Deck 13: Monetary Policy

Question 1

If the economy is facing inflationary pressures,the Fed will:

A) raise taxes.
B) raise interest rates.
C) lower interest rates.
D) decrease government spending.

Answer 1

raise interest rates.

Question 2

Fill in the blanks in this imaginary news article: "The Indian rupee _____________ in response to the Fed's announcement that it would continue its economic stimulus,making Indian exports to the U.S.______________."

A) surged;drop
B) surged;rise
C) plunged;drop
D) plunge;rise

Answer 2

surged;drop

Question 3

Which of the following groups is most likely to favor a tight monetary policy?

A) importers
B) borrowers
C) car dealers
D) home builders

Answer 3

importers

Question 4

If the unemployment rate is 4.5% and the inflation rate is 6%,the Fed will most likely:

A) lower the discount rate.
B) buy bonds.
C) lower the reserve requirement.
D) sell bonds.

Question 5

Suppose a news article reports,"Dismal jobs report suggests the Fed will lower interest rates." If the Fed does lower interest rates,the dollar will ____________ against foreign currencies,and U.S.goods will become ________________ for foreigners.

A) rise;more expensive
B) rise;cheaper
C) fall;more expensive
D) fall;cheaper

Question 6

A lower interest rate increases consumption,investment,and __________,which ___________ aggregate demand.

A) imports;increases
B) imports;decreases
C) exports;increases
D) exports;decreases

Question 7

Monetary policy deals with how:

A) the money supply is controlled to target interest rates.
B) the money supply is controlled to target specific prices.
C) taxes,government transfer payments,and government spending are controlled to target unemployment.
D) taxes,government transfer payments,and government spending are controlled to target interest rates.

Question 8

In May 2013,Brazilian President Dilma Rousseff said he would ensure that Brazil's central bank had the autonomy to do what was needed to tame inflation.Brazil's central bank would have to pursue a(n)_________ monetary policy.As a result,the dollar would ____________ against the real (Brazil's currency),making U.S.exports to Brazil _________________.

A) expansionary;rise;more expensive
B) expansionary;fall;cheaper
C) tight;rise;more expensive
D) tight;fall;cheaper

Question 9

A higher interest rate __________ consumption,investment,and _____________,which ___________ aggregate demand

A) decreases;exports;decreases
B) decreases;imports;decreases
C) increases;exports;increases
D) increases;imports;increases

Question 10

If monetary policy is tight:

A) the dollar will rise.
B) it will become easier for businesses to obtain loans.
C) U.S.exports will increase.
D) U.S.imports will decline.

Question 11

If the Fed pursues an expansionary monetary policy:

A) the dollar will rise.
B) U.S.imports from other countries will rise.
C) U.S.exports to other countries will rise.
D) aggregate supply will increase.

Question 12

The twin goals of monetary policy are:

A) economic growth with low unemployment and stable prices with moderate short-term interest rates.
B) economic growth with low unemployment and falling prices with low long-term interest rates.
C) economic growth with low unemployment and stable prices with moderate long-term interest rates.
D) economic growth with moderate unemployment and stable prices with low long-term interest rates.

Question 13

The housing bubble of 2004-2006 caused ____ pressures,leading the Fed to ____ interest rates.

A) deflationary;raise
B) deflationary;lower
C) inflationary;lower
D) inflationary;raise

Question 14

The dramatic collapse in the price of technology stocks in 2001-2003,coupled with a short recession in 2001,caused the Fed to ____ interest rates to stimulate ____.

A) raise;employment
B) lower;employment
C) raise;prices
D) lower;prices

Question 15

When the housing bubble collapsed in 2007,____ rose significantly,and the Fed ____ interest rates.

A) inflation;increased
B) unemployment;increased
C) unemployment;lowered
D) inflation;lowered

Question 16

Which action is the Fed most likely to take to curb inflation?

A) lower the discount rate
B) lower reserve requirements
C) raise taxes
D) sell securities in the open market

Question 17

If the unemployment rate is 10% and the inflation rate is 2%,the Fed will most likely:

A) raise the discount rate.
B) buy bonds.
C) lower the reserve requirement.
D) sell bonds.

Question 18

If the economy has high levels of unemployment,the Fed will:

A) lower taxes.
B) raise interest rates.
C) reduce interest rates.
D) increase government spending.

Question 19

The Fed uses its tools to counteract:

A) booms.
B) recessions.
C) booms and recessions.
D) depressions.

Question 20

The peak of the Internet growth in 1998-1999 led to inflationary pressures and ____,and the Fed responded by _____ interest rates.

A) economic growth;lowering
B) economic growth;raising
C) unemployment;raising
D) unemployment;lowering

Question 21

In times of economic downturn the Fed will engage in ____ monetary policy by ____ bonds.

A) contractionary;buying
B) contractionary;selling
C) expansionary;selling
D) expansionary;buying

Question 22

The short-run aggregate supply curve is ____ and the long-run aggregate supply curve is ____.

A) vertical;upward sloping
B) horizontal;vertical
C) vertical;horizontal
D) upward sloping;vertical

Question 23

Loosening monetary policy causes interest rates to ____ and consumption and investment to ____.

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

Question 24

In the classical monetary transmission mechanism any change in _______ will bring about ________.

A) M;changes in interest rates
B) M a direct proportionate change in P
C) V;a direct proportionate change in Q
D) M or V;changes in P

Question 25

When interest rates rise,exports ____ and imports ____.

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

Question 26

The housing bubble occurred in:

A) 1988-1999.
B) 2001-2003.
C) 2004-2006.
D) 2007-2009.

Question 27

The price of technology stocks collapsed dramatically in:

A) 1988-1999.
B) 2001-2003.
C) 2004-2006.
D) 2007-2009.

Question 28

When the interest rate falls,American bonds become ____ attractive to foreign investors,often leading to ____ in the value of the U.S.dollar in foreign exchange markets.

A) more;an increase
B) more;a decrease
C) less;an increase
D) less;a decrease

Question 29

When current real output exceeds potential real output,the Fed will _____ interest rates in an effort to fight _____.

A) increase;a recession
B) decrease;a recession
C) decrease;inflation
D) increase;inflation

Question 30

When the interest rate falls,the value of the U.S.dollar in foreign exchange markets tends to ____ and net exports tend to ____.

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

Question 31

When the Federal Reserve increases excess reserves to reduce interest rates and stimulate spending,it is said to engage in:

A) tight money policy.
B) expansionary fiscal policy.
C) expansionary monetary policy.
D) restrictive policy.

Question 32

Tightening monetary policy causes interest rates to ____ and aggregate ____ to _______.

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

Question 33

Which of the following results is NOT expected when the Federal Reserve lowers its federal funds target rate?

A) increased investment
B) increased consumption of durable goods
C) decreased exports
D) decreased imports

Question 34

When the value of the dollar rises,exports ____ and imports ____.

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

Question 35

The housing bubble collapsed in:

A) 1988-1999.
B) 2001-2003.
C) 2004-2006.
D) 2007-2009.

Question 36

An increase in the interest rate causes the aggregate _________ curve to shift _____.

A) demand;rightward
B) demand;leftward
C) supply;rightward
D) supply;leftward

Question 37

A reduction in the interest rate causes consumption and investment to ____,which shifts the aggregate demand curve ____.

A) rise;rightward
B) rise;leftward
C) fall;rightward
D) fall;leftward

Question 38

The peak of the Internet growth,when new "dot.com" companies sprouted up daily,occurred during:

A) 1988-1999.
B) 2001-2003.
C) 2004-2006.
D) 2007-2009.

Question 39

During 2010-2013,the United States underwent a ________ economic recovery with ________.

A) rapid;low unemployment
B) slow;persistent unemployment
C) rapid;high inflation
D) slow;falling prices

Question 40

The quantity theory equation of exchange states:

A) Supply = Demand.
B) GDP = Q × P.
C) M × V = P × Q.
D) M = P × Q.

Question 41

In the equation of exchange,if M = $1.5 trillion,V = 7,and P = 1.05,then:

A) nominal GDP is $10 trillion.
B) Q = $10 trillion.
C) Q = $10.5 trillion.
D) real GDP is $10.5 trillion.

Question 42

Which of the following statements about the classical money transmission mechanism is FALSE?

A) The quantity theory provides a good explanation of the short-run impact of monetary growth.
B) The quantity theory provides a good explanation of the long-run impact of monetary growth.
C) Changes in the money supply typically affect prices before equilibrium can be reestablished.
D) People typically respond to money supply changes by making more or fewer purchases of goods and services.

Question 43

The phenomenon of hoarding money when the interest rate falls to low levels is an outcome of:

A) the liquidity trap.
B) the transactions demand for money.
C) the precautionary demand for money.
D) deflation.

Question 44

Assuming full employment in the classical model,if velocity increases and the government wants stable prices,the government should:

A) increase the money supply.
B) decrease the money supply.
C) do nothing.
D) increase government spending.

Question 45

According to the equation of exchange,the long-run effect of a doubling of the money supply would be that:

A) both prices and real GDP double.
B) the economy grows with little inflation.
C) the price level is halved and real GDP doubles.
D) prices double and real GDP is unchanged.

Question 46

$\rightarrow\downarrow$

-Given that M represents the money supply,i represents interest rates,I represents investment,AD represents aggregate demand,V represents the velocity of money,and Q represents the economy's real output level,Keynesian theory can be represented by:

A) $\uarr$ M $\rightarrow\downarrow$ i $\rightarrow$ $\uarr$ I $\rightarrow$ $\uarr$ AD $\rightarrow$ $\uarr$ Q
B) $\uarr$ M $\rightarrow\uarr$ i $\rightarrow\downarrow$ I $\rightarrow\uarr$ AD $\rightarrow\uarr$ Q.
C) $\uarr$ M $\rightarrow\downarrow$ V $\rightarrow\downarrow$ I $\rightarrow\uarr$ AD $\rightarrow\uarr$ Q.
D) $\uarr$ M $\rightarrow\downarrow$ i $\rightarrow\uarr$ V $\rightarrow\uarr$ AD $\rightarrow\uarr$ Q.

Question 47

Money illusion:

A) is the misperception that prices have changed;it occurs when the Fed reduces the money supply.
B) occurs when output rises.
C) is the distinguishing factor between the short run and the long run.
D) is the misperception that one is wealthier;it occurs when the money supply grows.

Question 48

In the equation of exchange,if M = $2 trillion,P = 1.5,and Q = $8 trillion:

A) the velocity of money (V)= 6.
B) nominal GDP is $16 trillion.
C) the velocity of money (V)= 4.
D) real GDP is $12 trillion.

Question 49

The idea that a change in the money supply would affect prices but not real GDP is associated with the:

A) monetary equivalence theory.
B) law of unintended consequences.
C) classical monetary transmission mechanism.
D) GDP impossibility rule.

Question 50

Monetarists believe that in the short run a change in the money supply can affect _______________________,while in the long run,a change in the money supply will affect _____________.

A) output and the price level;output only
B) output only;the price level only
C) output and the price level;the price level only
D) the price level only;output only

Question 51

Keynesian theory:

A) states that open market operations and an increase in the money supply lead people to buy bonds,causing bond prices to rise and interest rates to fall,and increase the investment component of aggregate demand.
B) states that changes in the money supply have no impact on GDP in either the short or long run.
C) is the same as the classical transmission mechanism in all essential elements.
D) states that an increase in the money supply will lower interest rates and thereby shift the long-run aggregate supply curve to the right.

Question 52

The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called:

A) the liquidity trap.
B) the horizontality of demand.
C) the sterilization of money.
D) monetary incapacitation.

Question 53

Which of the following is a characteristic of the quantity theory of money?

A) It is focused on the short run.
B) It assumes that prices and interest rates are sticky.
C) It is a product of the classical school of economics.
D) It assumes money is used for both transactions and saving.

Question 54

In the long run,when the economy is at full employment,any change in money supply:

A) leads to a change in velocity only.
B) leads to a change in aggregate output only.
C) leads to a change in prices.
D) is brought about by a change in tax policy.

Question 55

Using the equation of exchange,if the money supply is $4 trillion,the price level is 2,and the level of output (real GDP)is $6 trillion,then the velocity of money is ___.

A) 1.33
B) 2
C) 3
D) 12

Question 56

The existence of a liquidity trap implies that a(n):

A) increase in the money supply will not lower interest rates.
B) decrease in the money supply will not lower interest rates.
C) decrease in the interest rate will be matched by a corresponding decrease in investment.
D) increase in the money supply leads to inflation.

Question 57

When the long-run aggregate supply curve is drawn as a vertical line,the theorist is assuming that:

A) the economy tends to full employment in the long run.
B) the economy tends to produce stable prices in the long run.
C) the economy is stagnating at a low level of growth.
D) shifting aggregate demand can change the level of employment in the long run.

Question 58

In a liquidity trap:

A) monetary policy is very effective in changing income and output.
B) fiscal policy is ineffective in changing income and output.
C) monetary policy is ineffective in changing income and output.
D) monetary policy is somewhat effective in changing income and output in the short run.

Question 59

In the equation of exchange,the term P × Q is the same as:

A) real GDP.
B) nominal GDP.
C) the money supply.
D) national income.

Question 60

Which of the following fiscal items is NOT a component in the equation of exchange in classical economics?

A) price level
B) money supply
C) output of the economy
D) unemployment rate

Question 61

What occurs during a negative demand shock?

A) Output and price level increase.
B) Output and price level decrease.
C) Output increases;price level decreases.
D) Output decreases;price level increases.

Question 62

Use the following to answer questions
Figure: Shifts in Aggregate Demand
(Figure: Shifts in Aggregate Demand)Starting at the equilibrium point b,if imports increase or consumer demand decreases,the demand curve will shift to _____,thus _____ the price level and _____ real output.

A) AD₁;increasing;decreasing
B) AD₂;decreasing;decreasing
C) AD₁;increasing;increasing
D) AD₂;increasing;decreasing

Question 63

Negative demand shocks to the economy can come from:

A) reductions in consumer demand.
B) increases in investment.
C) increases in government spending.
D) reductions in imports.

Question 64

In the long run,changes in the money supply will NOT change output according to:

A) classical economists and monetarists.
B) classical economists.
C) Keynesian monetary theory.
D) monetarists.

Question 65

Monetary policy is LEAST effective in reversing:

A) demand-pull inflation.
B) a decrease in private spending.
C) an adverse supply shock.
D) rapid growth in consumption expenditures.

Question 66

Which of the following is considered a supply shock?

A) an increase in consumer spending
B) a decrease in investment
C) an increase in input costs
D) a decrease in imports

Question 67

Which economists believe that fiscal policy is ineffective,while monetary policy is effective?

A) monetarists
B) Keynesians
C) classical economists
D) Fisherites

Question 68

Most economists think the Fed should target:

A) income and output in the long run.
B) price stability in the long run.
C) price stability in the short run.
D) the federal funds rate.

Question 69

According to the monetarists:

A) an increase in the money supply will not affect the price level in the long run.
B) output can never be above its full employment level.
C) a decrease in the money supply will have no effect on output in the short run.
D) the economy will move to its full employment output level in the long run.

Question 70

Monetarists and classical economists agree that:

A) monetary policy is ineffective.
B) the economy is self-stabilizing in the long run.
C) government economic policy is useful in the short run.
D) the interest rate is never important.

Question 71

A negative supply shock causes output to _________ and the price level to _______.

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

Question 72

Which economists believe that changes in the money supply lead only to price changes?

A) monetarists
B) Keynesians
C) classical economists
D) Fisherites

Question 73

Milton Friedman and Anna Schwartz are most famous for:

A) monetary theory.
B) fiscal theory.
C) comparative advantage theory.
D) their tenures on the Federal Reserve Board.

Question 74

A major war in the Middle East cuts off the supply of oil to the United States,causing a recession and inflation.With the tools of monetary policy,the Federal Reserve:

A) can fight either the recession or the inflation.
B) can fight both the recession and the inflation.
C) can fight neither the recession nor the inflation.
D) should not try to fight either the recession or the inflation.

Question 75

According to the monetarist theory:

A) an increase in the money supply will affect output and the price level in the long run.
B) a decrease in the money supply will increase interest rates as portfolios rebalance,leading to a drop in investment and/or consumption spending.
C) the velocity of money is highly unstable.
D) an increase in the money supply will affect only output in the long run.

Question 76

Which economists believe the economy will always self-adjust,so that intervention is unnecessary?

A) monetarists
B) Keynesians
C) classical economists
D) Fisherites

Question 77

John has $100,000 in annual income but does not own his house or a car.Bob has $100,000 in annual income and owns two houses and four cars.Which theorist would predict that John spends a different proportion of his current income than Bob?

A) Milton Friedman
B) John Maynard Keynes
C) Irving Fisher
D) David Ricardo

Question 78

Which economists believe that fiscal policy is effective,while monetary policy may be ineffective?

A) monetarists
B) Keynesians
C) classical economists
D) Fisherites

Question 79

(Figure: Shifts in SRAS and AD) Starting at equilibrium point d,if the cost of inputs rises,the short-run equilibrium will move to point _____,and thus real output will _____ and the price level will _____.

A) a;decrease;stay the same
B) b;decrease;increase
C) c;stay the same;increase
D) There is not enough information to answer this question.

Question 80

Use the following to answer questions
Figure: Shifts in Aggregate Demand
(Figure: Shifts in Aggregate Demand)Starting at the equilibrium point b,if investment or exports increase,the demand curve will shift to _____,thus _____ the price level and _____ real output.

A) AD₁;increasing;decreasing
B) AD₂;decreasing;decreasing
C) AD₁;increasing;increasing
D) AD₂;increasing;decreasing