Question 1

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

Accepted Answer

If money demand increases and the Fed attempts to keep interest rates stable, the only option is to increase the money supply. This can be done through open market operations where the Fed purchases government securities from banks, thus injecting cash into the banking system and increasing the money supply.

Question 2

Exhibit 15-4 -If the Fed is targeting interest rates and money demand shifts from D_m to D_m' in Exhibit 15-4,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 D_m to restore its target of i

Accepted Answer

When money demand shifts from DS1U1B1mS1U1B0 to DS1U1B1mS1U1B0', the interest rate rises to i'. The Fed targets interest rates, so it needs to increase the money supply to restore its target of i. This would shift the money supply curve to the right, back to S1U1B0. Increasing the money supply will lower the interest rate from i' back to i, which is the Fed's target. Therefore, the best choice is D.

Question 3

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

Accepted Answer

When the demand for money increases, it means that people want to hold more money relative to other assets. This can lead to an increase in interest rates as people compete to borrow money. In response, the Federal Reserve can increase the money supply to meet the demand and keep interest rates stable. This action will alleviate pressure on interest rates and help maintain economic stability. Therefore, the best response from the Federal Reserve is to increase the money supply.

Question 4

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

Accepted Answer

When the growth rate of the money supply just matches the growth in the demand for money, there is no excess of money chasing after relatively fewer goods and services. As a result, interest rates can remain stable during economic expansions. If the growth rate of the money supply exceeds the growth in the demand for money, it can lead to inflation and higher interest rates. If the growth rate of the money supply is less than the growth in the demand for money, it can lead to deflation and lower interest rates. A growth rate of zero in the money supply is unlikely to be feasible or desirable, as it could lead to a lack of liquidity in the economy. Matching the growth in nominal GDP does not necessarily ensure stable interest rates, as it does not account for changes in the demand for money.

Question 5

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

Accepted Answer

The traditional role of the Federal Reserve is to control the money supply. Attempting to control interest rates directly can have unintended consequences and is not always effective in achieving desired economic outcomes. By controlling the money supply, the Fed can indirectly influence interest rates. Therefore, it is generally agreed that the Fed should focus on controlling the money supply rather than attempting to control interest rates directly.

Question 6

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.

Accepted Answer

The answer of Which of the following statements about the...

Question 7

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

Accepted Answer

When the Fed targets the interest rate, it adjusts the money supply to maintain that target rate. This can lead to reinforcing fluctuations in economic activity because in times of economic boom, the Fed might lower interest rates to prevent overheating, which can further boost economic activity, and in times of recession, it might reduce rates to stimulate the economy, potentially leading to more pronounced cycles.

Question 8

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

Accepted Answer

The answer of If the Federal Reserve is targeting the...

Question 9

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

Accepted Answer

If the money supply grows at the same rate as money demand during economic expansions, it will help to maintain stable interest rates. If the money supply grows at a slower rate than money demand, interest rates will tend to rise, while if it grows at a faster rate than money demand, interest rates will tend to fall. Decreasing the money supply would also lead to higher interest rates during expansions.

Question 10

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

Accepted Answer

Both fixing the interest rate and fixing the money supply can have advantages and disadvantages, depending on the economic circumstances. For example, if there is a sudden economic shock that causes a decrease in demand for money, fixing the interest rate could lead to inflation as the money supply is increased to make up for the decrease in demand. On the other hand, fixing the money supply could lead to a decrease in spending and investment if interest rates are too high or too low. Therefore, the best choice would be to have flexibility to use both tools as needed and adjust policies based on the current economic situation.

Question 11

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

Accepted Answer

The answer of For interest rates to remain stable during...

Question 12

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.

Accepted Answer

The answer of Suppose the money demand curve shifts rightward.Which...

Question 13

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

Accepted Answer

If interest rates are to remain constant, changes in money demand will require a corresponding change in the money supply. For example, if there is an increase in money demand due to an increase in economic activity, the money supply should also increase to maintain interest rates constant. Similarly, if money demand decreases, the money supply should decrease as well to maintain interest rates constant.

Question 14

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

Accepted Answer

The period of October 1979 to October 1982 was notable for the emphasis placed on controlling the money supply during that period, which was a key component of monetary policy. This was known as the "monetarist experiment," and was led by Federal Reserve Chairman Paul Volcker. The goal was to reduce inflation, which had been rising rapidly, by controlling the growth of the money supply. This period was marked by high interest rates and a deep recession, but eventually led to a reduction in inflation and a more stable economy in the long run.

Question 15

Exhibit 15-4 -If the Fed is targeting the money supply and the money demand shifts from D_m to D_m' in Exhibit 15-4,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 D_m to restore its target of i

Accepted Answer

The answer of Exhibit 15-4 
-If the Fed is targeting...

Question 16

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

Accepted Answer

The Fed announced its focus on specified targets for growth of the money supply in October 1979, a strategy known as monetarism. This approach aimed to limit inflation by controlling the growth of the money supply.

Question 17

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

Accepted Answer

The answer of Suppose that the demand and supply of...

Question 18

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

Accepted Answer

The answer of If money demand increases and the Fed...

Question 19

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

Accepted Answer

Those who argue against interest rate targets for monetary policy claim that the necessary changes in money supply reinforce business cycles. In other words, manipulating interest rates to achieve certain economic goals can have unintended consequences that actually exacerbate economic fluctuations.

Question 20

If the Fed is targeting the money supply,it loses control over the interest rate.

Accepted Answer

When the Fed targets the money supply, it controls how much money is available in the economy for lending and borrowing. However, the interest rate is determined by the supply and demand for money in the economy. As a result, if the Fed is targeting the money supply, it may not be able to control the interest rate effectively.

Quiz 16: Monetary Theory and Policy

If money demand increases and the Fed attempts to keep interest rates stable,then

Exhibit 15-4 -If the Fed is targeting interest rates and money demand shifts from Dm to Dm' in Exhibit 15-4,the Fed will

If the Federal Reserve is targeting the interest rate when the demand for money increases,their proper response is to

For interest rates to remain stable during economic expansions,the growth rate of the money supply should

There is considerable disagreement about whether the Fed should

Which of the following statements about the velocity of money in the U.S.is correct?

If the Fed targets the interest rate,then

If the Federal Reserve is targeting the money supply when the demand for money decreases,their proper response is to

For interest rates to remain stable during economic expansions,the money supply should

If the Fed had to choose between fixing the interest rate and fixing the supply of money,it would

For interest rates to remain stable during economic contractions,monetary authorities should

Suppose the money demand curve shifts rightward.Which of the following is true about the Fed's options?

If interest rates are to remain constant,the money supply should change

In the history of monetary policy,the period of October 1979 to October 1982 was notable for

Exhibit 15-4 -If the Fed is targeting the money supply and the money demand shifts from Dm to Dm' in Exhibit 15-4,the Fed will

In October 1979 the Fed announced that it would focus on

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

If money demand increases and the Fed does not alter its monetary policy,then

Those who argue against interest rate targets for monetary policy claim that

If the Fed is targeting the money supply,it loses control over the interest rate.

Exhibit 15-4 -If the Fed is targeting interest rates and money demand shifts from D_m to D_m' in Exhibit 15-4,the Fed will

Exhibit 15-4 -If the Fed is targeting the money supply and the money demand shifts from D_m to D_m' in Exhibit 15-4,the Fed will