Question 1

If a dollar of money is used 5 times in transactions in an economy over the course of a year and the supply of money is $120 billion, what is the volume of total spending in the economy?
A)$5 billion
B)$600 billion
C)$240 billion
D)$20 billion

Accepted Answer

The formula for calculating the volume of total spending in an economy is:

Total Spending = Money Supply x Velocity of Money

Velocity of Money is the number of times a unit of currency is spent in an economy in a given time period, which is 5 in this case.

Therefore, Total Spending = $120 billion x 5 = $600 billion.

Thus, the correct answer is B, $600 billion.

Question 2

The Fed eases policy when it
A)decreases both the money growth and the federal funds rate.
B)decreases the money growth and increases the federal funds rate.
C)increases both the money growth and the federal funds rate.
D)increases the money growth and decreases the federal funds rate.

Accepted Answer

When the Fed eases its policy, it tries to stimulate economic growth by increasing the money supply and lowering interest rates. Therefore, the best choice is D, which states that the Fed increases the money growth and decreases the federal funds rate. This combination of policies is consistent with an expansionary monetary policy.

Question 3

Which of the following is an useful indicator of the stance of monetary policy?
A)The income tax rate
B)​The federal funds rate
C)​The exchange rate
D)The rate of unemployment

Accepted Answer

The federal funds rate is the interest rate at which banks lend and borrow reserves from each other overnight. It is set by the Federal Reserve and is one of the primary tools used to implement monetary policy. Therefore, changes in the federal funds rate are a useful indicator of the stance of monetary policy. The other options (income tax rate, exchange rate, and unemployment rate) are influenced by a variety of factors beyond just monetary policy and are not as directly tied to the Federal Reserve's actions.

Question 4

When a central bank decreases money growth, the bank is said to_______ monetary policy.
A)tighten
B)loosen
C)?destabilize
D)ease

Accepted Answer

When a central bank decreases money growth, it is implementing a contractionary monetary policy, which is also called a tight monetary policy. This is because it tightens the money supply by decreasing the amount of money circulating in the economy.

Question 5

Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?​
A)The economy will enter into a recession.
B)​The level of economic activity will increase.
C)The actual inflation rate will rise.
D)The federal funds rate will fall.

Accepted Answer

If people expect the inflation rate to be high, it means they anticipate prices to rise. If the central bank follows a tight monetary policy, it means they are reducing the money supply, which will cause interest rates to rise. As a result, borrowing becomes more expensive and spending will decrease. This leads to a reduction in economic growth and a possible recession.

Question 6

If the money supply is $300 billion, the price level is 1.3, and the real output is 1,300 billion, what is the velocity of money?
A)0.33
B)3
C)5.63
D)300,000

Accepted Answer

Velocity of money = (Money supply * Price level) / Real output= (300 * 1.3) / 1,300= 5.63

Question 7

People know that the Fed has the incentive to announce that the inflation rate will be 3 percent next year, so people will build 3 percent inflation into their wage negotiations.But then the Fed has the incentive to increase inflation above 3 percent to make the economy grow faster.This type of phenomenon is known as
A)inflation targeting.
B)time inconsistency.
C)McCallum's rule.
D)an expectations trap.

Accepted Answer

This phenomenon is called time inconsistency, which refers to the situation where a policy may seem optimal at the time it's announced, but in practice, the policy may not be optimal anymore due to people's reactions to it. In this case, the Fed may want to increase inflation to boost economic growth, but if people have already built the expectation of 3 percent inflation into their wage negotiations, the actual inflation rate may end up being higher than what is desirable for the economy.

Question 8

When a central bank increases money growth, the bank is said to _____policy.
A)restrict
B)tighten
C)destabilize
D)ease

Accepted Answer

When a central bank increases money growth, it is said to be easing monetary policy. This is because increasing the money supply makes borrowing cheaper, which encourages spending and investment, leading to an overall increase in economic activity.

Question 9

If the velocity of money is 8.2, the money supply is $223 billion, and real output is $958 billion, what is the price level?
A)0.5
B)0.8
C)1.7
D)1.9

Accepted Answer

The answer of If the velocity of money is 8.2,...

Question 10

The equation that says money times velocity equals total spending is known as
A)the national income identity.
B)purchasing-power parity.
C)a covenant.
D)the equation of exchange.

Accepted Answer

The equation that relates money, velocity, and total spending is known as the equation of exchange, which shows that total spending in an economy is determined by the amount of money in circulation multiplied by the velocity of money. The other options (A, B, and C) are not related to this equation. The national income identity refers to the equality between national income and national output, while purchasing-power parity refers to the idea that exchange rates should adjust to equalize the prices of goods and services in different countries, and a covenant is a type of contractual agreement.

Question 11

If velocity of money is 6, the price level is 1.2, and real output is worth $1,100 billion, what is the money supply?
A)$65 billion
B)$153 billion
C)$220 billion
D)$5,500 billion

Accepted Answer

Using the equation of exchange: 
MV = PQ 
where M is the money supply, V is velocity, P is the price level, and Q is real output.

Plugging in the given values: 
6M = 1.2(Q) 
6M = 1.2($1,100 billion) 
6M = $1,320 billion 
M = $220 billion

Therefore, the answer is choice C.

Question 12

When the central bank chooses a policy at one date, which leads people to make decisions based on that policy, which then causes the central bank to choose a different policy at a later date, then there is said to be
A)irrational expectations.
B)time inconsistency.
C)a liquidity trap.
D)an expectations trap.

Accepted Answer

This situation is referred to as time inconsistency, as the central bank's policy at the initial date causes people to make certain decisions, which make the initial policy less effective or undesirable at a later date, leading the central bank to choose a different policy.

Question 13

The systematic setting of policy according to a formula is known as
A)credibility.
B)an expectations trap.
C)discretionary policy.
D)a rule for monetary policy.

Accepted Answer

The systematic setting of policy according to a formula is known as a rule for monetary policy. This approach is often used by central banks to increase transparency and credibility in their decision-making process. By committing to a specific formula, the central bank can signal its commitment to achieving its economic objectives and provide guidance to markets and the public on its future actions.

Question 14

From 1991 to 2001, Argentina established commitment by
A)following the Taylor rule.
B)following a strict money growth rule.
C)establishing a currency board.
D)using a system of inflation targeting.

Accepted Answer

From 1991 to 2001, Argentina established a currency board, which fixed the peso's value to the U.S. dollar at a one-to-one ratio. The system required the central bank to hold a corresponding amount of U.S. dollars in reserves for every peso in circulation. This led to a period of stability, low inflation, and economic growth in the country.

Question 15

Monetarists think that
A)money growth is closely related to inflation in the long run.
B)money demand is unstable in the long run.
C)the central should focus on short run economic fluctuations.
D)the central bank should rely on discretionary policy making.

Accepted Answer

Monetarists believe that there is a strong relationship between the growth of the money supply and inflation in the long run. They argue that excessive money creation by the central bank will eventually lead to inflation, and therefore advocate for a strict control of the money supply. Monetarists also tend to favor rules-based rather than discretionary monetary policy, in order to avoid the potential for political interference or short-termism in decision-making.

Question 16

The average number of times a dollar of money is used for transactions over the course of a year is referred to as the
A)money multiplier.
B)velocity of money.
C)money growth rate.
D)extent of exchange.

Accepted Answer

The average number of times a dollar of money is used for transactions over the course of a year is called the velocity of money. This measure reflects the frequency with which money changes hands within the economy and is an important determinant of overall economic activity.

Question 17

If monetary policy is not set by a rule, it is said to be set by
A)randomization.
B)discretion.
C)credibility.
D)destabilization.

Accepted Answer

When monetary policy is not set by a rule, it is left to the discretion of the central bank or monetary authority. This gives them the flexibility to adjust policy in response to changing economic conditions, but can also lead to inconsistency and uncertainty in the markets if the decisions are not communicated clearly or if the central bank's credibility is called into question. Randomization, credibility, and destabilization are not typically used to describe the setting of monetary policy.

Question 18

Total spending divided by the money supply equals
A)the reserve requirement.
B)the transactions demand for money.
C)the money multiplier.
D)the velocity of money.

Accepted Answer

This is the equation for the velocity of money, which measures the speed at which money changes hands in the economy. It is calculated as total spending divided by the money supply.

Question 19

If the velocity of money in an economy is 7.5, money supply is $350 billion, and the price level is 1.5, the real output is worth
A)​$1,750 billion
B)​$1,200 billion
C)​$2625 billion
D)​$5250 billion

Accepted Answer

Real output is calculated using the equation MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real output.

Plugging in the given values,

350 billion x 7.5 = 1.5 x Q

Q = (350 billion x 7.5)/1.5

Q = $1,750 billion.

Therefore, the real output is $1,750 billion.

Question 20

The Fed is said to tighten policy when it
A)decreases both the money growth and the federal funds rate.
B)decreases the money growth and increases the federal funds rate.
C)increases both the money growth and the federal funds rate.
D)increases the money growth and decreases the federal funds rate.

Accepted Answer

Tightening policy refers to the Fed's actions to reduce the rate of growth of the money supply and increase the interest rate, known as the federal funds rate. Therefore, option B, which describes a decrease in money growth and an increase in the federal funds rate, is the correct answer.

Quiz 18: Rules for Monetary Policy

If a dollar of money is used 5 times in transactions in an economy over the course of a year and the supply of money is $120 billion, what is the volume of total spending in the economy?

The Fed eases policy when it

Which of the following is an useful indicator of the stance of monetary policy?

When a central bank decreases money growth, the bank is said to_______ monetary policy.

Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?​

If the money supply is $300 billion, the price level is 1.3, and the real output is 1,300 billion, what is the velocity of money?

When a central bank increases money growth, the bank is said to _____policy.

If the velocity of money is 8.2, the money supply is $223 billion, and real output is $958 billion, what is the price level?

The equation that says money times velocity equals total spending is known as

If velocity of money is 6, the price level is 1.2, and real output is worth $1,100 billion, what is the money supply?

When the central bank chooses a policy at one date, which leads people to make decisions based on that policy, which then causes the central bank to choose a different policy at a later date, then there is said to be

The systematic setting of policy according to a formula is known as

From 1991 to 2001, Argentina established commitment by

Monetarists think that

The average number of times a dollar of money is used for transactions over the course of a year is referred to as the

If monetary policy is not set by a rule, it is said to be set by

Total spending divided by the money supply equals

If the velocity of money in an economy is 7.5, money supply is $350 billion, and the price level is 1.5, the real output is worth

The Fed is said to tighten policy when it

Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?