Question 1

Other things being equal, an increase in the rate of interest causes a(n):

Accepted Answer

A)   upward movement along the demand for money curve.
B)   downward movement along the demand for money curve.
C)   rightward shift of the demand for money curve.
D)   leftward shift of the demand for money curve. A

Question 2

Monetarists argue that fiscal policy is ineffective because:

Accepted Answer

A)   the velocity of money is predictable.
B)   the crowding-out effect reduces investment.
C)   prices and wages are sticky in the short run.
D)   it causes the value of the dollar to depreciate. B

Question 3

When there is an excess demand for money, individuals and businesses will attempt to purchase bonds.

Accepted Answer

A) True 
 B)False  False

Question 4

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

Accepted Answer

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

Question 5

Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP. According to Keynesian theory, which of the following policies should be followed?

Accepted Answer

A)   The Federal Reserve should increase the money supply.
B)   The federal government should increase spending.
C)   The federal government should do nothing because the economy will self correct to potential real GDP.
D)   All of the above.

Question 6

The quantity theory of money of the Classical economists says that a change in the money supply will produce a:

Accepted Answer

A)   proportional change in the price level.
B)   greater than proportional change in the price level.
C)   less than proportional change in the price level.
D)   wide variation in the velocity of money.

Question 7

Keynesian economists believe monetary policy is more effective than fiscal policy in stabilizing the business cycle.

Accepted Answer

A) True 
 B)False

Question 8

Keynes called the money people hold in order to pay unforeseen or unexpected expenses the:

Accepted Answer

A)   transactions demand for holding money.
B)   precautionary demand for holding money.
C)   speculative demand for holding money.
D)   store of value demand for holding money.

Question 9

Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?

Accepted Answer

A)   The money demand curve is vertical.
B)   The investment curve is very steep.
C)   The money demand curve is horizontal at any interest rate.
D)   The monetary rule.

Question 10

According to Keynesians, an increase in the money supply will:

Accepted Answer

A)   decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment.
B)   decrease the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment.
C)   increase the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment.
D)   only increases prices.

Question 11

The precautionary demand for money is the demand for money:

Accepted Answer

A)   for normal transactions purposes.
B)   for normal investment purposes.
C)   for special stock purchases.
D)   to protect against inflation.
E)   to cover unexpected events.

Question 12

Exhibit 20-6  Money, investment and product markets  In Exhibit 20-6, if the Fed believes the economy is at AD3, how might it engineer a decline in the price level?

Accepted Answer

A)   By decreasing the money supply, the interest rate falls, investment rises, and aggregate demand falls, causing the price level to fall.
B)   By decreasing the money supply, the interest rate rises, investment rises, and aggregate demand rises, causing the price level to fall.
C)   By decreasing the money supply, the interest rate rises, investment falls, and aggregate demand falls, causing the price level to fall.
D)   By increasing the money supply, the interest rate rises, investment rises, and aggregate demand falls, causing the price level to fall.
E)   By increasing the money supply, the interest rate rises, investment falls, and aggregate demand rises, causing the price level to fall.

Question 13

An increase in the money supply:

Accepted Answer

A)   lowers the interest rate, causing a decrease in investment and an increase in GDP.
B)   lowers the interest rate, causing an increase in investment and a decrease in GDP.
C)   lowers the interest rate, causing an increase in investment and an increase in GDP.
D)   raises the interest rate, causing an increase in investment and an increase in GDP.
E)   raises the interest rate, causing a decrease in investment and a decrease in GDP.

Question 14

When people hold money to transact purchases they expect to make, this is known as the:

Accepted Answer

A)   precautionary demand for money.
B)   liquidity demand for money.
C)   spending demand for money.
D)   speculative demand for money.
E)   transactions demand for money.

Question 15

The stock of money people hold to pay everyday predictable expenses is the:

Accepted Answer

A)   transactions demand for holding money.
B)   precautionary demand for holding money.
C)   speculative demand for holding money.
D)   store of value demand for holding money.

Question 16

Exhibit 20A-4  Macro AD/AS Model  As shown in Exhibit 20A-4, assume the marginal propensity to consume MPC equals 0.75. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E1 to full employment.

Accepted Answer

A)   increased by $.25 trillion
B)   decreased by $.25 trillion
C)   decreased by $2 trillion
D)   increased by $2 trillion
E)   increased by $1 trillion

Question 17

If the economy is experiencing an inflationary gap, classical economists argue that the Federal Reserve should lower interest rates.

Accepted Answer

A) True 
 B)False

Question 18

The transmission mechanism is the effect of changes in monetary policy on the stock market.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)   if the money supply grows at a rate equal to the economy's long-run rate of economic growth, then the economy will be unstable.
B)   that changes in the money stock do not affect output or prices.
C)   the Fed will miss its money supply targets and make the economy worse.
D)   monetary policy can stimulate aggregate demand, but it cannot affect inflation.

Question 20

Monetarists accept the idea that velocity is not constant; nonetheless, they believe that it is still highly:

Accepted Answer

A)   constant.
B)   unpredictable, ill-behaved, and independent of money supply.
C)   unpredictable, well-behaved, and dependent of money supply.
D)   predictable.
E)   variable.

Exam 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Other things being equal, an increase in the rate of interest causes a(n) :

Monetarists argue that fiscal policy is ineffective because:

When there is an excess demand for money, individuals and businesses will attempt to purchase bonds.

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

Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP. According to Keynesian theory, which of the following policies should be followed?

The quantity theory of money of the Classical economists says that a change in the money supply will produce a:

Keynesian economists believe monetary policy is more effective than fiscal policy in stabilizing the business cycle.

Keynes called the money people hold in order to pay unforeseen or unexpected expenses the:

Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?

According to Keynesians, an increase in the money supply will:

The precautionary demand for money is the demand for money:

Exhibit 20-6 Money, investment and product markets In Exhibit 20-6, if the Fed believes the economy is at AD₃, how might it engineer a decline in the price level?

An increase in the money supply:

When people hold money to transact purchases they expect to make, this is known as the:

The stock of money people hold to pay everyday predictable expenses is the:

Exhibit 20A-4 Macro AD/AS Model As shown in Exhibit 20A-4, assume the marginal propensity to consume MPC equals 0.75. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E₁ to full employment.

If the economy is experiencing an inflationary gap, classical economists argue that the Federal Reserve should lower interest rates.

The transmission mechanism is the effect of changes in monetary policy on the stock market.

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

Monetarists accept the idea that velocity is not constant; nonetheless, they believe that it is still highly: