CH-15 Monetary Theory and Policy – Macroeconomics: A Contemporary Introduction : Exam Guide

Chapter 15—Monetary Theory and Policy 1. The demand for money is depicted by a curve downward sloping curve because if the interest rate falls, the opportunity cost of holding assets in the form of money decreases. A. True B. False 2. If the price level rises, the money demand curve will shift to the right. A. True B. False 3. Speaking of the demand for money A. makes no sense in a modern society in which most people use credit cards B. makes no sense in a modern society in which most people use checks C. makes sense in a modern society in which most people use checks, since demand deposits are included in M1, but it does not make sense in a society in which the primary payment is by credit card D. makes sense in a modern society in which most people use credit cards, since credit cards are included in M1, but it does not make sense in a society in which the primary payment is by check E. is relevant even in a society in which primary payment is by credit card, since eventually all accounts must be settled with money 4. The demand for money A. d and e are correct B. all of the following are correct C. decreases as the average selling price of a unit of output increases D. increases as GDP increases E. is increased by credit card usage 5. In deciding how much money to hold, you should compare the A. disadvantage of liquidity with the advantage of earning more interest B. advantage of liquidity with the disadvantage of losing interest C. disadvantage of storing wealth with the advantage of having a medium of exchange D. advantage of storing wealth with the advantage of having a medium of exchange E. advantage of liquidity with the disadvantage of storing wealth 6. 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 7. 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 8. What is the opportunity cost of holding money rather than some other financial asset? A. the forgone interest income B. the forgone utility C. time D. the forgone leisure E. the forgone profit 9. The demand for money is based primarily on money's role as a(n) A. store of wealth B. medium of exchange C. standard of value D. interest-bearing asset E. non-interest-bearing asset 10. The money demand curve shifts to the right whenever there is a decrease in the interest rate. A. True B. False 11. The higher the interest rate, the more of their wealth people will hold as money. A. True B. False 12. The money demand curve will shift when there is a change in A. interest rates B. velocity C. the money supply D. the opportunity cost of holding money E. nominal GDP 13. Which of the following best explains why the demand for money depends upon the interest rate? A. Money is an interest-earning asset. B. Money is not an interest-earning asset. C. The alternatives to holding money are not interest-earning assets. D. The alternatives to holding money earn more interest than money does. E. People must pay interest on loans. 14. The money demand curve describes how the quantity of money demanded varies with A. nominal GDP B. real GDP C. the price level D. the interest rate E. consumption 15. When the demand for money is shown on a graph, the __________ is on the vertical axis, and the __________ is on the horizontal axis. A. quantity of money; interest rate B. interest rate; quantity of money C. real GDP; quantity of money D. nominal GDP; quantity of money E. price level; quantity of money 16. 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 GDP increases D. upward because people demand more money as GDP decreases E. downward because people demand more money as the price level increases 17. The demand for money varies A. directly with both the price level and the level of real GDP B. inversely with both the price level and the level of real GDP C. inversely with the price level and directly with the level of real GDP D. directly with the price level and inversely with the level of real GDP E. inversely with the level of nominal GDP 18. 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 19. People will hold __________ money as the interest rate __________ because they will __________ other financial assets. A. more; decreases; buy B. more; increases; sell C. more; decreases; sell D. less; increases; sell E. less; decreases; buy 20. The relationship between the interest rate and the quantity of money demanded A. is a direct relationship B. is an inverse relationship C. is nonexistent D. is a direct relationship when the interest rate is low and an inverse relationship when the interest rate is high E. is an inverse relationship when the interest rate is low and a direct relationship when the interest rate is high 21. If the interest rate rises, people hold A. less money because its opportunity cost has increased B. more money because its opportunity cost has increased C. less money because its opportunity cost has declined D. more money because its opportunity cost has declined E. the same amount of money 22. A decrease in the interest rate 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 23. Which of the following is not assumed to be constant along the money demand curve? A. the price level B. the interest rate C. real GDP D. nominal GDP E. individual's tastes and preferences 24. Which of the following, other things constant, will shift the money demand curve to the right? A. an increase in the interest rate B. a decrease in the interest rate C. an increase in real GDP D. a decrease in real GDP E. a decrease in the price level 25. Which of the following, other things constant, will shift the money demand curve to the left? 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 26. Which of the following would 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 27. 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 28. 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 (to the left) 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 29. If the price level rises, then the A. money supply will increase B. money supply will decrease C. quantity of money supplied will increase D. quantity of money supplied will decrease E. demand for money will increase 30. The opportunity cost of holding money A. includes bank service charges B. is the interest foregone on potential interest-earning assets C. varies inversely with the rate of interest D. affects relatively few individuals E. is determined exclusively by the Fed 31. Exhibit 15-1 Referring to Exhibit 15-1, an increase in the interest rate will cause a move from A. B to A B. A to B C. DM to DM’ D. DM to DM* E. C to D 32. Exhibit 15-1 Referring to Exhibit 15-1, an increase in the level of real GDP will cause a move from A. B to A B. A to B C. DM to DM’ D. DM to DM* E. E to F 33. When the money supply increases, people get rid of their excess money by buying real assets, such as durable goods. A. True B. False 34. When people exchange money for financial assets, the interest rate rises. A. True B. False 35. The supply of money is depicted diagrammatically as a vertical line because the quantity of money supplied is totally dependent on the rate of interest. A. True B. False 36. As the price level rises, money __________ causing interest rates to __________ and investment spending to __________. A. demand rises; fall; fall B. demand rises; rise; fall C. demand falls; rise; rise D. supply rises; rise; fall E. supply falls; fall; rise 37. If the money supply decreases, the opportunity cost of holding money __________ and people will want to hold __________ quantity of money. A. rises; a greater B. rises; a smaller C. does not change; the same D. falls; a greater E. falls; a smaller 38. If the money supply increases, the interest rate will __________ and people will want to hold a __________ quantity of money. A. rise; greater B. rise; smaller C. not change; greater D. fall; greater E. fall; smaller 39. The equilibrium interest rate is determined by A. the Fed B. Congress C. the demand for money alone D. the supply of money alone E. both the supply of and demand for money 40. An increase in the money supply will A. increase the demand for money at each interest rate B. decrease the demand for money at each interest rate C. lead people to try to exchange money for interest-bearing assets D. lead people to try to exchange interest-bearing assets for money E. increase the interest rate 41. Which one of the following statements is correct? A. The lower the interest rate, the higher the opportunity cost of holding assets in the form of money. B. A vertical money supply curve means that 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 transactions demand for money increases whenever the price level decreases. 42. Of the following, the major influence on the supply of money is A. interest rates B. prices C. the transactions demand for money D. GDP E. the Fed 43. If the quantity of money supplied exceeds the quantity of money demanded, A. this is evidence of a failed fiscal policy B. this indicates that the supply of money curve is horizontal C. the interest rate will fall D. the quantity of money demanded will increase E. the transactions money demand curve will shift to the right 44. If there is a decrease in the supply of money, which one of the following is most likely to happen? A. the demand for money will increase B. planned investment spending will increase C. interest rates will rise D. aggregate expenditure will increase E. the demand for money will decrease 45. Exhibit 15-2 Given the demand for money in Exhibit 15-2, if the supply of money is given by the supply curve labelled S, the equilibrium interest rate and quantity of money would be A. r and m B. r* and m* C. r’ and m’ D. r and m’ E. cannot tell from the information given 46. Exhibit 15-2 Each of the following can cause the supply of money to shift from S to S* in Exhibit 15-2, except A. an increase in the required reserve ratio B. the sale of US Treasury securities by the Fed C. a decrease in the required reserve ratio D. a decrease in the discount rate E. an increase in excess reserves in the banking system 47. When an increase in the money supply reduces the interest rate, investment and nominal GDP increase. A. True B. False 48. In a macroeconomic model, increases in the money supply decrease the interest rate, increase investment, and thus raise employment and real GDP. A. True B. False 49. An increase in the money supply will cause a decrease in planned investment spending. A. True B. False 50. In the short run, a decrease in the money supply will cause a decrease in Gross Domestic Product and a decrease in the price level. A. True B. False 51. In the aggregate demand-aggregate supply model, an increase in the money supply will cause in the short run 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 52. In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run 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 53. If the Fed wanted to stimulate the economy, it might A. buy bonds to lower the money supply B. sell bonds to lower the money supply C. raise the discount rate to increase the money supply D. lower the discount rate to increase the money supply E. increase the required reserve ratio to lower the money supply 54. 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. nothing happens to the quantity of money demanded 55. If the Fed buys bonds, then 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 56. An increase in the interest rate will A. have no effect on investment, since investment is autonomous B. increase investment, since it will be more profitable to hold stocks and bonds C. increase investment, since people will be less willing to hold money D. decrease investment only if firms have to borrow money to make investments E. decrease investment regardless of whether firms have to borrow money to make an investment 57. The demand curve for investment is graphed with __________ on the vertical axis and __________ on the horizontal axis. A. the interest rate; investment B. investment; the interest rate C. the price level; investment D. investment; the price level E. real GDP; investment 58. As 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 59. As the interest rate decreases, 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. GDP decreases 60. 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 61. Planned investment expenditures will eventually increase after A. the money supply decreases B. the demand for money increases C. the interest rate falls D. the Fed sells government securities E. business managers are pessimistic about future market conditions for their product 62. What is the effect of an expansionary monetary policy on the demand for investment curve? A. It causes the curve to shift left. B. It causes the curve to shift right. C. It causes downward movement along the curve. D. It causes an upward movement along the curve. E. It has no effect on the quantity of investment demanded. 63. If the Fed decreases the money supply, causing the interest rate to rise, GDP A. increases by the same amount as the increase in the interest rate B. decreases by more 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 more than the decrease in investment because of the multiplier E. decreases by less than the decrease in investment because of the multiplier 64. If the Fed increases the money supply, GDP 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 65. If the Fed decreases the money supply, GDP 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 66. As a result of expansionary monetary policy, A. both aggregate expenditure and aggregate demand increase B. both aggregate expenditure and aggregate demand decrease C. aggregate expenditure increases and aggregate demand decreases D. aggregate expenditure decreases and aggregate demand increases E. aggregate expenditure remains unchanged; aggregate demand increases 67. If the Fed sells U.S. government securities to drain reserves from banks, which of the following will probably occur? A. The demand for money will increase and the interest rate will rise. B. The money supply will increase and the interest rate will fall. C. The interest rate will rise and the quantity of money demanded will fall. D. The money supply will decrease and the interest rate will fall. E. The interest rate will fall and the quantity of money demanded will increase. 68. If the Fed sells government securities to banks, eventually we expect A. aggregate demand to increase B. short-run aggregate supply to decrease C. interest rates to decrease D. planned investment expenditures to decrease E. real Gross Domestic Product to increase 69. If the Fed sells government securities to banks, eventually we expect A. the price level to increase B. planned investment expenditures to increase C. aggregate demand to increase D. short-run aggregate supply to increase E. interest rates to increase 70. An increase in the money supply leads to a(n) A. decline in interest rates, an increase in investment, and an increase in aggregate demand B. decline in interest rates, a decrease in investment, and an increase in aggregate demand C. decline in interest rates, an increase in investment, and a decline in aggregate demand D. increase in interest rates, an increase in investment, and an increase in aggregate demand E. decline in interest rates, a decline in investment, and a decline in aggregate demand 71. If investment is not sensitive to changes in the interest rate, then changes in the money supply A. will have no effect on interest rates B. will have a major impact on investment C. will have no effect on aggregate demand D. will have a major impact on aggregate demand E. mean the money supply curve will not be vertical 72. If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rates, then monetary policy will be __________ in changing Gross Domestic Product. A. sensitive; sensitive; effective B. responsive; insensitive; ineffective C. responsive; insensitive; effective D. not responsive; sensitive; effective E. not responsive; insensitive; effective 73. An increase in the money supply causes interest rates to __________, investment spending to __________ and aggregate demand to __________. A. rise; rise; rise B. rise; fall; rise C. rise; fall; fall D. fall; rise; fall E. fall; rise; rise 74. A decrease in the money supply causes interest rates to __________, investment spending to __________ and Gross Domestic Product to __________. A. fall; rise; fall B. fall; fall; rise C. rise; rise; rise D. rise; fall; fall E. rise; fall; rise 75. For monetary policy to be effective in changing planned investment spending, A. interest rates must not be responsive to changes in the money supply B. interest rates must be sensitive to changes in Gross Domestic Product C. investment must be sensitive to changes in interest rates D. investment must be sensitive to changes in the spending multiplier E. the spending multiplier must be stable 76. If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be effective in changing aggregate demand. A. responsive; sensitive B. responsive; insensitive C. not responsive; sensitive D. not responsive; insensitive E. none of the above 77. If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be ineffective in changing aggregate demand. A. responsive; sensitive B. responsive; insensitive C. not responsive; sensitive D. not responsive; insensitive E. none of the above 78. What would be the ultimate effect of a reduction in the money supply? A. a leftward shift of the aggregate demand curve B. a rightward shift of the short-run aggregate supply curve C. a movement upward along the aggregate demand curve D. a movement downward along the aggregate demand curve E. such a monetary policy would have no impact at all 79. To eliminate a contractionary gap, the Fed can __________ the money supply, which would __________. A. increase; increase the interest rate and investment B. increase; decrease the interest rate and increase investment C. decrease; increase the interest rate and investment D. decrease; decrease the interest rate and investment E. decrease; increase the interest rate and decrease investment 80. Which monetary policy would be appropriate to close a contractionary gap? A. a tax cut B. a decrease in government purchases C. an increase in reserve requirements D. the Fed's purchase of U.S. government securities E. the Fed's raising the discount rate 81. What happens to the aggregate demand curve when the Fed reduces the money supply? A. It shifts leftward, lowering real GDP and the price level. B. It shifts leftward, raising real GDP and the price level. C. It shifts leftward, lowering real GDP but raising the price level. D. It shifts rightward, raising real GDP and the price level. E. It shifts rightward, lowering real GDP but raising the price level. 82. If the Fed decreases the money supply, A. aggregate demand and aggregate supply both increase B. aggregate demand increases, which leads to movement along the short-run aggregate supply curve C. aggregate demand decreases, which leads to movement along the short-run aggregate supply curve D. aggregate supply increases, which leads to movement along the aggregate demand curve E. aggregate supply decreases, which leads to movement along the aggregate demand curve 83. If the Fed wants to close a contractionary gap, it might A. increase government spending B. increase taxes C. decrease taxes D. sell U.S. government bonds to banks E. lower the discount rate 84. Exhibit 15-3 In the situation shown in Exhibit 15-3, how could the Fed return the economy to potential output? A. decrease government spending B. increase taxes C. decrease taxes D. decrease the money supply E. increase the money supply 85. Exhibit 15-3 In the situation shown in Exhibit 15-3, how could the Fed return the economy to potential output? A. decrease government spending B. decrease taxes C. sell U.S. government bonds to banks D. lower the discount rate E. lower the required reserve ratio 86. Exhibit 15-3 In the situation shown in Exhibit 15-3, how could the Fed return the economy to potential output? A. decrease government spending B. decrease taxes C. sell U.S. government bonds to banks D. increase the discount rate E. increase the required reserve ratio 87. Exhibit 15-3 In the situation shown in Exhibit 15-3, how could the Fed return the economy to potential output? A. decrease government spending B. decrease excess reserves in the banking system C. sell U.S. government bonds to banks D. increase the discount rate E. lower the required reserve ratio 88. Which of the following is an example of an expansionary monetary policy? A. Government purchases of goods and services decline. B. The discount rate is increased. C. The Fed sells U.S. government securities in the open market. D. The required reserve ratio is lowered. E. The income tax is lowered. 89. Which of the following is an example of a contractionary monetary policy? A. Transfer payments to poor families are reduced. B. The Fed buys government securities in the open market. C. The discount rate is raised. D. The required reserve ratio is lowered. E. Anything the Fed does to shift the money supply to the right is a contractionary policy. 90. An increase in the money supply can increase the price level, real GDP, or both, but it is impossible to tell exactly what will happen without knowing the slope of the aggregate supply curve. A. True B. False 91. The steeper the short-run aggregate supply curve, the __________ the change in price level and the __________ the change in real Gross Domestic Product for a given shift in the aggregate demand curve. A. larger; larger B. larger; smaller C. smaller; larger D. smaller; smaller E. real GDP and the price level are not affected by the shape of the aggregate supply curve 92. When the short-run aggregate supply curve is steep, then for a given increase in aggregate demand, A. the increase in real GDP will be relatively small and the increase in the price level will be relatively large B. the increase in real GDP will be relatively large and the increase in the price level will be relatively small C. the increases in real GDP and the price level will be large D. the increases in real GDP and the price level will be small E. the decrease in real GDP will be larger than the decrease in the price level 93. If the short-run aggregate supply curve is positively sloped and the Fed increases the money supply, aggregate demand A. increases, which increases real GDP and the price level B. increases, which decreases real GDP and the price level C. falls, which decreases real GDP and increases the price level D. increases, which decreases real GDP and increases the price level E. falls, which increases real GDP and the price level 94. Exhibit 15-4 In Exhibit 15-4, short-run equilibrium occurs A. at point a B. at point b C. at point c, where the actual price level exceeds the expected price level D. at point c, where the actual price level is less than the expected price level E. at point c, where there is a contractionary gap 95. Exhibit 15-4 In Exhibit 15-4, the Fed can return the economy to its potential output by A. selling US Treasury securities inthe open market B. lowering the discount rate C. by lowering the reserve requirenment D. buying US Treasury securities in the open market E. printing money 96. Exhibit 15-5 If the economy pictured in Exhibit 15-5 is in equilibrium where AD = SRAS, then it A. is experiencing a contractionary gap B. will experience an increase in the price level if no government action is taken C. is operating at the potential level of output D. will experience a stable price level if no government action is taken E. is operating at less than the economy's potential level of output 97. Exhibit 15-5 The economy pictured in Exhibit 15-5 is A. in a long-run equilibrium at the price level P and income level Y B. in a short-run equilibrium at the price level P and income level Y C. experiencing a contractionary gap at price level P and income level Y D. not able to reach a long-run equilibrium without government intervention E. in a short-run equilibrium at the price level P' and income level Y 98. Exhibit 15-5 To bring the economy shown in Exhibit 15-5 to its potential output level, the Fed could A. do nothing and the price level would fall to P' B. do nothing and the price level would remain at its current level C. increase the money supply and increase the price level to P" D. increase the money supply and decrease the price level to P' E. decrease the money supply and decrease the price level to P' 99. Over the past 40 years, the most frequent target for the Fed’s monetary policy has been A. the prime interest rate B. the federal funds rate C. the M1 money supply D. the M2 money supply E. the M3 money supply 100. If the Fed changes the federal funds rate A. inflation is brought to an immediate halt B. the inflation rate increases for several months, but then begins to decreases C. major banks try to offset this change by lowering the interest rates they charge on loans D. major banks try to offset this change by lowering the interest rates they pay on savings deposits E. major banks raise the prime interest rate that they charge to their best customers 101. The quantity theory of money states that increases in the money supply result in proportional increases in real GDP. A. True B. False 102. When calculating by how much changes in the money supply will change nominal GDP, we use the money multiplier instead of the spending multiplier. A. True B. False 103. According to the equation of exchange, M × V = P × C. A. True B. False 104. The equation of exchange states that the quantity of money multiplied by the velocity of money equals A. real Gross Domestic Product B. the price level C. nominal Gross Domestic Product D. the turnover rate E. the demand for money 105. The equation of exchange A. states that the price level times velocity equals GDP divided by the interest rate B. states that total spending equals real GDP C. states that money supply times velocity equals real GDP D. is an identity, not a theory E. becomes the quantity theory of money on the assumption that the price level is always constant 106. The equation of exchange states that A. money in circulation × prices = velocity × income B. money in circulation × income = velocity × prices C. real GDP = money in circulation × velocity D. nominal GDP = money in circulation × velocity E. real GDP = prices × money in circulation × velocity 107. The equation of exchange is A. quantity supplied equals quantity demanded B. quantity bought equals quantity sold C. M × V = P × Y D. C × I + G = Y E. input equals output 108. Velocity measures A. the average length of time that people hold wealth B. how fast aggregate spending will increase for a given decline in money demand C. how fast inflation will rise for a given increase in the money supply D. how quickly money changes hands E. how quickly banks can create money 109. If the money supply equals $1,000 and nominal GDP equals $3,000, then V A. equals 1/3 B. equals 3 C. equals 3 million D. cannot be determined since we do not know anything about prices E. cannot be determined since we do not know anything about real GDP 110. If the money supply is $1,000, the price level is 3, and real income (or output) is $5,000, then the velocity of money is A. 0.2 B. 0.6 C. 1.67 D. 5 E. 15 111. According to the equation of exchange, if nominal GDP equals $6 trillion and the money supply equals $1 trillion, the velocity of money A. must be 6 B. must be 1/6 C. must be 6 trillion D. must be 1/6 trillion E. cannot be determined unless we know the price level 112. According to the equation of exchange, if real GDP is $2 trillion and the money supply is $0.5 trillion, the velocity of money A. must be 4 B. must be 1/4 C. must be 4 trillion D. must be 1/4 trillion E. cannot be determined unless we know the price level 113. If the money supply is $300, the price level is $4, and real GDP is $1,500, what is the nominal value of output? A. $1,200 B. $4,500 C. $6,000 D. $180,000 E. $500 114. If the money supply is $600, the price level is $2, and real GDP is $300, what is velocity? A. 1 B. 150 C. 300 D. 600 E. 1,200 115. According to the equation of exchange, if the amount of money in the economy of Monetania times the velocity of money equals 800 million Monetanian dollars ($), then Monetania's A. real GDP equals $800 million B. nominal GDP equals $800 million C. real GDP equals $800 million times the price level D. nominal GDP equals $800 million times the price level E. price level equals 8 Monetanian dollars 116. In the long run, increases in the money supply increase the economy's potential output level. A. True B. False 117. In order for changes in the money supply to affect real GDP, the aggregate supply curve cannot be vertical. A. True B. False 118. In the quantity theory of money, it is assumed that M and P are the only elements in the equation that are free to fluctuate. A. True B. False 119. If the money supply increases when there is much idle capacity in the economy, A. most of the resulting rise in nominal GDP will be a result of price increases B. most of the resulting rise in nominal GDP will be a result of increases in real output C. most of the resulting rise in real GDP will be a result of increases in the price level D. most of the resulting rise in real GDP will be a result of increases in the interest rate E. only nominal GDP will change; real GDP will be unaffected 120. Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy? A. a higher price level B. a higher level of real output C. both a higher price level and a higher level of real output D. a lower price level E. a lower level of real output 121. If the Fed expands the money supply, a short-run aggregate supply curve __________ would yield the largest short-run increase in real GDP. A. that is vertical B. with a steep slope C. that coincides with the 45-degree line D. that is relatively flat E. that shifts leftward 122. If the Fed expands the money supply, a short-run aggregate supply curve __________ would yield the largest short-run increase in the price level. A. that is vertical B. with a steep slope C. that coincides with the 45-degree line D. that is relatively flat E. that is horizontal 123. An increase in aggregate demand will have the greatest short-run effect on real output if the A. aggregate demand curve is horizontal B. aggregate demand curve is vertical C. aggregate demand curve is horizontal and the short-run aggregate supply curve is vertical D. short-run aggregate supply curve is vertical E. short-run aggregate supply curve is horizontal 124. The extent to which a given increase in nominal income is the result of a price level change or a change in real income is primarily determined by A. the quantity theory of money B. the equation of exchange C. the slope of the aggregate demand curve D. the slope of the short-run aggregate supply curve E. none of the above 125. An increase in aggregate demand will have a smaller long-run effect on real GDP if the A. aggregate demand curve is flat B. short-run aggregate supply curve is horizontal C. economy is well below potential output D. economy is already at potential output E. aggregate demand curve is fairly steep 126. In the long run, an increase in aggregate demand A. increases the price level and real output, but the effect on the price level is larger B. increases the price level and real output, but the effect on output is larger C. affects only real output D. affects only the price level E. has no effect at all 127. In an economy in which velocity is constant and the same level of real output is produced year after year, a slow increase in the money supply would result in a A. constant price level B. slowly increasing price level C. rapidly increasing price level D. slowly increasing real GDP E. rapidly increasing real GDP 128. In an economy in which velocity is constant and real output grows at an average rate of 4 percent per year, a 4 percent average rate of growth in the money supply would result in A. a constant price level B. a slowly increasing price level C. a rapidly increasing price level D. constant real GDP E. constant nominal GDP 129. In an economy in which velocity is constant and real output grows at an average rate of 3 percent per year, a 5 percent average rate of growth in the money supply would result in a A. constant price level B. slowly increasing price level C. slowly decreasing price level D. stable 4 percent growth in real GDP E. stable 4 percent growth in nominal GDP 130. In an economy in which real output grows at an average rate of 3 percent per year, a 7 percent average rate of growth in the money supply would result in a(n) A. inflation rate of 4 percent, if velocity were constant B. inflation rate of -4 percent, if velocity were constant C. $4 increase in the price level per year D. $4 decrease in the price level per year E. change in the velocity of money 131. If the money supply is increasing at a constant 8 percent, velocity is constant, real GDP is increasing at 5 percent, and the inflation rate is 3 percent, which of the following is true? A. The growth rate of GDP is too low to be maintained. B. The inflation rate is too low to be maintained. C. Velocity is too low to be maintained. D. The money supply growth rate is too low to be maintained. E. This situation can continue indefinitely. 132. If real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between A. the money supply and the price level B. the money supply and the interest rate C. the money supply and the foreign exchange rate D. velocity and real GDP E. velocity and nominal GDP 133. The quantity theory of money states that A. MV = PY B. since velocity is reasonably stable, we can predict the effects of an increase in the money supply on nominal income C. since velocity is not stable, changes in the money supply have unpredictable impacts on income D. since velocity is reasonably stable, we can predict the effects of an increase in the money supply on employment E. since velocity is reasonably stable, we can predict the effects of an increase in the money supply on interest rates 134. The quantity theory of money A. states that fiscal policy plays an important role in determining economic activity B. states that the quantity of money in circulation determines aggregate spending C. argues that velocity is unpredictable D. states that the quantity of money in circulation determines only the price level in the long run E. states that the quantity of money in circulation determines only real spending in the short run 135. For the quantity theory of money to yield useful predictions, A. fiscal policy must be ineffective in altering aggregate demand B. fiscal policy must be effective in altering aggregate demand C. the economy must be operating at the potential level of real Gross Domestic Product D. velocity must be stable or predictable E. velocity must be unstable 136. In the long run, changes in the money supply affect only the price level because A. the aggregate demand curve is vertical B. the aggregate demand curve is downward sloping C. the long-run aggregate supply curve is vertical D. the long-run aggregate supply curve is upward sloping E. current real GDP is less than the economy's potential GDP 137. Which of the following statements best describes the historical relationship between increases in the money supply (M1) and inflation in the U.S.? A. All three major episodes of inflation since 1914 were preceded and accompanied by an increase in the growth rate of M1. B. There is no strong evidence of any relationship between inflation and increases in the money supply in the 20th century. C. Since the formation of the Fed in 1914, there have been no significant periods of inflation D. In all three major episodes of inflation since 1914, increases in the growth rate of M1 occurred after the inflation subsided. E. There were significant periods of inflation during each decade of the 20th century and each was preceded and accompanied by an increase in the growth rate of M1. 138. Increases in the expected inflation rate cause A. the velocity of money to increase B. the velocity of money to decrease C. money to become a better store of wealth D. decreases in the actual price level E. the money supply to increase 139. Which of the following would cause an increase in the velocity of money? A. increased use of credit cards B. an increase in the money supply C. an increase in demand for money D. a decrease in interest rates E. a decrease in nominal GDP and a constant money supply 140. Which of the following would most likely lower the velocity of money? A. commercial innovations that facilitate exchange B. a lower inflation rate C. a decline in the effectiveness of money as a store of wealth D. a higher inflation rate E. paying workers once a week instead of once a month 141. Velocity will be higher A. the less frequently workers are paid B. the fewer transactions there are to make C. the less effective money is as a store of value D. the less people use credit cards to make purchases E. the slower the physical transportation of money between one person and another 142. If something causes the velocity of money to increase, the same amount of money will A. be able to support more transactions, so nominal GDP can increase B. be forced to support more transactions, so nominal GDP will decrease C. be able to support fewer transactions, so nominal GDP will decrease D. no longer have to support so many transactions, so nominal GDP can increase E. mean nothing can happen to nominal GDP 143. The velocity of money is defined as A. the time it takes the average worker to get to the bank with his/her paycheck B. the time it takes banks to clear checks C. the average number of times per year each dollar is used to purchase final goods and services D. M × P  Y E. the average number of times per year each dollar is spent for goods, payrolls, Social Security payments, etc. 144. A rising rate of inflation A. makes people more willing to hold money as an asset B. reduces the usefulness of money as a store of value and thus increases the velocity of money C. increases the usefulness of money as a medium of exchange and thus reduces the velocity of money D. is usually preceded by a reduction in the money supply E. does not, apparently, have any effect on the velocity of money 145. Historical evidence has shown that the M1 velocity of money in the United States A. has remained constant B. has remained predictable but not constant C. has varied over the century but is currently near constant D. has varied over the century and has recently fluctuated a quite a bit E. is not correctly placed within the equation of exchange 146. In the United States over the last decade, the velocity of A. M1 has been more stable than the velocity of M2, possibly because of the deregulation of the interest paid on checkable deposits B. M1 has been more stable than the velocity of M2, leading the Fed to rely more on M1 targets C. M2 has been more stable than the velocity of M1, but the Fed still relies on M1 targets D. M2 has been more stable than the velocity of M1, possibly because of the deregulation of the interest paid on checkable deposits E. both c and d are true 147. The velocity of M1 money has moved erratically in the past several years because A. of low and stable rates of inflation B. of regulatory changes allowing banks to pay interest on checkable deposits C. interest rates have been stable D. monetary policy has been highly erratic E. a large number of banks and savings and loan associations have gone bankrupt 148. The behavior of the M1 velocity of money in recent years can be explained by A. stability of interest rates B. a low and stable rate of inflation C. monetary policy that has been successful in stabilizing the economy D. financial innovation creating new substitutes for money M1 E. a large number of banks and savings and loan associations going bankrupt 149. The velocity of money increases for all of the following reasons except A. use of electronic transmission of funds B. increased use of charge accounts C. increased use of automatic teller machines D. a rising inflation rate E. decreased use of credit cards 150. Which of the following statements about the velocity of money in the U.S. is correct? A. From 1915 to 1947, the velocity of M1 increased. B. From 1947 to 1973, the velocity of M1 decreased. C. In the 1970s, velocity growth was extremely stable at approximately 3% to 4%. D. During most of this century, the velocity of money has remained unchanged. E. The velocity of money has decreased because of ATM machines and credit cards. 151. There is considerable disagreement about whether the Fed should A. engage in open market operations B. have the power to set reserve requirements C. reduce the money supply when the economy is growing D. allow banks to invest in the stock market E. attempt to control interest rates or should instead attempt to control the money supply 152. If the Fed is targeting the money supply, it loses control over the interest rate. A. True B. False 153. Suppose the money demand curve shifts rightward. Which of the following is true about the Fed's options? A. The Fed can keep the interest rate from rising only if it increases the money supply. B. The Fed cannot prevent the interest rate from rising. C. The Fed can prevent the interest rate from rising without changing the money supply. D. If the Fed expands the money supply, the interest rate will rise even further. E. The Fed should reduce the money supply if it wishes to prevent the interest rate from rising. 154. Suppose that the demand and supply of money are initially in equilibrium, and that the demand for money increases. A monetary authority interested in keeping the money supply constant and the interest rate low must A. increase the money supply B. decrease the money supply C. increase the demand for money D. decrease the demand for money E. give up pursuing both goals at the same time and choose one or the other 155. If the Fed had to choose between fixing the interest rate and fixing the supply of money, it would A. always fix the money supply, so that the price level would be stable B. always fix the money supply, so that spending would be stable C. always fix the interest rate, so that investment would be stable D. always fix the interest rate, so that demand for money would be stable E. find neither alternative would be clearly better than the other 156. If interest rates are to remain constant, the money supply should change A. in the opposite direction to a change in aggregate demand B. in the same direction as a change in money demand C. only when investment changes D. only when the demand for money decreases E. only when the inflation rate changes 157. For interest rates to remain stable during economic expansions, the money supply should A. decrease at a faster rate than the demand for money B. grow at the same rate as money demand C. grow at a faster rate than money demand D. grow at a slower rate than money demand E. decrease at a slower rate than the demand for money 158. If the Fed targets the interest rate, then A. the money supply will grow at a more controlled rate B. monetary policy will reinforce fluctuations in economic activity C. the price level will be more stable in the long run D. money demand will be more stable E. velocity will be less stable 159. Those who argue against interest rate targets for monetary policy claim that A. the necessary changes in money supply reinforce business cycles B. the necessary changes in money supply dampen expansions C. increased crowding out reduces private investment even more D. inflation would fall E. monetary policy is too effective 160. For interest rates to remain stable during economic expansions, the growth rate of the money supply should A. exceed the growth in the demand for money B. just match the growth in the demand for money C. be less than the growth in the demand for money D. be zero E. just match the growth in nominal GDP 161. For interest rates to remain stable during economic contractions, monetary authorities should A. reduce the demand for money B. increase the demand for money C. match the rate of growth in the money supply to the rate of growth in nominal GDP D. reduce the rate of growth in the money supply below the rate of growth in the demand for money E. slow the growth of the money supply, or even let the money supply shrink 162. If money demand increases and the Fed does not alter its monetary policy, then A. the money supply will increase B. the money supply will decrease C. interest rates will decrease D. interest rates will increase E. velocity will decrease 163. If money demand increases and the Fed attempts to keep interest rates stable, then A. the money supply will increase B. the money supply will decrease C. velocity will increase D. velocity will decrease E. the Fed will sell government securities 164. Exhibit 15-6 If the Fed is targeting interest rates and money demand shifts from Dm to Dm' in Exhibit 15-6, the Fed will A. do nothing and the interest rate will rise to i' B. do nothing and the interest rate will settle at i C. decrease the money supply to restore its target of i D. increase the money supply to restore its target of i E. decrease money demand back to Dm to restore its target of i 165. Exhibit 15-6 If the Fed is targeting the money supply and the money demand shifts from Dm to Dm' in Exhibit 15-6, the Fed will A. do nothing and the interest rate will rise to i' B. do nothing and the interest rate will settle at i C. decrease the money supply to restore its target of i D. increase the money supply to restore its target of i E. decrease money demand back to Dm to restore its target of i 166. If the Federal Reserve is targeting the interest rate when the demand for money increases, their proper response is to A. decrease the money supply B. keep the money supply constant C. increase the money supply D. stimulate inflation to increase the demand for money E. stimulate a decrease in the price level to increase the demand for money 167. If the Federal Reserve is targeting the money supply when the demand for money decreases, their proper response is to A. decrease the money supply B. keep the money supply on a path of constant, predictable growth C. increase the money supply to match the increase in the demand for money D. stimulate inflation to increase the demand for money E. stimulate a decrease in the price level to increase the demand for money 168. In October 1979 the Fed announced that it would focus on A. stabilizing interest rates B. specified targets for slowly falling interest rates C. specified targets for the long-run equilibrium price level D. specified targets for growth of the money supply E. stabilizing the long-run equilibrium price level 169. In the history of monetary policy, the period of October 1979 to October 1982 was notable for A. being a period of steady prices and low unemployment B. the emphasis placed on controlling interest rates during that period C. the emphasis placed on controlling the money supply during that period D. the rapid increase in the growth of the money supply during that period E. the rapid rise in prices during that period 170. In recent years, much of the emphasis of Fed policy has been on A. controlling short-term interest rates B. implementing a system of price controls C. regulating bank managers D. controlling the money supply E. making changes in the international financial markets 171. The policy of the Fed purchasing long-term assets to stabilize financial markets is called A. controlling short-term interest rates B. quantitative easing C. regulating bank managers D. controlling the money supply E. qualitative easing 172. Which of the following is not a goal of quantitative easing? A. stabilizing financial markets B. reducing long-term interest rates C. improving the investment environment D. lowering the unemployment rate E. neither c or d is a goal of quantitative easing 173. The federal government made a profit off of their bailout of insurance giant AIG. A. True B. False 174. As a result of the bailout of AIG, shareholders in the insurance giant reaped huge gaains from the rise in the share price of the company. A. True B. False 175. Which of the following is not considered to be a nonbank financial institution. A. credit unions B. mortgage companies C. insurance companies D. brokerage firms E. money market mutual funds 176. Nonbank financial institutions, like, insurance companies and money market mutual funds make up what is known as the shadow banking system. A. True B. False 177. The Kennedy-Lieberman Act brought the shadow banking system under the Fed’s regulatory control. A. True B. False 178. The goal of quantitative easing is to lower short-term interest rates. A. True B. False 179. Which of the following are the twin statutory goals of the Fed? A. price stability and maximum economic growth B. maximum employment and maximum economic growth C. maximum economic growth and equitable distribution of income D. price stability and maximum employment E. price stability and equitable distribution of income 180. One of the reasons that the FOMC lowered its target for the federal funds rate in September 2007 was A. confidence that the fallout from rising mortgage default rates would not spread to the wider economy B. the belief that lenders would respond to the housing crisis by loosening lending standards C. more easily available credit boosting investment and economic growth D. to add liquidity to financial markets and strengthen the economy E. All of the answers are correct 181. The interest rate that banks charge one another for overnight lending of reserves is the A. federal funds rate B. interbank credit card rate C. subprime mortgage rate D. prime rate E. local funds rate 182. Because __________ the federal funds rate __________ the cost of covering any reserve shortfall, banks are __________ willing to lend to the public. A. lowering, reduces, less B. raising, increases, more C. lowering, reduces, more D. raising, decreases, more E. lowering, increases, more 183. To execute the policy of lowering the federal funds rate, the FOMC authorizes the New York Fed to make open-market sales to increase bank reserves until the federal funds rate falls to the target level. A. True B. False 184. The Fed’s grip is tightest on the A. prime rate B. federal funds rate C. mortgage rate D. credit card rate E. student loan rate 185. In order to become more transparent, the Fed A. began announcing immediately after each meeting its target for the federal funds rate B. announces after meetings the probable “bias” of policy in the near term C. releases the minutes three weeks after each meeting D. publicizes its decisions and policy “bias” in the news media E. All of the answers are correct 186. If the situation is serious enough, the FOMC may act between regular meetings. A. True B. False 187. While monetary targets are important, also significant is what Fed officials have to say. Sometimes reassurance is all that’s required to calm market jitters. A. True B. False 188. Which of the following is the last step in the sequence? A. A strong dollar relative to foreign currencies hurts U.S. exporters B. As the money supply increases, interest rates fall in the short run C. The value of the dollar declines D. Low U.S. interest rates makes the dollar less attractive to foreign investors E. The Fed chooses an expansionary monetary policy 189. Because monetary policy is the main focus of the Fed, it ignores international considerations. A. True B. False 190. Exhibit 15-7 Referring to Exhibit 15-7, a decrease in the level of real GDP will cause a move from A. A to F B. A to B C. A to C D. A to D E. A to H 191. Exhibit 15-7 Referring to Exhibit 15-7, a decrease in the interest rate will cause a move from A. A to B B. A to F C. A to G D. A to C E. A to I 192. Exhibit 15-7 Referring to Exhibit 15-7, an increase in the price level will cause a move from A. A to B B. A to F C. A to C D. A to D E. A to H 193. Exhibit 15-8 In Exhibit 15-8, the demand for money is represented by D1 and the supply by S1. If the Fed lowers the reserve requirement, the equilibrium will move from A. A to B B. A to C C. A to E D. A to H E. A to I 194. Exhibit 15-8 In Exhibit 15-8, the demand for money is represented by D1 and the supply by S1. If the Fed buys bonds on the open market, the equilibrium will move from A. A to B B. A to C C. A to E D. A to H E. A to I 195. Exhibit 15-8 In Exhibit 15-8, the demand for money is represented by D1 and the supply by S1. If the Fed lowers the discount rate, the equilibrium will move from A. A to B B. A to C C. A to E D. A to H E. A to I 196. Exhibit 15-8 In Exhibit 15-8, the demand for money is represented by D1 and the supply by S1. If the Fed raises the discount rate, the equilibrium will move from A. A to B B. A to C C. A to E D. A to H E. A to I 197. Exhibit 15-8 In Exhibit 15-8, the demand for money is represented by D1 and the supply by S1. If the Fed sells bonds on the open market, the equilibrium will move from A. A to B B. A to C C. A to E D. A to H E. A to I 198. Exhibit 15-8 In Exhibit 15-8, the demand for money is represented by D1 and the supply by S1. If the Fed raises the reserve requirement, the equilibrium will move from A. A to B B. A to C C. A to E D. A to H E. A to I 199. Since the financial crisis the Fed has tried to increase its transparency by communicating its intention more clearly. Which of the following is not one of the approaches employed by the Fed in this open communication policy? A. following FOMC meetings, the FOMC notes its federal funds rate target B. in its post-meeting statement, the FOMC now communicates its bias for future interest rate direction C. the FOMC records its meetings and makes the audio recording available to the media following every meeting D. the FOMC is now providing meeting minutes three weeks after their meeting E. after about half of the FOMC meetings, the Fed chair holds a press conference Test Bank for Macroeconomics: A Contemporary Introduction William A. McEachern 9781133188131, 9780538453776