Deck 28: Empirical Evidence on the Effectiveness of Monetary Policy

Question 1

Lower interest rates cause the velocity of M1 to

A) turn negative.
B) move erratically.
C) increase.
D) decline.

Answer 1

D

Question 2

When comparing the velocity of M2 (V2), with the velocity of M1 (V1), the evidence suggests that V2 has been __________ and V1 has been __________ over time.

A) relatively predictable; relatively predictable
B) relatively predictable; relatively unpredictable
C) relatively unpredictable; relatively predictable
D) relatively unpredictable; relatively unpredictable

Answer 2

B

Question 3

When comparing the velocity of M2 (V2), with the velocity of M1 (V1), the evidence shows that V2 has been __________ and V1 has been __________ over time.

A) relatively stable; relatively stable
B) relatively stable; relatively unstable
C) relatively unstable; relatively stable
D) relatively unstable; relatively unstable

Answer 3

B

Question 4

Statistical studies indicate that the liquidity trap

A) occurs during most recessions.
B) occurs during inflationary periods.
C) occurred only during the Great Depression.
D) has not occurred.

Question 5

Since the 1970s, the M1 demand for money has been

A) relatively stable.
B) unpredictable.
C) constant.
D) unmeasurable.

Question 6

As credit card usage expands in usage, the likely effect will be to

A) increase the velocity of M1.
B) reduce the velocity of M1.
C) increase money demand.
D) increase the money supply.

Question 7

It is true that __________ changes in velocity cause __________ changes in real GDP.

A) small; no
B) large; no
C) small; large
D) large; small

Question 8

Keynesians argue that velocity is

A) equal to the inflation rate.
B) equal to one.
C) negative.
D) unpredictable.

Question 9

Prior to the 1970s, the demand for money (M1)was

A) relatively stable.
B) unpredictable.
C) constant.
D) unmeasurable.

Question 10

When considering the velocity of money, the Federal Reserve is most concerned about its

A) stability.
B) absolute size.
C) determinants.
D) sign.

Question 11

The velocity of M2 is equal to

A) M3 minus M1.
B) GDP divided by M2.
C) GDP multiplied by M2.
D) the velocity of M1.

Question 12

The increasing attractiveness of a variety of liquid financial assets has caused the

A) velocity of M1 to rise.
B) demand for M1 to rise.
C) velocity of M1 to decline.
D) supply of M1 to decline.

Question 13

The interest elasticity of money demand is estimated to be

A) small in absolute value.
B) large in absolute value.
C) highly volatile.
D) not statistically different from zero.

Question 14

In most cases, higher interest rates cause the velocity of M1 to

A) turn negative.
B) move erratically.
C) increase.
D) decline.

Question 15

One of the reasons the velocity of M1 has risen over the long-run is

A) increased economic uncertainty.
B) growth in the money supply.
C) new techniques of cash management by corporate treasurers.
D) an increase in the demand for money.

Question 16

One of the reasons the velocity of M1 has risen over the long-run is

A) increased economic uncertainty.
B) growth in the money supply.
C) growth in personal income.
D) expanding use of credit cards.

Question 17

Empirical evidence indicates that money demand is determined by

A) interest rates and the level of GDP.
B) the inflation rate and the unemployment rate.
C) interest rates and the money supply.
D) the money supply and the level of GDP.

Question 18

Which of the following is not responsible for the post-World War II rise in M1 velocity?

A) The relatively wide historical definition of M1
B) The increasing attractiveness of other categories of financial assets
C) Attractive yield on financial assets other than money
D) The lending of money to earn higher interest rates

Question 19

The underground economy refers to

A) transactions in mineral and mining activity.
B) cash payments made in lieu of credit cards.
C) cash payments made in order to avoid documentation of taxable income.
D) hoarding of dollar bills in high-inflation countries.

Question 20

The inability of the Federal Reserve to explain movements in M1 demand has led to

A) less emphasis on money growth as a policy tool.
B) the Federal Reserve's targeting V1 growth more closely.
C) the Federal Reserve's switching to M2 and M3 targets.
D) All of the above.

Question 21

The Federal Reserve econometric model estimates that a 1 percent increase in government spending, with the money supply increased to hold the interest rate constant, will

A) increase real GDP by 3 percent in 3 years.
B) increase real GDP by 3 percent in 4 years.
C) increase real GDP by 1 percent 2 years.
D) have no effect on real GDP after 3 years.

Question 22

The Federal Reserve appears to tighten monetary policy after a trough __________ it eases policy after a peak in the business cycle.

A) sooner than
B) after about the same length of time as
C) later than
D) no sooner or later than

Question 23

The Federal Reserve econometric model estimates that a 1 percent increase in government spending, with the money supply held constant, will

A) increase real GDP by 1 percent per year for two years.
B) increase real GDP by 2 percent per year for two years.
C) decrease real GDP by 1 percent per year for two years.
D) have no effect on real GDP.

Question 24

The impact lag is the time between

A) a change in the money supply and a change in interest rates.
B) a change in the money supply and a change in GDP.
C) the use of a Federal Reserve tool and its effect on GDP.
D) the use of a Federal Reserve tool and its effect on the money supply.

Question 25

Economic models using computer simulations can provide an estimate of the

A) recognition lag.
B) decision lag.
C) bureaucratic lag.
D) impact lag.

Question 26

The Federal Reserve econometric model predicts that a 2 percent increase in the money supply will increase real GDP after one year by

A) 1 percent.
B) 2.5 percent.
C) 2 percent.
D) 10 percent.

Question 27

A Keynesian econometric model is likely to emphasize that monetary policy affects economic activity through changes in

A) the money supply.
B) reserve requirements.
C) interest rates.
D) currency holding by the public.

Question 28

The problem of getting an accurate reading on current economic developments is known as the

A) data problem.
B) recognition lag.
C) impact lag.
D) information problem.

Question 29

All of the following explain the impact lag except the time between

A) a change in the money supply and a change in interest rates.
B) a change in interest rates and a change in investment.
C) a change in investment and the change in GDP.
D) a change in the economy and the use of a tool of monetary policy.

Question 30

Empirical studies on velocity and money demand have limited usefulness for monetary policy because they often ignore

A) money supply effects.
B) interest rate effects.
C) inflation effects.
D) lags in monetary policy.

Question 31

Keynesian models involve considerable efforts to explain the determinants of

A) the money supply.
B) aggregate supply.
C) liquidity preference.
D) the demand deposit multiplier.

Question 32

When detailing the impact of monetary policy, a Keynesian econometric model is likely to emphasize the link between

A) interest rates and investment.
B) the money supply and inflation.
C) velocity and economic growth.
D) aggregate supply and the money supply.

Question 33

Crowding out is least likely to occur when deficit government spending is financed through

A) taxation.
B) reductions in consumption.
C) monetary expansion.
D) reductions in investment.

Question 34

Federal Reserve policy appears to be

A) more concerned with avoiding recession rather than preventing inflation.
B) more concerned with preventing inflation rather than avoiding recession.
C) equally concerned with avoiding recession and preventing inflation.
D) motivated by whether inflation or recession is the current problem.

Question 35

The Federal Reserve econometric model estimates that a 1 percent increase in the money supply will

A) increase real GDP by 1 percent after 3 years.
B) increase real GDP by 2 percent in 3 years.
C) increase real GDP by 3 percent 3 years.
D) have no effect on real GDP after 2 years.

Question 36

The Federal Reserve often begins to tighten monetary policy after a trough in the business cycle because of

A) the impact lag.
B) the recognition lag.
C) bureaucratic indecision.
D) the time necessary to get Congress to act.

Question 37

The __________ lag refers to the problem of getting an accurate fix on what is happening in the economy.

A) recognition
B) realization
C) impact
D) None of the above.

Question 38

The Federal Reserve econometric model estimates that it takes __________ for crowding out to reduce the impact of a 1 percent increase in government spending, with the money supply held constant, to zero.

A) 2 years
B) 3 years
C) 4 years
D) Crowding out never reduces the impact to zero.

Question 39

The consensus of major econometric models is that monetary policy has

A) no effect on real GDP.
B) an effect on real GDP only in the long run.
C) a negative effect on real GDP.
D) a substantial short-run effect on real GDP.

Question 40

A Monetarist-oriented econometric model is likely to emphasize that monetary policy affects economic activity

A) directly through changes in government spending.
B) directly through changes in the money supply.
C) indirectly through changes in velocity.
D) indirectly through changes in money demand.

Question 41

The Federal Reserve econometric model estimates that the liquidity effect an increase in the money supply will

A) lower interest rates for 6 months to a year.
B) lower interest rates permanently.
C) have no effect on interest rates.
D) raise interest rates after 6 months to a year.

Question 42

Your business' success is most likely to be affected by Federal Reserve policy if it is in the

A) defense industry.
B) health services industry.
C) restaurant industry.
D) residential construction industry.

Question 43

The St. Louis Federal Reserve Bank econometric model indicates that crowding out

A) is only partial.
B) never occurs.
C) occurs only in highly unusual circumstances.
D) is complete.

Question 44

Part of the effect of higher interest rates on residential construction is through

A) inflationary expectations.
B) credit rationing.
C) the expected value of the homes to the buyers.
D) the income effect.

Question 45

The wealth effect on consumer spending is

A) about the same as the effect on plant and equipment expenditure.
B) about the same as the effect on residential construction.
C) less than the effect on plant and equipment expenditure.
D) larger than the effect on residential construction.

Question 46

The crowding out effect of expansionary fiscal policy when the money supply is not increased is confirmed by

A) the Keynesian econometric models only.
B) the Monetarist models only.
C) both the monetarist and Keynesian econometric models.
D) neither the Monetarist nor the Keynesian econometric models.

Question 47

Approximately __________ of the impact of monetary policy on GDP after one year stems from the effective of changes in wealth on consumer spending.

A) 10 percent
B) 25 percent
C) 50 percent
D) 75 percent

Question 48

Historical evidence shows that the relationship between interest rates and investment is

A) indeterminable.
B) positive.
C) negative.
D) None of the above.

Question 49

One of the major weaknesses of the Federal Reserve Bank of St. Louis econometric model was that it

A) was large and cumbersome.
B) was limited to analyzing an economy with substantial unemployment.
C) did not specify the categories of private spending that were affected by monetary policy.
D) included a government spending multiplier that was clearly too high.

Question 50

The liquidity effect indicates that expansionary monetary policy causes

A) interest rates to fall.
B) interest rates to rise.
C) bond prices to fall.
D) inflation.

Question 51

The Federal Reserve econometric model emphasizes the impact of the wealth effect on

A) consumption.
B) government spending.
C) business investment.
D) exports.