Question 1

Exhibit 20A-1  Policy Alternatives  In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the federal government decides to intervene, it would most likely:

Accepted Answer

A)  increase taxes. 
B)  decrease the money supply. 
C)  increase the level of government spending for goods and services. 
D)  decrease the level of government spending for goods and services.

Question 2

Exhibit 20-6  Money, investment and product markets  In Exhibit 20-6, if the interest rate falls from i1 to i2, then:

Accepted Answer

A)  the quantity demanded of investment increases from I1 to I2 and investment spending shifts the aggregate demand curve from AD2 to AD1, decreasing the level of real GDP. 
B)  the quantity demanded of investment increases from I1 to I2 and investment spending shifts the aggregate demand curve from AD1 to AD2, increasing the level of real GDP. 
C)  the quantity demanded of investment decreases from I2 to I1 and investment spending shifts the aggregate demand curve from AD1 to AD2, decreasing the level of real GDP. 
D)  the quantity demanded of investment decreases from I2 to I1 and investment spending shifts the aggregate demand curve from AD2 to AD1, increasing the level of real GDP. 
E)  the quantity demanded of investment stays the same causing the aggregate demand curve to shift from AD2 to AD1 decreasing the level of real GDP.

Question 3

Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would:

Accepted Answer

A)  fall by 50 percent. 
B)  rise by 50 percent. 
C)  increase by 100 percent. 
D)  decrease by 100 percent.

Question 4

Assume a fixed demand for money curve and the Fed increases the money supply. The result is a temporary:

Accepted Answer

A)  excess quantity of money demanded. 
B)  excess quantity of money supplied. 
C)  new equilibrium interest rate. 
D)  decrease in the demand for loans.

Question 5

If people attempt to sell bonds because of excess money demand, then the interest rate will:

Accepted Answer

A)  rise. 
B)  fall. 
C)  remain unchanged 
D)  react unpredictably.

Question 6

Suppose that the Fed makes a $100 billion open-market sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?

Accepted Answer

A)  The money supply shifts inward, and the equilibrium interest rate rises in the money market. 
B)  The money supply shifts outward, and the equilibrium interest rate falls in the money market. 
C)  Investment declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy. 
D)  Both a. and c. are correct. 
E)  Both b. and c. above are correct.

Question 7

The impact of an increase in the money supply is a(n):

Accepted Answer

A)  increase in the interest rate, which in turn stimulates investment and GDP. 
B)  decrease in the interest rate, which in turn stimulates investment and GDP. 
C)  a reduction in the general level of prices, which will increase the disposable income of households. 
D)  improvement in technology, which will stimulate both output and employment.

Question 8

Exhibit 20-4  Aggregate demand and supply model  In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD3 to AD2?

Accepted Answer

A)  Lower the legal reserve requirement. 
B)  Lower the discount rate. 
C)  Lower the federal funds rate. 
D)  Sell government securities. 
E)  Print currency.

Question 9

The speculative demand curve for money is:

Accepted Answer

A)  downward sloping. 
B)  upward sloping. 
C)  vertical. 
D)  horizontal. 
E)  spiral.

Question 10

According to Keynesian economists, which of the following is not a consequence of increasing the money supply?

Accepted Answer

A)  A lower interest rate. 
B)  Greater investment. 
C)  Lower real GDP. 
D)  Higher real GDP.

Question 11

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

Accepted Answer

A)  The Federal Reserve should use open market operations and buy U.S. government securities. 
B)  The Federal Reserve should not follow a fixed rule. 
C)  The federal government should cut taxes. 
D)  Fiscal policy and monetary policy should not be activist.

Question 12

The demand curve for money:

Accepted Answer

A)  shows the amount of money balances that individuals and businesses wish to hold at various levels of private investment. 
B)  reflects the open market operations policy of the Federal Reserve. 
C)  shows the amount of money that households and businesses wish to hold at various rates of interest. 
D)  indicates the amount that consumers wish to borrow at a given interest rate.

Question 13

Suppose that the current money market equilibrium has an interest rate of 5 percent and a quantity of $2 trillion. Suppose that at a 6 percent interest rate, the quantity of money demanded is $1.5 trillion, while at a 4 percent interest rate it is $2.5 trillion. If the Fed makes an open-market purchase of $50 billion, and the money multiplier is 10, what will be the new money market equilibrium?

Accepted Answer

A)  An interest rate of 6 percent and a quantity of $1.5 trillion. 
B)  An interest rate of 5 percent and a quantity of $2 trillion. 
C)  An interest rate of 4 percent and a quantity of $2.5 trillion. 
D)  None of the above.

Question 14

When interest rates rise, the quantity demanded of money held for the:

Accepted Answer

A)  speculative motive rises. 
B)  precautionary motive rises. 
C)  transactions motive falls. 
D)  precautionary motive falls. 
E)  speculative motive falls.

Question 15

Keynesian economists argue that monetary policy works through its effects on:

Accepted Answer

A)  interest rates and investment. 
B)  price- and wage-flexibility. 
C)  budget deficits and trade deficits. 
D)  the spending and money multipliers.

Question 16

Exhibit 20-3  Money market demand and supply curves  As shown in Exhibit 20-3, assume the money supply curve shifts rightward from MS1 to MS2 and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

Accepted Answer

A)  higher investment, lower real GDP, and lower price level. 
B)  lower investment, lower real GDP, and lower price level. 
C)  higher investment, higher real GDP, and higher price level. 
D)  higher interest rate and no effect on real GDP or the price level.

Question 17

If the Fed expands the money supply by $1 trillion, what will happen in the money market?

Accepted Answer

A)  The equilibrium interest rate will rise, and less money will be exchanged in equilibrium. 
B)  The equilibrium interest rate will fall, and more money will exchanged in equilibrium. 
C)  The equilibrium interest rate will not change. 
D)  None of the above.

Question 18

John Maynard Keynes listed three types of motives for people holding money--transactions, precautionary, and speculative.

Accepted Answer

A) True 
 B)False

Question 19

An increase in the supply of money will lead to ____ in equilibrium real GDP and ____ in equilibrium price level.

Accepted Answer

A)  an increase; an increase 
B)  an increase; a decrease 
C)  a decreases; an increase 
D)  a decrease; a decrease

Question 20

Exhibit 20A-2  Macro AD/AS Models  In Panel (b) of Exhibit 20A-2, a Keynesian expansionary stabilization policy designed to move the economy from Y1 to Yp would attempt to shift the:

Accepted Answer

A)  aggregate demand curve (A
D)  leftward. 
B)  SRAS curve leftward. 
C)  aggregate demand curve (A
D)  rightward. 
D)  LRAS curve rightward.

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

Exhibit 20A-1 Policy Alternatives In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government decides to intervene, it would most likely:

Exhibit 20-6 Money, investment and product markets In Exhibit 20-6, if the interest rate falls from i₁ to i₂, then:

Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would:

Assume a fixed demand for money curve and the Fed increases the money supply. The result is a temporary:

If people attempt to sell bonds because of excess money demand, then the interest rate will:

Suppose that the Fed makes a $100 billion open-market sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?

The impact of an increase in the money supply is a(n) :

Exhibit 20-4 Aggregate demand and supply model In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD₃ to AD₂?

The speculative demand curve for money is:

According to Keynesian economists, which of the following is not a consequence of increasing the money supply?

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

The demand curve for money:

When interest rates rise, the quantity demanded of money held for the:

Keynesian economists argue that monetary policy works through its effects on:

Exhibit 20-3 Money market demand and supply curves As shown in Exhibit 20-3, assume the money supply curve shifts rightward from MS₁ to MS₂ and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

If the Fed expands the money supply by $1 trillion, what will happen in the money market?

John Maynard Keynes listed three types of motives for people holding money--transactions, precautionary, and speculative.

An increase in the supply of money will lead to in equilibrium real GDP and in equilibrium price level.

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, a Keynesian expansionary stabilization policy designed to move the economy from Y₁ to Y_p would attempt to shift the:

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

Exhibit 20A-1 Policy Alternatives In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the federal government decides to intervene, it would most likely:

Exhibit 20-6 Money, investment and product markets In Exhibit 20-6, if the interest rate falls from i1 to i2, then:

Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would:

Assume a fixed demand for money curve and the Fed increases the money supply. The result is a temporary:

If people attempt to sell bonds because of excess money demand, then the interest rate will:

Suppose that the Fed makes a $100 billion open-market sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?

The impact of an increase in the money supply is a(n) :

Exhibit 20-4 Aggregate demand and supply model In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD3 to AD2?

The speculative demand curve for money is:

According to Keynesian economists, which of the following is not a consequence of increasing the money supply?

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

The demand curve for money:

When interest rates rise, the quantity demanded of money held for the:

Keynesian economists argue that monetary policy works through its effects on:

Exhibit 20-3 Money market demand and supply curves As shown in Exhibit 20-3, assume the money supply curve shifts rightward from MS1 to MS2 and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

If the Fed expands the money supply by $1 trillion, what will happen in the money market?

John Maynard Keynes listed three types of motives for people holding money--transactions, precautionary, and speculative.

An increase in the supply of money will lead to ____ in equilibrium real GDP and ____ in equilibrium price level.

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, a Keynesian expansionary stabilization policy designed to move the economy from Y1 to Yp would attempt to shift the:

Exhibit 20A-1 Policy Alternatives In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government decides to intervene, it would most likely:

Exhibit 20-6 Money, investment and product markets In Exhibit 20-6, if the interest rate falls from i₁ to i₂, then:

Exhibit 20-4 Aggregate demand and supply model In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD₃ to AD₂?

Exhibit 20-3 Money market demand and supply curves As shown in Exhibit 20-3, assume the money supply curve shifts rightward from MS₁ to MS₂ and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

An increase in the supply of money will lead to in equilibrium real GDP and in equilibrium price level.

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, a Keynesian expansionary stabilization policy designed to move the economy from Y₁ to Y_p would attempt to shift the: