Deck 15: Monetary Theory and Policy

Question 1

If the money supply in an economy is increased,the interest rate will fall,and real GDP will decrease.

Answer 1

False

Question 2

When calculating how much changes in the money supply will change nominal GDP,we use the money multiplier instead of the spending multiplier.

Answer 2

False

Question 3

The quantity theory of money assumes that money supply and price level are the only variables in the equation of exchange that are free to fluctuate.

Answer 3

False

Question 4

The higher the interest rate,the greater the preference for liquidity.

Question 5

The quantity theory of money states that increases in the money supply result in proportional increases in real GDP.

Question 6

An identity is a relationship expressed in such a way that it is true by definition.

Question 7

If the value of the spending multiplier is greater than 1,then an increase in investment will shift the aggregate demand curve to the left.

Question 8

According to the quantity theory of money,if velocity of money is constant,a 5 percent increase in money supply will lead to a 0.25 percent increase in nominal GDP.

Question 9

Since the Federal Reserve was established in 1913,the U.S.has experienced three periods of high inflation and each was preceded and accompanied by a period of sharp decline in the money supply.

Question 10

An expansionary monetary policy is always capable of boosting aggregate investment.

Question 11

The supply of money is depicted as an upward sloping line that depends directly on the interest rate.

Question 12

The demand for money is a downward sloping line that depicts the relationship between the price level and the opportunity cost of holding money.

Question 13

A wider use of charge accounts and credit cards have reduced the demand for "walking-around" money.

Question 14

For a given shift of the aggregate demand curve,the steeper the short-run aggregate supply curve,the larger the change in real GDP.

Question 15

The Dodd-Frank Act gave the Fed and the FDIC expanded oversight of large financial institutions,including those that were not depository institutions.

Question 16

The demand for money was high in the year 2015 when the interest rate on savings deposits and time deposits was close to zero.

Question 17

In the long run,increases in the money supply increase the economy's potential output level.

Question 18

When the Fed is targeting the money supply,it has complete control over the interest rate.

Question 19

A decrease in the money supply in the short run will cause an increase in planned investment spending.

Question 20

The money demand curve shifts to the right whenever there is a decrease in the interest rate.

Question 21

​The demand for money in an economy is high when the:

A)real GDP is low.
B)personal tax rate is low.
C)unemployment rate is high.
D)price level is high.
E)interest rate is high.

Question 22

Before 2008,money market mutual funds and hedge funds had been out of Fed's scope and control because they did not rely on customer deposits.

Question 23

​The money demand curve slopes:

A)downward because the cost of holding money decreases as the interest rate decreases.
B)downward because the cost of holding money increases as the interest rate decreases.
C)upward because people demand more money as real GDP increases.
D)upward because people demand more money as real GDP decreases.
E)downward because people demand more money as the price level decreases.

Question 24

​Other things constant,an increase in the price level will:

A)shift the money demand curve to the right.
B)shift the money demand curve to the left.
C)increase the quantity of money people want to hold.
D)decrease the quantity of money people want to hold.
E)have no impact on the money demand curve.

Question 25

​Which of the following changes will shift the money demand curve leftward?

A)An increase in the price level
B)An increase in real GDP
C)A decrease in the nominal interest rate
D)An increase in the nominal interest rate
E)A decrease in real GDP

Question 26

​Which of these is a flow variable?

A)Money
B)Income
C)Jewelry
D)Bank deposit
E)Foreign currency reserve

Question 27

​The demand for money is a relationship between:

A)the price level and the amount of cyclical unemployment.
B)the price level and the actual output produced in an economy.
C)the interest rate and how much money people choose to hold.
D)the interest rate and how much money people earn during a certain time period.
E)the interest rate and the rate of inflation.

Question 28

​Suppose an individual can earn 3 percent interest on an annual term deposit.His opportunity cost of holding $100,000 in cash instead of investing in the term deposit will be:

A)$3,300.
B)$330.
C)$1,000.
D)$6,000.
E)$3,000.

Question 29

​The demand for money is based primarily on money's role as a(n):

A)measure of wealth.
B)medium of exchange.
C)standard of economic well-being.
D)interest-bearing asset.
E)non-interest-bearing asset.

Question 30

​The money demand curve will shift when there is a change in the:

A)unemployment rate.
B)inflation rate.
C)money supply.
D)nominal interest rate.
E)price level.

Question 31

​The demand for money will be high in an economy experiencing:

A)a depression.
B)hyperinflation.
C)deflation.
D)a recession.
E)a sluggish population growth.

Question 32

​A decrease in the market interest rate,other things constant,will result in:

A)a rightward shift of the money demand curve.
B)a leftward shift of the money demand curve.
C)an increase in the slope of the money demand curve.
D)a movement up along the money demand curve.
E)a movement down along the money demand curve.

Question 33

​Which of the following forms of money will earn at least some interest income?

A)Gold coins
B)Currency notes
C)Traveler's checks
D)Checkable deposits
E)Gift checks

Question 34

​Other things constant,an increase in the real GDP of a country will:

A)increase the price level.
B)shift the demand for money curve rightward.
C)shift the demand for money curve leftward.
D)decrease the nominal interest rate.
E)decrease the quantity of money demanded.

Question 35

​Movements along a money demand curve reflect the effects of changes in the:

A)price level on the quantity of money demanded.
B)interest rate on the demand for money.
C)real exchange rate on the demand for money.
D)interest rate on the quantity of money demanded.
E)potential GDP on the quantity of money demanded.

Question 36

​Which of the following changes will shift the money demand rightward?

A)An increase in the price level
B)A decrease in real GDP
C)A decrease in the nominal interest rate
D)An increase in the nominal interest rate
E)A decrease in the price level

Question 37

​Which of these is an advantage of money as a store of value?

A)It can generate high interest income.
B)It can facilitate hassle-free international exchange.
C)It can be easily liquidated.
D)It can signal a nation's economic health.
E)It can increase potential output.

Question 38

​Other things constant,the quantity of money demanded varies:

A)directly with the market interest rate.
B)inversely with the market interest rate.
C)inversely with the price level.
D)directly with the price level.
E)inversely with the unemployment rate.

Question 39

​The opportunity cost of holding money is measured by the:

A)interest rate.
B)liquidity lost by holding money.
C)money supply curve.
D)inflation rate.
E)cost of cashing in financial assets.

Question 40

​The opportunity cost of holding money increases when:

A)the interest rate rises.
B)the interest rate falls.
C)the price level falls.
D)nominal GDP rises.
E)nominal GDP falls.

Question 41

​The figure given below shows the interest rate on the vertical axis and the quantity of money on the horizontal axis.In this figure,an increase in the level of real GDP will cause a movement from: Figure 15.1

A)point B to point A.
B)point A to point B.
C)DM to DM'.
D)DM to DM*.
E)point E to point F.

Question 42

​The figure given below shows the interest rate on the vertical axis and the quantity of money on the horizontal axis.In this figure,an increase in the interest rate will cause a movement from: Figure 15.1

A)point B to point A.
B)point A to point B.
C)DM to DM'.
D)DM to DM*.
E)point E to point D.

Question 43

​Which one of these statements is correct?

A)The lower the interest rate,the higher the opportunity cost of holding assets in the form of money.
B)The quantity of money supplied is independent of the interest rate.
C)The larger the supply of money,the higher the interest rate,all things equal.
D)Travelers checks and government bonds are equally liquid assets.
E)The demand for money increases whenever the price level decreases.

Question 44

​The figure given below shows the interest rate on the vertical axis and the quantity of money on the horizontal axis.In this figure,a decrease in nominal GDP with no change in the price level will cause a movement from: Figure 15.1
​

A)point B to point A.
B)point A to point B.
C)DM to DM'.
D)DM to DM*.
E)point E to point F.

Question 45

​The equilibrium interest rate in a money market is determined by:

A)the rate of inflation.
B)aggregate demand and aggregate supply.
C)money demand and money supply.
D)the Congress.
E)the Fed.

Question 46

​The figure given below shows the interest rate on the vertical axis and the quantity of money on the horizontal axis.In this figure,an increase in the price level will cause a movement from: ​
Figure 5.1
​

A)point B to point A.
B)point A to point B.
C)DM to DM'.
D)DM to DM*.
E)point E to point F.

Question 47

​For a given money demand curve,an increase in money supply:

A)drives up the real interest rate.
B)lowers the opportunity cost of holding money.
C)decreases the quantity of money demanded.
D)drives down the price level in an economy.
E)contracts the total output produced in an economy.

Question 48

​Which of the following will result in the money market when the price level in an economy rises,while the supply of money remains unchanged?

A)The demand for money will decrease.
B)The supply of money will increase.
C)The rate of interest will decrease.
D)The total investment spending in the economy will increase.
E)The rate of interest will increase.

Question 49

​An increase in the nominal interest rate,other things constant,will:

A)shift the money demand curve to the right.
B)shift the money demand curve to the left.
C)increase the quantity of money people choose to hold.
D)decrease the quantity of money people choose to hold.
E)have no impact on the money demand curve.

Question 50

​In the money market,if the money supply decreases,the opportunity cost of holding money:

A)decreases and the quantity of money demanded increases.
B)decreases and the quantity of money demanded falls.
C)increases and the quantity of money demanded falls.
D)increases but the quantity of money demanded remains unchanged.
E)increases and the quantity of money demanded also increases.

Question 51

​Other things constant,if the interest rate rises,people prefer to hold:

A)less money because the opportunity cost of holding money has increased.
B)more money because the opportunity cost of holding money has increased.
C)less money because the opportunity cost of holding money has declined.
D)more money because the opportunity cost of holding money has declined.
E)the same amount of money because the opportunity cost of holding money is zero.

Question 52

​People prefer to hold less of their wealth in the form of financial assets like bonds and term deposits when:

A)real GDP is at an all-time low
B)the real interest rate is above 10 percent.
C)the price level is very low.
D)the nominal interest rate is close to zero.
E)the nominal interest rate is very high.

Question 53

​A movement upward and to the left along the money demand curve is caused by:

A)an increase in the interest rate.
B)a decrease in the interest rate.
C)a decrease in real GDP.
D)an increase in real GDP.
E)an increase in the average price level.

Question 54

​If the quantity of money supplied exceeds the quantity of money demanded,at a point in time:

A)the price level in the economy will fall.
B)the equilibrium interest rate will fall.
C)the equilibrium interest rate will fall.
D)the money demand curve will shift to the right.
E)the money demand curve will shift to the left.

Question 55

​Which of the following changes is most likely to be observed in the money market of a country experiencing a recession?

A)The demand curve for money will shift to the right.
B)The demand curve for money will shift to the left.
C)The quantity of money demanded will increase.
D)The quantity of money demanded will decrease.
E)The supply of money will fall.

Question 56

​Which of the following is not assumed to be constant along a money demand curve?

A)The price level
B)The interest rate
C)Real GDP
D)Nominal GDP
E)Individual's tastes and preferences

Question 57

​When people exchange money for financial assets,the _____ rises.

A)real GDP
B)price level
C)unemployment rate
D)nominal GDP
E)interest rate

Question 58

​Which of the following changes will cause a downward movement along the money demand curve?

A)An increase in the interest rate
B)A decrease in the interest rate
C)A decrease in real GDP
D)An increase in real GDP
E)An increase in the price level

Question 59

​In the money market,an increase in money supply will:

A)increase the demand for money at each interest rate.
B)decrease the demand for money at each interest rate.
C)encourage people to exchange money for interest-bearing assets.
D)encourage people to exchange interest-bearing assets for money.
E)increase the interest rate.

Question 60

​At a given point in time,if the demand for money increases:

A)the interest rate will fall.
B)there will be a movement downward along the money demand curve.
C)there will be a movement upward along the money demand curve.
D)there will be a rightward shift of the money demand curve.
E)there will be a leftward shift of the money demand curve.

Question 61

​Planned investment expenditures will eventually decrease after:

A)the money supply decreases.
B)the demand for money decreases.
C)the interest rate falls.
D)the Fed buys government securities.
E)business managers become more optimistic about future market conditions for their products.

Question 62

​If the Fed purchases U.S.government securities,gross domestic product:

A)increases because the resulting increase in the interest rate leads to a decrease in investment.
B)increases because the resulting decrease in the interest rate leads to an increase in investment.
C)decreases because the resulting increase in the interest rate leads to a decrease in investment.
D)decreases because the resulting increase in the interest rate leads to an increase in investment.
E)decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question 63

​The figure given below shows equilibrium in a money market.If S is the initial supply curve,the movement from S to S* can be attributed to: Figure 152

A)a decrease in the required reserve ratio.
B)the purchase of U.S.Treasury securities by the Fed.
C)the sale of U.S.Treasury securities by the Fed.
D)a decrease in the discount rate.
E)a decrease in excess reserves in the banking system.

Question 64

​In the aggregate demand-aggregate supply model in the short run,a decrease in the money supply is likely to cause a(n):

A)increase in both the price level and real GDP.
B)decrease in both the price level and real GDP.
C)increase in real GDP and a decrease in the price level.
D)decrease in real GDP and an increase in the price level.
E)increase in the price level only.

Question 65

​The figure given below shows equilibrium in a money market.Which of the following will be observed if the money supply curve shifts from S to S' while the rate of interest remains at "r"? Figure 15.2

A)There will be an excess demand for money.
B)There will be an excess supply of money.
C)The Fed will buy U.S.Treasury securities.
D)The quantity of money demanded will fall.
E)The quantity of money supplied will fall.

Question 66

​All other things constant,when the interest rate increases:

A)the demand for investment curve shifts to the right
B)the demand for investment curve shifts to the left.
C)there is a movement downward along the demand for investment curve.
D)there is a movement upward along the demand for investment curve.
E)GDP increases.

Question 67

​When the Fed purchases U.S.government securities through the open market,the money supply:

A)increases,the interest rate falls,and the quantity of money demanded increases.
B)falls,the interest rate falls,and the quantity of money demanded increases.
C)increases,the interest rate increases,and the quantity of money demanded increases.
D)falls,the interest rate increases,and the quantity of money demanded falls.
E)falls,the interest rate falls,and the quantity of money demanded falls.

Question 68

​Which of these changes is likely to follow when the Fed purchases U.S.government securities?

A)Aggregate demand will decrease.
B)The demand for financial securities will increase.
C)Rate of interest will increase.
D)Planned investment spending will increase.
E)Real GDP will decrease.

Question 69

​All other things constant,if the interest rate decreases on account of a monetary policy:

A)the demand for investment curve shifts to the right.
B)the demand for investment curve shifts to the left.
C)there is a downward movement along the demand for investment curve.
D)there is an upward movement along the demand for investment curve.
E)real GDP decreases.

Question 70

​The figure given below shows equilibrium in a money market.When the money supply curve shifts from S to S',the equilibrium interest rate and quantity of money changes to: Figure 15.2

A)r and m,respectively.
B)r* and m*,respectively.
C)r' and m',respectively.
D)r and m',respectively.
E)r' and m*,respectively.

Question 71

​If the Fed decreases the money supply,gross domestic product:

A)increases by the same amount as the increase in the interest rate.
B)decreases by a greater amount than the increase in the interest rate because of the multiplier.
C)decreases by the same amount as the decrease in investment.
D)decreases by a greater amount than the decrease in investment because of the multiplier.
E)decreases by a lesser amount than the decrease in investment because of the multiplier.

Question 72

​Which of the following policies can be adopted by the Fed in order to stimulate an economy in the short run?

A)Increase the market interest rate
B)Purchase U.S.government securities
C)Increase the discount rate
D)Increase the price of consumer goods
E)Increase the required reserve ratio

Question 73

​Which of the following changes is most likely to happen when there is a decrease in the supply of money in a market that was initially in equilibrium?

A)The demand for money increases
B)Planned investment spending increases
C)Interest rate increases
D)Aggregate expenditure increases
E)The demand for money decreases

Question 74

​The figure given below shows equilibrium in a money market.If S is the supply curve,the equilibrium interest rate and quantity of money will be: Figure 15.2

A)r and m,respectively.
B)r* and m*,respectively.
C)r' and m',respectively.
D)r and m',respectively.
E)r' and m*,respectively.

Question 75

​In the aggregate demand-aggregate supply model in the short run,an increase in the money supply will lead to a(n):

A)increase in both the price level and real GDP.
B)decrease in both the price level and real GDP.
C)increase in real GDP and a decrease in the price level.
D)decrease in real GDP and an increase in the price level.
E)increase in the price level only.

Question 76

​When the Fed adopts an expansionary monetary policy:

A)the demand for investment curve shifts to the left.
B)the demand for investment curve shifts to the right.
C)there is a downward movement along the demand for investment curve.
D)there is an upward movement along the demand for investment curve.
E)there is no impact on the demand for investment curve.

Question 77

​The figure given below shows equilibrium in a money market.Which of the following will be observed if the money supply curve shifts from S to S* while the rate of interest remains at "r? Figure 15.2

A)There will be an excess demand for money.
B)There will be an excess supply of money.
C)The Fed will sell U.S.Treasury securities.
D)The money market equilibrium will move from point B to point C.
E)The money market equilibrium will move from point C to point A.

Question 78

​If the Fed increases the money supply,then:

A)the interest rate declines and the quantity of money demanded increases.
B)the interest rate declines and the quantity of money demanded declines.
C)the interest rate increases and the quantity of money demanded increases.
D)the interest rate increases and the quantity of money demanded declines.
E)the interest rate increases but the quantity of money demanded remains unaffected.

Question 79

​In the short run,a decrease in the money supply will lead to a(n):

A)decrease in Gross Domestic Product.
B)increase in the price level.
C)increase in aggregate demand.
D)increase in the demand for money.
E)decrease in the market interest rate.

Question 80

​The demand curve for investment depicts:

A)an inverse relationship between interest rate and aggregate demand.
B)an inverse relationship between interest rate and investment.
C)an inverse relationship between price level and real GDP.
D)a direct relationship between interest rate and quantity of money.
E)a direct relationship between aggregate demand and real GDP