that interest rates may not respond to changes in the money supply.
C)Implies that people are willing to hold very limited amounts of money at low interest rates.
D)Occurs when people wish to hold more and more money as interest rates fall.

Question 52

Monetary stimulus will fail if

A)Banks are reluctant to lend money.
B)The investment demand curve is fairly flat.
C)The money demand curve is fairly steep.
D)Consumers begin to spend more.

Question 53

Monetary policy will be ineffective if

A)The demand for money is very sensitive to changes in the interest rate,but the investment demand is not.
B)The demand for money and investment demand are both very sensitive to changes n the interest rate.
C)Interest rates are sensitive to the quantity of money supplied,and investment spending is sensitive to changes in the interest rate.
D)Investors have favorable expectations for future sales.

Question 54

The success of Fed intervention depends on how well

A)Congress performs when manipulating the money supply.
B)Individuals respond to the Fed's direct requests of the public.
C)The Treasury follows the Fed's directions for releasing money.
D)Changes in long-term interest rates closely follow changes in short-term interest rates.

Question 55

Monetary policy is most effective when the money demand curve is __________ and investment demand is _____________.

A)horizontal; elastic
B)downward-sloping; elastic
C)horizontal; inelastic
D)downward-sloping; inelastic

Question 56

Which of the following is true about monetary policy in the liquidity trap?

A)Monetary policy will be unable to reduce interest rates further to stimulate investment.
B)The opportunity cost of holding money is relatively high at interest rates implied by the liquidity trap.
C)An expansion of the money supply will have the large effect of raising interest rates when the economy is in the liquidity trap.
D)The demand for money is interest-inelastic in the liquidity trap.

Question 57

When the money market is in equilibrium in the liquidity trap,

A)An increase in the money supply does not affect interest rates.
B)The demand for money is perfectly insensitive to interest rates.
C)Investment spending falls to zero.
D)There is no speculative demand for money.

Question 58

All of the following impact the effectiveness of Fed policy except

A)Global sources of money.
B)The time lag between when interest rates change and when investment changes.
C)How well individuals respond to the agricultural press releases.
D)Expectations about the economy in the future.

Question 59

Long-term interest rates may not closely follow short-term interest rates if

A)People prefer to hold transactions accounts over cash.
B)The required reserve ratio decreases.
C)Lenders are reluctant to make loans.
D)The Fed intervenes in the bond market.

Question 60

If the Federal Reserve raises the discount rate,we would expect the

A)AS curve to increase.
B)Investment curve to increase.
C)AD curve to increase.
D)AD curve to decrease.

Question 61

According to the monetarist view and the equation of exchange,which of the following will occur because the Fed sells securities in the open market?

A)A decrease in real interest rates.
B)A decrease in nominal aggregate spending.
C)A lower level of real output.
D)An increase in the price level.

Question 62

Keynes believed that monetary stimulus would be ineffective during a recession because of all of the following except

A)The liquidity trap.
B)Low expectations.
C)The reluctance of banks to lend.
D)The willingness of consumers to increase consumption when interest rates fall.

Question 63

Using the equation of exchange and assuming full employment and a constant velocity of money,a decrease in the required reserve ratio would result in a

A)Lower velocity.
B)Lower quantity of real output.
C)Higher price level.
D)Lower price level.

Question 64

Global money can impact monetary policy

A)Because businesses refuse to borrow and spend when they see that foreign rates are lower than U.S.rates.
B)Because lower foreign interest rates reduce consumer confidence in the domestic economy.
C)Because businesses may be able to borrow from foreign banks at cheaper rates.
D)Very little because businesses are not allowed to borrow from foreign sources.

Question 65

The long-term rate of unemployment,determined by structural forces in labor and product markets,defines the

A)Frictional rate of unemployment.
B)Seasonal rate of unemployment.
C)Natural rate of unemployment.
D)Cyclical rate of unemployment.

Question 66

The equation of exchange can be stated as

A)MV = PQ.
B)PV = MQ.
C)MP = VQ.
D)MQ = V ÷ P.

Question 67

Monetary policy is most likely to result in inflation when the aggregate supply curve is

A)Vertical and the Fed lowers the discount rate.
B)Vertical and the Fed raises the reserve requirement.
C)Horizontal and the Fed sells securities.
D)Horizontal and the Fed lowers the reserve ratio.

Question 68

Using the equation of exchange and assuming effective price controls and a constant velocity of money,a decrease in the discount rate could temporarily result in

A)Higher velocity.
B)Higher quantity of real output.
C)Higher price level.
D)Lower money supply.

Question 69

U.S.multinational nonbank corporations can borrow money from all of the following except

A)Domestic banks.
B)Foreign bond markets.
C)Foreign subsidiaries.
D)Federal Reserve district banks.

Question 70

The effectiveness of monetary policy is influenced by

A)The time it takes for lower interest rates to make investment spending more profitable.
B)The willingness of Congress to implement it.
C)How responsive the money supply is to changes in taxes.
D)Reports by the Congressional Budget Office.

Question 71

Using the equation of exchange,all of the following are true according to monetarists except

A)A reduction in M can leave real output unaffected.
B)The velocity of money is stable.
C)Changes in M may cause changes in P.
D)The equation of exchange is irrelevant.

Question 72

Banks and customers are most likely to be reluctant to use the full lending capacity made available by the Federal Reserve when the economy experiences

A)Growth and low interest rates.
B)Growth and inflation rates higher than the interest rate.
C)High inflation rates.
D)A deep recession.

Question 73

Monetarists argue that

A)The velocity of money is constant.
B)Fiscal policy puts idle money balances to work,which reduces V.
C)When there is a recession,people accumulate money balances,which increases V.
D)The velocity of money increases as much as total spending falls so that MV remains constant.

Question 74

Which of the following explains why small reductions in interest rates may not lead to an increase in investment spending?

A)Excess capacity gives businesses little incentive to expand production capacity.
B)Investment demand is elastic with respect to the interest rate.
C)Improved expectations shift the investment demand curve to the right.
D)Banks are eager to make loans at the lower interest rate.

Question 75

Using the equation of exchange,the existence of a natural rate of unemployment implies that in the long run:

A)Velocity in the equation of exchange is actually very unstable.
B)Monetary policy affects only the rate of inflation.
C)Quantity of real output in the equation of exchange varies in proportion to money supply.
D)The rate of unemployment can be permanently reduced by more expansionary monetary and fiscal policies.

Question 76

When the Fed sells securities through open market operations,the equation of exchange (under monetarist assumptions about V being stable)requires that either aggregate spending

A)Increases or prices decrease,or both.
B)Or prices decrease,or both.
C)Decreases or prices increase,or both.
D)Or prices increase,or both.

Question 77

According to the extreme monetarist position,using the equation of exchange,an increase in the quantity of money in circulation will

A)Increase real GDP.
B)Decrease the velocity of money.
C)Have no effect on the price level.
D)Increase the price level.

Question 78

Using the equation of exchange,if real output increases by 5 percent per year and velocity is stable,in order to keep the price level stable

A)The interest rate must increase by 5 percent per year.
B)Velocity must increase by 5 percent per year.
C)The money supply must increase by 5 percent per year.
D)The money supply must increase by more than 5 percent per year because nominal output is greater than 5 percent.

Question 79

Which of the following groups believes monetary policy to be effective for fighting inflation but not for changing real output?

A)Keynesian economists.
B)Classical economists.
C)Monetarists.
D)Neo-Keynesian economists.

Question 80

Which of the following increases the effectiveness of monetary policy from a monetarist perspective?

A)The liquidity trap.
B)The constant velocity of money.
C)Changing expectations.
D)Unresponsive investment demands.