Question 1

Describe the channels through which an open market purchase of bonds by the Fed affects output in a closed economy.

Accepted Answer

An open market purchase of bonds by the Fed leads to a rightward shift in the money supply. As a result, interest rates decrease, which in turn increases investment. The higher levels of investment translate into higher output levels.

Question 2

The appreciation of the dollar will make U.S. goods ________ to foreigners and make imports ________ for U.S. residents.

Accepted Answer

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

Question 3

An open market sale of bonds by the Federal Reserve will lead to an increase of reserves in banks.

Accepted Answer

A) True 
 B)False  False

Question 4

At higher interest rates the

Accepted Answer

A)   money supply is higher.
B)   money supply is indeterminate.
C)   quantity of money demanded is higher.
D)   quantity of money demanded is lower.

Question 5

A decrease in the money supply will tend to reduce investment.

Accepted Answer

A) True 
 B)False

Question 6

To increase the level of output, the Fed should conduct an open market sale.

Accepted Answer

A) True 
 B)False

Question 7

An inside lag is

Accepted Answer

A)   a lag in implementing policy.
B)   the period of time it takes for policies to work.
C)   a policy aimed at increasing GDP.
D)   a policy aimed at reducing GDP.

Question 8

In the short run when prices don't have enough time to change, the Federal Reserve

Accepted Answer

A)   can influence the level of interest rates in the economy.
B)   cannot influence the level of interest rates in the economy.
C)   can influence the level of interest rates in the economy but generally will not because it would be destabilizing.
D)   can only affect the amount of money in the economy.

Question 9

If the Federal Reserve wanted to change the money supply in the economy, it would be least likely to

Accepted Answer

A)   buy bonds on the open market.
B)   sell bonds on the open market.
C)   change the level of reserves required to be held by banks.
D)   change the federal funds rate.

Question 10

The demand for money that arises so that individuals or firms can make purchases on quick notice is called the

Accepted Answer

A)   real demand for money.
B)   transaction demand for money.
C)   liquidity demand for money.
D)   speculative demand for money.

Question 11

When the Federal Reserve increases interest rates, investment spending ________ and GDP ________.

Accepted Answer

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

Question 12

Based on the model of the money market, if prices in the economy decrease, the equilibrium interest rate should

Accepted Answer

A)   stay the same.
B)   increase.
C)   decrease.
D)   increase to the same extent that the supply of money increases.

Question 13

Explain why real and nominal rates of interest will differ when the public expects inflation.

Accepted Answer

The answer of Explain why real and nominal rates of...

Question 14

An open market sale by the Fed causes the value of the dollar to

Accepted Answer

A)   rise, increasing net exports.
B)   rise, reducing net exports.
C)   fall, increasing net exports.
D)   fall, reducing net exports.

Question 15

An open market ________ by the Fed increases interest rates and ________ output.

Accepted Answer

A)   sale; increases
B)   sale; decreases
C)   purchase; increases
D)   purchase; decreases

Question 16

If the quantity of money demanded is less than the quantity of money supplied, then the

Accepted Answer

A)   interest rate stays the same.
B)   interest rate will increase.
C)   interest rate will decrease.
D)   effect on the interest rate is indeterminate.

Question 17

Why might economic policies aimed at stabilization actually increase the magnitudes of economic fluctuations?

Accepted Answer

The answer of Why might economic policies aimed at stabilization...

Question 18

A rise in the value of a currency is called a(n)

Accepted Answer

A)   depreciation.
B)   appreciation.
C)   consolation.
D)   integration.

Question 19

If the actual interest rate in the money market is higher than the equilibrium interest rate, there would be an excess supply of money.

Accepted Answer

A) True 
 B)False

Question 20

If your wealth is held as currency or in checking accounts, or other assets that you can convert to money on short notice, your assets are considered to be

Accepted Answer

A)   abundant.
B)   fast moving.
C)   interest bearing.
D)   liquid.

Exam 17: Monetary Policy and Inflation

Describe the channels through which an open market purchase of bonds by the Fed affects output in a closed economy.

The appreciation of the dollar will make U.S. goods to foreigners and make imports for U.S. residents.

An open market sale of bonds by the Federal Reserve will lead to an increase of reserves in banks.

At higher interest rates the

A decrease in the money supply will tend to reduce investment.

To increase the level of output, the Fed should conduct an open market sale.

An inside lag is

In the short run when prices don't have enough time to change, the Federal Reserve

If the Federal Reserve wanted to change the money supply in the economy, it would be least likely to

The demand for money that arises so that individuals or firms can make purchases on quick notice is called the

When the Federal Reserve increases interest rates, investment spending and GDP .

Based on the model of the money market, if prices in the economy decrease, the equilibrium interest rate should

Explain why real and nominal rates of interest will differ when the public expects inflation.

An open market sale by the Fed causes the value of the dollar to

An open market by the Fed increases interest rates and output.

If the quantity of money demanded is less than the quantity of money supplied, then the

Why might economic policies aimed at stabilization actually increase the magnitudes of economic fluctuations?

A rise in the value of a currency is called a(n)

If the actual interest rate in the money market is higher than the equilibrium interest rate, there would be an excess supply of money.

If your wealth is held as currency or in checking accounts, or other assets that you can convert to money on short notice, your assets are considered to be