Deck 15: Monetary Theory and Policy.

Question 1

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.

Answer 1

medium of exchange.

Question 2

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.

Answer 2

the interest rate rises.

Question 3

Which of these is a flow variable?

A) wealth
B) income
C) jewelry
D) a bank deposit
E) a foreign currency reserve

Answer 3

income

Question 4

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 5

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 6

The demand for money will be high in an economy experiencing _____

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

Question 7

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 8

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 9

Which of the following changes will shift the money demand curve 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 10

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 11

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 12

Which statement describes 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 13

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 14

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 15

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 16

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 17

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 18

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 19

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 20

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 21

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 22

Exhibit 15.1

Exhibit 15.1 shows the interest rate on the vertical axis and the quantity of money on the horizontal axis. An increase in the price level will cause a movement from _____

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

Question 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

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) The interest rate increases.
D) Aggregate expenditure increases.
E) The demand for money decreases.

Question 31

Exhibit 15.1

Exhibit 15.1 shows the interest rate on the vertical axis and the quantity of money on the horizontal axis. An increase in the interest rate will cause a movement from _____

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

Question 32

Exhibit 15.1

Exhibit 15.1 shows the interest rate on the vertical axis and the quantity of money on the horizontal axis. A decrease in nominal GDP with no change in the price level will cause a movement from _____

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

Question 33

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 34

Exhibit 15.1

Exhibit 15.1 shows the interest rate on the vertical axis and the quantity of money on the horizontal axis. An increase in the level of real GDP will cause a movement from _____

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

Question 35

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 36

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 37

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 tastes and preferences

Question 38

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 39

If the quantity of money supplied exceeds the quantity of money demanded at a given point in time, _____

A) the price level in the economy will fall.
B) the equilibrium interest rate will increase.
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 40

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 41

Exhibit 15.3

Exhibit 15.3 shows equilibrium in a money market. The vertical supply curve Sm implies that _____

A) the quantity of money supplied is independent of the interest rate.
B) the quantity of money supplied is dependent on the interest rate.
C) the quantity of money demanded is independent of the interest rate.
D) the quantity of money demanded is dependent on the interest rate.
E) money supply and money demand are dependent on each other.

Question 42

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 43

Exhibit 15.2

Exhibit 15.2 shows equilibrium in a money market. If S is the supply curve, the equilibrium interest rate and quantity of money will be _____

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 44

In the short run, money affects the economy through _____

A) changes in GDP.
B) changes in money demand.
C) changes in money supply.
D) changes in interest rates.
E) changes in price levels.

Question 45

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

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

Question 46

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.

Question 47

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

Question 48

Exhibit 15.3

Exhibit 15.3 shows equilibrium in a money market. What happens if the money supply curve shifts from S to S'_m while the rate of interest remains at i?

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 49

Exhibit 15.3

Exhibit 15.3 shows equilibrium in a money market. What happens if the money supply curve shifts from S'_m to Sm while the rate of interest remains at I'?

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 50

Exhibit 15.2

Figure 15.2 shows equilibrium in a money market. If S is the initial supply curve, the movement from S to S* can be attributed to _____

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 51

Monetary policy influences the market interest rate, which in turn affects _____

A) investment, a component of aggregate demand.
B) government spending, a component of aggregate demand.
C) consumption, a component of aggregate demand.
D) net exports, a component of aggregate demand.
E) employment and price levels.

Question 52

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 53

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

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

Question 54

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 55

Exhibit 15.2

Exhibit 15.2 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 _____

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 56

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 57

Exhibit 15.3

Exhibit 15.3 shows equilibrium in a money market. What determines the equilibrium interest rate, i?

A) the intersection of the demand for money D_m with the supply of money S'_m.
B) the intersection of the demand for money D_m with the supply of money S_m.
C) the intersection of the demand for money S_m with the supply of money D_m.
D) the intersection of the demand for money S'_m with the supply of money D_m.
E) the discount rate at the Federal Reserve

Question 58

Exhibit 15.2

Exhibit 15.2 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"?

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 59

Exhibit 15.2

Exhibit 15.2 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"?

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 60

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 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

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 63

Given an upward sloping aggregate supply curve, which of the following changes in the aggregate demand curve is observed when the Fed reduces the money supply?

A) The aggregate demand curve shifts leftward, lowering real GDP and the price level.
B) The aggregate demand curve shifts leftward, raising real GDP and the price level.
C) The aggregate demand curve shifts leftward, lowering real GDP but raising the price level.
D) The aggregate demand curve shifts rightward, raising real GDP and the price level.
E) The aggregate demand curve shifts rightward, lowering real GDP but raising the price level.

Question 64

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 price level.
E) interest rates must be sensitive to changes in the price level.

Question 65

As a result of an 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.

Question 66

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 no impact on the quantity of money demanded.
C) will have no effect on the aggregate demand of an economy.
D) will have a major impact on the aggregate demand of an economy.
E) will have a major impact on the price level in an economy.

Question 67

If the Fed sells U.S. government securities to drain reserves from banks, which of the following is most likely to 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.

Question 68

The ultimate effect of a reduction in the money supply is _____

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) a movement upward along the short-run aggregate supply curve.

Question 69

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 70

Monetary policy will be effective in changing the gross domestic product of a nation only if _____

A) planned investment expenditures are autonomous.
B) planned investment expenditures are sensitive to interest rates.
C) interest rates are unresponsive to changes in money supply.
D) interest rates are sensitive to changes in the price level.
E) planned investment expenditures are not sensitive to interest rates.

Question 71

If the Fed sells U.S. government securities in the open market, 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 72

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 73

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 74

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 75

To eliminate a recessionary gap, the Fed can _____

A) increase the money supply, as it will increase the interest rate and investment.
B) increase the money supply, as it will decrease the interest rate and increase investment.
C) decrease the money supply, as it will increase the interest rate and investment.
D) decrease the money supply, as it will decrease the interest rate and investment.
E) decrease the money supply, as it will increase the interest rate and decrease investment.

Question 76

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.

Question 77

An increase in investment can lead to a greater increase in aggregate demand if the value of the spending multiplier is _____

A) greater than 1.
B) less than 1 but more than zero.
C) negative.
D) exactly equal to zero.
E) exactly equal to one.

Question 78

If the Fed adopts a contractionary monetary policy, eventually we can 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.

Question 79

Which of the following monetary policies would be appropriate to close a recessionary gap?

A) a tax cut
B) a decrease in government purchases
C) an increase in reserve requirements
D) the Fed purchasing U.S. government securities
E) the Fed raising the discount rate

Question 80

Identify the correct statement about changes in money supply.

A) A decrease in money supply causes interest rates to fall.
B) A decrease in money supply causes investment spending to increase.
C) A decrease in money supply causes gross domestic product to increase.
D) A decrease in money supply causes investment spending to decrease.
E) A decrease in money supply causes aggregate expenditure to increase.