Deck 15: Monetary Policy

Question 1

The amount of money that people demand is:

A)positively related to the interest rate.
B)independent the interest rate.
C)negatively related to the interest rate.
D)positively or negatively related to the interest rate depending on the state of the economy.

Answer 1

C

Question 2

We hold money to:

A)earn interest.
B)reduce transaction costs.
C)increase transaction costs
D)protect our purchasing power.

Answer 2

B

Question 3

Janet Yellen is:

A)chair of the Board of Governors of the Federal Reserve System.
B)an AIG executive who received large bonuses.
C)a Supreme Court justice who ruled that budget deficits are unconstitutional.
D)a financial adviser on CNBC.

Answer 3

A

Question 4

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____.

A)falls; falls; falls
B)falls; falls; rises
C)rises; falls; falls
D)rises; falls; rises

Question 5

People forgo interest and hold money:

A)because they are required to.
B)to reduce their transaction costs.
C)because there are no substitutes for money.
D)because banks are too risky.

Question 6

The money demand curve shows the relationship between the _____ and the _____ of money demanded.

A)money supply; quantity
B)aggregate price level; nominal quantity
C)interest rate; nominal quantity
D)real GDP; nominal quantity

Question 7

The chair of the Board of Governors during the 2008 financial crisis was:

A)Barack Obama.
B)Ben Bernanke.
C)J) P. Morgan.
D)John McCain.

Question 8

The short-term interest rate applies to financial assets that mature within:

A)less than a year.
B)a year or more.
C)2 years.
D)5 years.

Question 9

Short-term interest rates apply to financial assets due within:

A)24 hours.
B)three months.
C)six months.
D)one year.

Question 10

The money demand curve is _____ because the opportunity cost of holding money is _____ related to the interest rate.

A)downward-sloping; inversely
B)downward-sloping; directly
C)upward-sloping; inversely
D)upward-sloping; directly

Question 11

Generally, the more liquid an asset is, the:

A)lower its purchasing power.
B)lower its rate of return.
C)higher its capacity to store value over time.
D)higher its rate of return.

Question 12

The Federal Reserve can influence financial crises because it:

A)determines tax rates.
B)determines government spending.
C)conducts monetary policy.
D)is responsive to the people who elected its members to office.

Question 13

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 3%, the opportunity cost of holding cash in a checking account is:

A)zero.
B)0)02%.
C)1%.
D)2%.

Question 14

In 2014, Ben Bernanke was succeeded as chair of the Board of Governors of the Federal Reserve by:

A)Janet Yellen.
B)Paul Ryan.
C)Joe Biden.
D)Nancy Pelosi.

Question 15

The interest earnings one gives up to hold more liquid assets are:

A)an opportunity cost.
B)a transaction cost.
C)an asset of the company.
D)a liability of the company.

Question 16

If during 2007 the interest rate on one-month Treasury bills was 2.5% and during 2008 it was 2%, the opportunity cost of holding money:

A)decreased.
B)became negative.
C)increased.
D)did not change.

Question 17

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 2%, the opportunity cost of holding the checking account as money is:

A)zero.
B)0)02%.
C)1%.
D)2%.

Question 18

An individual who decides to hold money instead of other assets:

A)is giving up the interest that other assets could have earned.
B)is likely to be subject to money illusion.
C)is not affected by unanticipated inflation.
D)can maintain a higher standard of living.

Question 19

In a graph of a money demand curve, _____ is plotted on the vertical axis.

A)the interest rate on liquid assets such as short-term CDs
B)the interest rate on 30-year Treasury bills
C)the rate of inflation
D)the rate of return in the stock market

Question 20

The opportunity cost of holding money is:

A)zero.
B)the interest rate when someone uses a credit card.
C)the difference between interest rates on monetary assets and on nonmonetary assets.
D)the discount rate.

Question 21

The fact that many stores in the United States have found it economical to accept credit cards has:

A)increased the demand for money.
B)decreased the demand for money.
C)increased the demand for credit card transactions but has not affected the demand for money.
D)decreased the demand for credit card transactions but has not affected the demand for money.

Question 22

The slope of the demand curve for money is:

A)vertical.
B)horizontal.
C)positive.
D)negative.

Question 23

A decrease in the demand for money would result from:

A)an increase in income.
B)an increase in real GDP.
C)a decrease in the price level.
D)an increase in nominal GDP.

Question 24

An increase in the aggregate price level _____ the demand for money.

A)increases
B)decreases
C)does not affect
D)left-shifts

Question 25

The money demand curve is _____ because a lower interest rate _____ the opportunity cost of holding money.

A)upward-sloping; increases
B)downward-sloping; increases
C)upward-sloping; decreases
D)downward-sloping; decreases

Question 26

An increase in the demand for money would result from a(n):

A)decrease in nominal GDP.
B)decrease in real GDP.
C)decrease in the price level.
D)increase in the price level.

Question 27

The introduction of ATMs:

A)increased the demand for cash because it made cash easier to get.
B)decreased the demand for cash because it reduced the cost of moving from other assets into cash.
C)did not change the demand for cash because it is proportional to the price level.
D)did not change the demand for cash, as ATMs do not affect public spending habits.

Question 28

An increase in real aggregate spending will shift the money:

A)demand curve rightward.
B)demand curve leftward.
C)supply curve rightward.
D)supply curve leftward.

Question 29

Now that fast food places such as McDonald's are accepting credit card payments, the:

A)demand for money has increased.
B)demand for money has decreased.
C)demand for money has not been affected.
D)supply of money has increased, as some cash is unused.

Question 30

U.S. banks did not offer interest on checking accounts until the beginning of the 1980s. As a result, before the early 1980s:

A)the opportunity costs of keeping funds in checking accounts was zero.
B)the opportunity costs of keeping funds in checking accounts was lower.
C)the opportunity costs of keeping funds in checking accounts was higher.
D)people kept money under their mattress.

Question 31

If inflation increases from 2% to 5%, the money demand curve will:

A)remain constant.
B)remain constant, but the quantity of money demanded will decrease.
C)shift to the left.
D)shift to the right.

Question 32

Which one of the following events will NOT decrease the demand for money?

A)an increase in the aggregate price level
B)the advent of ATMs
C)the ability of the stores to process credit cards
D)a fall in real GDP

Question 33

A 30% increase in the aggregate price level will:

A)increase money demand by 30%.
B)increase money demand by the money multiplier.
C)decrease money demand by 30%.
D)not affect the demand for money.

Question 34

Improvements in information technology have:

A)shifted the demand for cash to the right.
B)decreased the demand for money.
C)not affected the demand for money.
D)increased the demand for money.

Question 35

An increase in interest rates causes the demand for money to:

A)increase.
B)decrease.
C)stay the same.
D)shift to the right.

Question 36

A decrease in the demand for money would result from:

A)an increase in income.
B)a decrease in real GDP.
C)an increase in the price level.
D)an increase in nominal GDP.

Question 37

If Congress imposes a $5 tax on each ATM transaction, the demand for money will likely:

A)increase.
B)decrease.
C)fluctuate randomly.
D)be unaffected.

Question 38

A 20% increase in the aggregate price level will increase the quantity of money demanded by:

A)20%.
B)the money multiplier.
C)10%.
D)half of the money multiplier.

Question 39

U.S. banks did not offer interest on checking accounts until the beginning of the 1980s. Then banking regulations changed, allowing banks to pay interest on checking account funds. As a result, the _____ money _____ and shifted the money demand curve to the _____.

A)supply of; fell; left
B)demand for; fell; left
C)demand for; rose; right
D)supply of; rose; right

Question 40

If Congress places a $5 tax on each ATM transaction, there will likely be:

A)a movement up a stationary money demand curve.
B)a movement down a stationary money demand curve.
C)a shift to the left of the money demand curve.
D)a shift to the right of the money demand curve.

Question 41

If the demand for money is $300 billion and the supply of money is $200 billion, then the interest rate will:

A)fall.
B)rise.
C)remain unchanged.
D)be in equilibrium.

Question 42

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____.

A)increase; decrease
B)increase; increase
C)decrease; increase
D)decrease; decrease

Question 43

A change in _____ does NOT shift the money demand curve.

A)the interest rate
B)the price level
C)banking technology
D)real GDP

Question 44

If the aggregate price level doubles:

A)the money supply will also double.
B)neither money demand nor the money supply will rise.
C)both money demand and the money supply will rise proportionally.
D)money demand at any given interest rate will also double.

Question 45

Suppose that the economy enters a recession and real GDP falls. All else equal, we would expect:

A)the money demand curve to shift inward.
B)the money demand curve to shift outward.
C)a downward movement along a fixed money demand curve.
D)an upward movement along a fixed money demand curve.

Question 46

All of the following factors will shift the money demand curve EXCEPT:

A)changes in inflation.
B)changes in the real GDP.
C)changes in the aggregate price level.
D)changes in the interest rate.

Question 47

In the liquidity preference model, the money supply is represented by:

A)a vertical line.
B)an upward-sloping curve with a slope of 1 / V.
C)a horizontal line.
D)a downward-sloping curve with a slope of 1 / k.

Question 48

The quantity demanded of money is negatively related to _____, and the demand for money is positively related to _____.

A)the interest rate; real GDP
B)the interest rate; unemployment
C)real GDP; the interest rate
D)real GDP; the money supply

Question 49

The federal funds rate is the interest rate on _____, and it is controlled by the _____.

A)loans from the Federal Reserve to banks; Federal Open Market Committee
B)reserves that banks lend to each other; Federal Open Market Committee
C)loans from the Federal Reserve to banks; president and Congress
D)reserves that banks lend to each other; president and Congress

Question 50

A high demand for money (as in Japan) would result from:

A)a decrease in nominal GDP and a high crime rate.
B)a decrease in real GDP and a preference from businesses to accept only debit cards.
C)a decrease in the price level.
D)low crime rates and widespread lack of capacity to accept noncash payments.

Question 51

The demand for money is higher in Japan than in the United States because:

A)telecommunications and information technology is more advanced in the United States than in Japan.
B)Japanese consumers use credit cards more than people in the United States.
C)Japanese interest rates are higher than those in the United States.
D)Japanese interest rates are lower than those in the United States.

Question 52

According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _____, and this leads to a _____ in the interest rate.

A)decreases; rise
B)increases; fall
C)decreases; fall
D)increases; rise

Question 53

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, money demanded is _____ than money supplied.

A)less than
B)greater than
C)equal to
D)It is impossible to predict which is greater, money demanded or money supplied.

Question 54

Among the factors that could cause money demand to shift are all of the following EXCEPT:

A)real aggregate spending.
B)institutional constraints in the banking system.
C)technology of transactions.
D)interest rates.

Question 55

The demand curve for money will shift to the right because of a:

A)fall in the interest rate.
B)rise in real GDP.
C)rise in the interest rate.
D)fall in real GDP.

Question 56

The demand for money is higher in Japan than in the United States because:

A)Japanese banks pay interest on checking accounts.
B)most stores in Japan do not accept credit cards.
C)the ATMs are open all night.
D)the average price level is lower in Japan.

Question 57

Suppose a typical basket of goods is now more expensive than it used to be. All else equal, we would expect:

A)the demand for money to shift inward.
B)a downward movement along a fixed money demand curve.
C)the demand for money to shift outward.
D)an upward movement along a fixed money demand curve.

Question 58

Which of the following is NOT one of the reasons that the Japanese tend to keep large amounts of cash?

A)Banks have invested heavily in credit card technology.
B)Japan has a low crime rate.
C)Interest rates in Japan have been below 1% since the 1990s.
D)Japan's retail sector is dominated by mom-and-pop stores that don't accept credit cards.

Question 59

If the demand for money is $100 billion and the supply of money is $200 billion, then the interest rate will:

A)fall.
B)rise.
C)remain unchanged.
D)be in equilibrium.

Question 60

Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect:

A)the money demand curve to shift outward.
B)the money demand curve to shift inward.
C)a downward movement along a fixed money demand curve.
D)an upward movement along a fixed money demand curve.

Question 61

Use the following to answer questions 67-69:
Figure: Equilibrium in the Money Market
(Figure: Equilibrium in the Money Market) Look at the figure Equilibrium in the Money Market. If the interest rate is above equilibrium, there will be an excess _____ money and the interest rate will _____.

A)demand for; rise
B)supply of; fall
C)demand for; fall
D)supply of; rise

Question 62

If the interest rate is below the equilibrium rate, the:

A)supply of nonmonetary financial assets is greater than the demand for them.
B)demand for nonmonetary financial assets is greater than the supply.
C)demand and supply of money can still be in balance.
D)supply of money is greater than the demand.

Question 63

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2% sellers of interest-bearing financial assets _____ interest rates to find willing buyers.

A)must offer higher
B)can offer lower
C)can offer 2%
D)Sales of financial assets do not depend on the rate offered.

Question 64

Use the following to answer questions 67-69:
Figure: Equilibrium in the Money Market
(Figure: Equilibrium in the Money Market) Look at the figure Equilibrium in the Money Market. Equilibrium will occur at interest rate _____ and quantity of money _____.

A)r₂; Q₀
B)r₀; Q₂
C)r₁; Q₁
D)r₁; Q₂

Question 65

According to the liquidity preference model, the equilibrium interest rate is determined by:

A)the supply of and demand for loanable funds.
B)the supply of and demand for money.
C)the level of investment spending and saving.
D)the International Monetary Fund.

Question 66

The liquidity preference model uses the demand for and supply of money to determine:

A)GDP.
B)the price level.
C)the interest rate.
D)nominal output.

Question 67

The idea that the interest rate is determined by the supply and demand for money is known as:

A)the liquidity preference model.
B)the quantity theory of money.
C)the monetarist theory.
D)the loanable funds theory.

Question 68

Use the following to answer questions 78-79:
Figure: Changes in the Money Supply
(Figure: Changes in the Money Supply) Look at the figure Changes in the Money Supply. Federal Reserve policy to increase the supply of money, hence to lower the interest rate from 6% to 4%, is accomplished by action that _____ the _____ Treasury bills.

A)lowers; price of
B)increases; interest rate on
C)increases; demand for
D)increases; supply of

Question 69

An increase in the supply of money with no change in demand will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.

A)increase; rise
B)increase; fall
C)decrease; rise
D)decrease; fall

Question 70

Suppose the Federal Reserve sells Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates.

A)reduce; increase; lower
B)increase; lower; lower
C)increase; raise; lower
D)reduce; reduce; raise

Question 71

According to the liquidity preference model:

A)an increase in the money supply lowers the equilibrium rate of interest.
B)a decrease in the money supply lowers the equilibrium rate of interest.
C)the money supply curve is a horizontal line.
D)the demand for money curve is a vertical line.

Question 72

If the equilibrium interest rate in the money market is 5%, at an interest rate of 2% the quantity of nonmonetary interest-bearing financial assets demanded is _____ the quantity supplied.

A)less than
B)greater than
C)equal to
D)irrelevant to

Question 73

At interest rates below equilibrium, people will want to:

A)shift their wealth into Treasury bills.
B)shift their wealth into money.
C)decrease the amount of money that they hold.
D)make no changes to their assets.

Question 74

The money supply curve is:

A)downward sloping.
B)vertical.
C)upward rising.
D)horizontal.

Question 75

Suppose the Federal Reserve buys Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates.

A)reduce; increase; lower
B)increase; lower; lower
C)increase; raise; lower
D)reduce; reduce; raise

Question 76

An increase in the demand for money with no change in supply will lead to _____ in the equilibrium quantity of money and _____ in the equilibrium interest rate.

A)no change; a rise
B)no change; a fall
C)a decrease; a rise
D)an increase; a fall

Question 77

A decrease in the supply of money with no change in demand for money will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.

A)increase; rise
B)increase; fall
C)decrease; rise
D)decrease; fall

Question 78

Use the following to answer questions 67-69:
Figure: Equilibrium in the Money Market
(Figure: Equilibrium in the Money Market) Look at the figure Equilibrium in the Money Market. If the rate of interest is below equilibrium, there will be an excess _____ money and the interest rate will _____.

A)demand for; rise
B)supply of; fall
C)demand for; fall
D)supply of; rise

Question 79

Use the following to answer questions 78-79:
Figure: Changes in the Money Supply
(Figure: Changes in the Money Supply) Look at the figure Changes in the Money Supply. If the supply of money shifts from S₁ to S₂, the Federal Reserve must have _____ Treasury bills in the open market.

A)sold
B)bought
C)issued new
D)borrowed

Question 80

A sale of Treasury bills by the Federal Reserve _____ interest rates and _____ the money supply.

A)raises; increases
B)raises; reduces
C)lowers; reduces
D)lowers; increases