Deck 15: Monetary Policy

Question 1

The equilibrium rate of interest is determined by

A)Money demand and money supply.
B)The U.S.Treasury.
C)The president of the Federal Reserve Bank of New York.

Answer 1

Money demand and money supply.

Question 2

Which of the following shifts in the demand for money or the supply of money is most likely to occur as the result of a recession?

A)The demand curve shifts leftward.
B)The demand curve shifts rightward.
C)The supply curve shifts rightward.

Answer 2

The demand curve shifts leftward.

Question 3

Currency held by the public plus balances in transactions accounts are the

A)Total reserves.
B)Money supply (M1).
C)Required reserves.

Answer 3

Money supply (M1).

Question 4

The speculative demand for money is related to money functioning as a

A)Store of value.
B)Standard of value.
C)Medium of exchange.

Question 5

The money supply M2 includes M1

A)Plus balances in savings accounts and money market mutual funds.
B)Plus balances in savings accounts,money market mutual funds,and currency in private bank vaults and in the Federal Reserve vaults.
C)Minus balances in savings accounts and money market mutual funds.

Question 6

The cost of holding money in the form of cash is

A)Higher during the holidays.
B)Always considered by noneconomists when deciding how much money to hold.
C)Equal to whatever interest you would have received at the bank or other investment alternatives.

Question 7

Ceteris paribus,if the Fed sells bonds through open market operations,the money

A)Supply curve should shift rightward.
B)Supply curve should shift leftward.
C)Demand curve should shift rightward.

Question 8

The speculative,transactions,and precautionary demands for money added together give the

A)Market demand curve for money.
B)Monetarist demand-for-money curve.
C)Keynesian liquidity trap.

Question 9

The money supply curve as determined by current Federal Reserve policy is

A)Vertical since it's not determined by the interest rate.
B)Horizontal since it's not determined by the interest rate.
C)Upward-sloping to the right.

Question 10

During periods of hyperinflation,money does not hold its value long enough to make everyday market purchases;therefore,people hold as little as possible for as short a time as possible.This description implies that the

A)Transactions demand for money has decreased.
B)Precautionary demand for money has increased.
C)Speculative demand for money has decreased.

Question 11

Ceteris paribus,the quantities of money people are willing and able to hold

A)Decrease as interest rates fall.
B)Increase as interest rates fall.
C)Increase as the money supply decreases.

Question 12

Money held to take advantage of future financial opportunities is the

A)Transactions demand for money.
B)Precautionary demand for money.
C)Speculative demand for money.

Question 13

The Fed can change the equilibrium rate of interest by changing

A)Government spending.
B)Taxes.
C)Reserve requirements or the discount rate,or through open market operations.

Question 14

The choice to hold money in the form of cash

A)Has no opportunity cost.
B)Results in forgone interest.
C)Results in increased interest income.

Question 15

The use of money and credit controls to change the macroeconomy is

A)Monetary policy.
B)Considered ineffective by most economists.
C)No longer used in the United States.

Question 16

Which of the following causes the opportunity cost of holding money in the form of cash to decrease?

A)Lower interest rates.
B)Higher short-term yields.
C)Higher reserve requirement.

Question 17

Carolina holds $2,000 in her savings account in case of a medical emergency.This represents the

A)Medical savings account.
B)Transaction demand for money.
C)Precautionary demand for money.

Question 18

Money held for making everyday market purchases represents the

A)Crisis demand for money.
B)Speculative demand for money.
C)Transactions demand for money.

Question 19

Individuals hold precautionary balances in order to

A)Take advantage of future changes in bond prices.
B)Make anticipated expenditures.
C)Pay for emergency purchases.

Question 20

Mark holds $100 in cash in his wallet to make purchases for gas and groceries.This represents the

A)Precautionary demand for money.
B)Transactions demand for money.
C)Speculative demand for money.

Question 21

Long-term interest rates may not closely follow short-term interest rates if

A)People prefer to hold transactions accounts over cash.
B)The required reserve ratio decreases.
C)Lenders are reluctant to make loans.

Question 22

Which shift should occur if the Fed raises the discount rate?

A)The investment demand curve should shift rightward.
B)The aggregate supply curve should shift rightward.
C)The aggregate demand curve should shift leftward.

Question 23

Which of the following is a series of events that accurately describes the steps by which restrictive monetary policy is effective?

A)Decrease in interest rate,decrease in M1,and increase in investment.
B)Decrease in M1,increase in interest rate,and decrease in investment.
C)Increase in M1,decrease in investment,and decrease in interest rate.

Question 24

An increase in the money supply will

A)Reduce interest rates and increase aggregate demand.
B)Reduce interest rates and decrease aggregate demand.
C)Raise interest rates and increase aggregate demand.

Question 25

The most visible market signal of the Fed's activity is the

A)Equilibrium interest rate.
B)Federal funds rate.
C)Discount rate.

Question 26

All of the following impact the effectiveness of Fed policy except

A)Global sources of money.
B)The time lag between when interest rates change and when investment changes.
C)How well individuals respond to the agricultural press releases.

Question 27

Which of the following is likely to cause monetary restraint to be effective?

A)High expectations overwhelm high interest rates.
B)Businesses have the ability to borrow funds from foreign banks.
C)People behave rationally and borrow less when interest rates rise.

Question 28

According to Bernanke's policy guide,a full-point decrease in long-term interest rates results in a

A)$10 billion stimulus for the economy.
B)$20 billion stimulus for the economy.
C)$200 billion stimulus for the economy.

Question 29

A monetary stimulus is designed to shift the

A)AS curve to the right.
B)AS curve to the left.
C)AD curve to the right.

Question 30

Monetary stimulus will fail if

A)Banks lend too much money.
B)Short-term interest rates are affected but long-term interest rates are not.
C)Consumers spend too much money,creating a shortage of money.

Question 31

When the money market is in equilibrium in the liquidity trap,

A)An increase in the money supply does not affect interest rates.
B)The demand for money is perfectly insensitive to interest rates.
C)Investment spending falls to zero.

Question 32

What should happen to the equilibrium interest rate and the corresponding rate of investment if the Fed decreases the discount rate?

A)The equilibrium interest rate and the equilibrium rate of investment should both increase.
B)The equilibrium interest rate should increase,and the equilibrium rate of investment should decrease.
C)The equilibrium interest rate should decrease,and the equilibrium rate of investment should increase.

Question 33

If the Fed's objective is to stimulate the economy,which of the following gives the correct sequence of events?

A)The money supply increases,interest rates decrease,investment increases,and AD increases.
B)The money supply increases,interest rates decrease,investment increases,and AS decreases.
C)The money supply decreases,interest rates increase,investment decreases,and AD decreases.

Question 34

Monetary restraint is associated with all of the following except

A)A decrease in interest rates.
B)A decrease in the money supply.
C)An increase in the reserve requirement.

Question 35

According to Bernanke's policy guide,a 1/4 point decrease in long-term interest rates results in a

A)$10 billion stimulus for the economy.
B)$50 billion stimulus for the economy.
C)$10 billion decrease for the economy.

Question 36

All of the following impact the effectiveness of Fed policy except

A)How well the Treasury follows the Fed's directions for releasing money.
B)The willingness or reluctance of banks to lend funds.
C)Global sources of money.

Question 37

33.The effect of a higher discount rate could best be represented by,ceteris paribus,

A)An upward shift of the investment demand curve.
B)A downward shift of the investment demand curve.
C)A movement up the investment demand curve.

Question 38

The liquidity trap

A)Refers to the vertical portion of the money demand curve.
B)Refers to the possibility that interest rates may not respond to changes in the money supply.
C)Implies that people are willing to hold very limited amounts of money at low interest rates.

Question 39

A decrease in aggregate demand could be caused by

A)A decrease in the value of the domestic currency.
B)A booming economy.
C)Contractionary monetary policy.

Question 40

Monetary stimulus will fail if

A)Banks are reluctant to lend money.
B)The investment demand curve is fairly flat.
C)The money demand curve is fairly steep.

Question 41

Which of the following increases the effectiveness of monetary policy from a monetarist perspective?

A)The liquidity trap.
B)The constant velocity of money.
C)Changing expectations.

Question 42

When the Fed sells securities through open market operations,the equation of exchange (under monetarist assumptions about V being stable)requires that either aggregate spending

A)Increases or prices decrease,or both.
B)Or prices decrease,or both.
C)Decreases or prices increase,or both.

Question 43

Which of the following groups believes monetary policy to be effective for fighting inflation but not for changing real output?

A)Keynesian economists.
B)Classical economists.
C)Monetarists.

Question 44

The effectiveness of monetary policy is influenced by

A)The time it takes for lower interest rates to make investment spending more profitable.
B)The willingness of Congress to implement it.
C)How responsive the money supply is to changes in taxes.

Question 45

Using the equation of exchange and assuming effective price controls and a constant velocity of money,a decrease in the discount rate could temporarily result in

A)Higher velocity.
B)Higher quantity of real output.
C)Higher price level.

Question 46

Monetarists argue that

A)The velocity of money is constant.
B)Fiscal policy puts idle money balances to work,which reduces V.
C)When there is a recession,people accumulate money balances,which increases V.

Question 47

Using the equation of exchange and assuming full employment and a constant velocity of money,a decrease in the required reserve ratio would result in a

A)Lower velocity.
B)Lower quantity of real output.
C)Higher price level.

Question 48

Using the equation of exchange,the existence of a natural rate of unemployment implies that in the long run:

A)Velocity in the equation of exchange is actually very unstable.
B)Monetary policy affects only the rate of inflation.
C)Quantity of real output in the equation of exchange varies in proportion to money supply.

Question 49

Global money can impact monetary policy

A)Because businesses refuse to borrow and spend when they see that foreign rates are lower than U.S.rates.
B)Because lower foreign interest rates reduce consumer confidence in the domestic economy.
C)Because businesses may be able to borrow from foreign banks at cheaper rates.

Question 50

According to the monetarist view and the equation of exchange,which of the following will occur because the Fed sells securities in the open market?

A)A decrease in real interest rates.
B)A decrease in nominal aggregate spending.
C)A lower level of real output.

Question 51

Monetary policy is most effective when the money demand curve is __________ and investment demand is _____________.

A)horizontal;elastic
B)downward-sloping;elastic
C)horizontal;inelastic

Question 52

Which of the following explains why small reductions in interest rates may not lead to an increase in investment spending?

A)Excess capacity gives businesses little incentive to expand production capacity.
B)Investment demand is elastic with respect to the interest rate.
C)Improved expectations shift the investment demand curve to the right.

Question 53

The long-term rate of unemployment,determined by structural forces in labor and product markets,defines the

A)Frictional rate of unemployment.
B)Seasonal rate of unemployment.
C)Natural rate of unemployment.

Question 54

Monetary policy will be ineffective if

A)The demand for money is very sensitive to changes in the interest rate,but the investment demand is not.
B)The demand for money and investment demand are both very sensitive to changes n the interest rate.
C)Interest rates are sensitive to the quantity of money supplied,and investment spending is sensitive to changes in the interest rate.

Question 55

Monetary stimulus may be ineffective because

A)The investment demand curve is inelastic.
B)Expectations of a boom cause the investment demand curve to shift to the right,offsetting interest rate effects that would stimulate the economy.
C)The investment demand curve is horizontal.

Question 56

Using the equation of exchange,if real output increases by 5 percent per year and velocity is stable,in order to keep the price level stable

A)The interest rate must increase by 5 percent per year.
B)Velocity must increase by 5 percent per year.
C)The money supply must increase by 5 percent per year.

Question 57

The effectiveness of monetary policy is increased

A)In the liquidity trap.
B)When investment demand becomes more responsive to changes in the interest rate.
C)If the velocity of money is constant.

Question 58

The equation of exchange can be stated as

A)MV = PQ.
B)PV = MQ.
C)MP = VQ.

Question 59

Monetary policy will never be effective if interest rates

A)Change quickly.
B)Respond to a change in the money supply,and investment spending responds to a change in the interest rate.
C)Do not respond to a change in the money supply,and investment spending does not respond to changes in the interest rate.

Question 60

Which of the following is true about monetary policy in the liquidity trap?

A)Monetary policy will be unable to reduce interest rates further to stimulate investment.
B)The opportunity cost of holding money is relatively high at interest rates implied by the liquidity trap.
C)An expansion of the money supply will have the large effect of raising interest rates when the economy is in the liquidity trap.

Question 61

Monetary policy is most likely to result in inflation when the aggregate supply curve is

A)Vertical and the Fed lowers the discount rate.
B)Vertical and the Fed raises the reserve requirement.
C)Horizontal and the Fed sells securities.

Question 62

Which of the following is less sensitive to interest rate changes?

A)The residential housing market.
B)Retail markets.
C)Utility industries.

Question 63

Effective expansionary monetary policy,according to Keynesian theorists,will do all of the following except

A)Increase bank lending capacity.
B)Lower real output.
C)Encourage people to borrow and spend money.

Question 64

If the nominal interest rate is a constant 15 percent and anticipated inflation falls from 10 percent to 7 percent,the real interest rate would change from

A)15 to 10 percent.
B)5 to 8 percent.
C)7 to 9 percent.

Question 65

Given a vertical aggregate supply curve,which of the following is most likely to occur if the Fed pursues restrictive monetary policy?

A)The equilibrium price level and output will both increase.
B)The equilibrium price level and output will both decrease.
C)The equilibrium price level will decrease but output will stay the same.

Question 66

According to monetarists,the aggregate supply curve is

A)Upward-sloping to the right.
B)Vertical at the natural rate of unemployment.
C)Flat until full employment is reached.

Question 67

Assuming the aggregate supply curve is vertical,which of the following is most likely to occur if the Fed pursues expansionary monetary policy?

A)The equilibrium price level and output will both increase.
B)The equilibrium price level and output will both decrease.
C)The equilibrium price level will increase but output will stay the same.

Question 68

If the real rate of interest is negative,then,ceteris paribus,

A)The nominal interest rate is negative.
B)Monetary policy is tight.
C)The nominal interest rate is less than the anticipated inflation rate.

Question 69

If the anticipated inflation rate is 5 percent and the nominal interest rate is 9 percent,the real interest rate will be

A)4 percent.
B)Negative 14 percent.
C)14 percent.

Question 70

Lower interest rates redistribute income from

A)Lenders to borrowers.
B)Spenders to savers.
C)Borrowers to lenders.

Question 71

According to Keynesians,fiscal policy affects

A)Real interest rates only.
B)Aggregate spending,prices,and nominal interest rates only.
C)Aggregate spending,real output,and real interest rates,with possible effects on prices and nominal interest rates.

Question 72

Which of the following is a monetarist assumption that plays a key role in explaining the ineffectiveness of fiscal policy?

A)The liquidity trap.
B)The instability in the velocity of money.
C)Crowding out.

Question 73

When monetary policy reduces interest rates,

A)The income for retired people increases.
B)Income is redistributed from lenders to borrowers.
C)The construction industry is negatively impacted.

Question 74

Assuming the aggregate supply curve is upward-sloping,which of the following is most likely to occur if the Fed pursues restrictive monetary policy?

A)The equilibrium price level and output will both increase.
B)The equilibrium price level and output will both decrease.
C)The equilibrium price level will decrease but output will stay the same.

Question 75

Which of the following is consistent with the monetarist view?

A)A reduction in taxes will leave the value of real output unaffected.
B)Prices may be affected by increases in G or reductions in T.
C)Changes in M may cause changes in V and Q in the long run.

Question 76

If the economy is in the vertical portion of the aggregate supply curve,according to monetarists,an increase in the money supply in the long run will

A)Increase the price level.
B)Decrease the price level.
C)Increase the output level.

Question 77

According to extreme monetarists,monetary policy affects

A)The velocity of money and level of employment.
B)Real output,investment,and the money supply.
C)Aggregate demand,prices,and nominal interest rates only.

Question 78

To reduce the level of unanticipated inflation,monetarists advocate

A)A sharp increase in short-term interest rates.
B)Steady and predictable changes in the money supply.
C)A decrease in short-term interest rates.

Question 79

Which of the following is a monetarist solution for a recession?

A)Steady and predictable growth of the money supply.
B)A decrease in short-term interest rates.
C)An increase in the money supply alone.

Question 80

If a lender desires to earn a real return of 3 percent on a loan and the anticipated rate of inflation is 2 percent,the lender should charge a

A)Real interest rate of 5 percent.
B)Nominal interest rate of 5 percent.
C)Real interest rate of 6 percent.