Question 1

Money is assumed to earn
A) no interest at all, being just currency in hand.
B) in checkable deposit form a rate below "the interest rate."
C) in checkable deposit form a rate equal to "the interest rate."
D) in checkable deposit form a rate above "the interest rate."

Accepted Answer

Money held in checkable deposits typically earns interest rates below "the interest rate" set by the Federal Reserve. This is because checkable deposits are considered to be a more liquid form of money and therefore do not need to offer as high of an interest rate to attract depositors.

Question 2

Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P) = 600. Should Y fall to 3,900, the same quantity of real money balances
A) will not be demanded under any conditions.
B) will be demanded again provided the interest rate does not change.
C) will be demanded again provided the interest rate rises by a certain amount.
D) will be demanded again provided the interest rate falls by a certain amount.

Accepted Answer

The answer of Suppose that Y = 4,000 and we...

Question 3

"Real money balances" refers to
A) the currency part of the total money supply.
B) the money supply divided by the price level.
C) the money supply times one minus the interest rate.
D) the non-interest-earning part of the money supply.

Accepted Answer

Real money balances refer to the purchasing power of the money supply, which is calculated by dividing the nominal money supply by the price level. This adjusts the nominal amount of money for the effects of inflation or deflation, providing a measure of the quantity of goods and services that can be purchased with the money supply.

Question 4

In the early stages of macroeconomic model building, the money supply is regarded as a policy ________ that is under ________ control by the Federal Reserve.
A) goal, perfect
B) goal, imperfect
C) instrument, perfect
D) instrument, imperfect

Accepted Answer

In the early stages of macroeconomic model building, the money supply is regarded as a policy instrument, meaning it is a tool used by policymakers (in this case, the Federal Reserve) to achieve their economic objectives. It is considered to be under perfect control by the Federal Reserve, implying that the Fed can precisely adjust the money supply to influence economic conditions as desired.

Question 5

Suppose that banks pay 4 percent interest on checking accounts while U.S. Savings Bonds pay 6 percent interest. Under these conditions
A) no nonmonetary assets are willingly held.
B) a combination of money and nonmonetary assets are willingly held.
C) no money balances are willingly held.
D) we do not have sufficient information to tell whether or not any money balances are willingly held.

Accepted Answer

If banks pay 4 percent interest on checking accounts and U.S. Savings Bonds pay 6 percent interest, some people may choose to hold a combination of both money and nonmonetary assets. They may opt to keep some money in checking accounts for convenience and immediate access to funds, while investing the rest in U.S. Savings Bonds to earn a higher rate of return. Therefore, a combination of money and nonmonetary assets is willingly held.

Question 6

Along a downward-sloping money demand schedule, as the interest rate falls
A) the quantity of money demanded falls.
B) the quantity of money demanded rises.
C) real income rises.
D) real income falls.

Accepted Answer

Along a downward-sloping money demand schedule, as the interest rate falls, the opportunity cost of holding money decreases and therefore people demand more money, resulting in an increase in the quantity of money demanded.

Question 7

An increase in real GDP causes the demand for real money balances to
A) rise.
B) fall.
C) remain unaffected.
D) rise, fall, or remain unaffected depending on the interest rate at the time.

Accepted Answer

An increase in real GDP generally leads to an increase in income and spending, which in turn leads to an increase in the demand for real money balances as people need more money to make transactions.

Question 8

From any point above the current LM curve, money market equilibrium can be restored by some combination of a ________ income and a ________ interest rate.
A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower

Accepted Answer

To restore money market equilibrium from any point above the current LM curve, we need to reduce the excess supply of money. This can be achieved by increasing income, which increases the demand for money, or by decreasing the interest rate, which increases the quantity of money demanded. Thus, a combination of higher income and lower interest rate (choice B) is the most appropriate answer.

Question 9

At all points below the current LM curve,
A) the supply of output exceeds output demand.
B) the supply of output falls short of output demand.
C) the supply of money falls short of money demand.
D) the supply of money exceeds money demand.

Accepted Answer

Below the LM curve, the demand for money exceeds the supply, as the LM curve represents equilibrium in the money market where money supply equals money demand.

Question 10

In deriving LM curves, holding the real money supply constant while raising real GDP causes us to
A) trace up along an LM curve.
B) trace down along an LM curve.
C) shift the LM curve to the right.
D) shift the LM curve to the left.

Accepted Answer

Holding the real money supply constant means that the interest rate remains the same. Therefore, an increase in real GDP leads to an increase in the demand for money, which results in the interest rate rising to equilibrate the money market. This increase in the interest rate causes a movement up along the existing LM curve.

Question 11

Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P) = 600. Should Y rise to 4,200, the same quantity of real money balances
A) will not be demanded under any conditions.
B) will be demanded again provided the interest rate does not change.
C) will be demanded again provided the interest rate rises by a certain amount.
D) will be demanded again provided the interest rate falls by a certain amount.

Accepted Answer

When income (Y) increases, for the same quantity of real money balances to be demanded, the interest rate must rise. This is because higher income typically increases the demand for money for transaction purposes, which can be offset by a higher interest rate, making holding money less attractive compared to other assets.

Question 12

The LM curve is the set of combinations of ________ such that ________.
A) interest rates and real money balances, real income equals real money balances times (1/r)
B) interest rates and real money balances, the money supply is equally demanded
C) real income and real money balances, the production of output is equally demanded
D) real income and interest rates, the production of output is equally demanded
E) real income and interest rates, the money supply is equally demanded

Accepted Answer

The LM curve represents combinations of real income and interest rates where the demand for money equals the supply of money.

Question 13

Suppose that we are at a point on the money demand schedule where (M/P) = 500. At a constant interest rate, the quantity of money demanded increases when real income ________ so that ________.
A) rises, the money demand schedule shifts to the right
B) rises, the money demand schedule shifts to the left
C) rises, we move downward along the money demand schedule
D) falls, the money demand schedule shifts to the left
E) falls, we move upward along the money demand schedule

Accepted Answer

When real income rises, people demand more money for transactions, leading to a rightward shift in the money demand schedule.

Question 14

Moving upward along an LM curve, ________ quantity of real money balances is equally demanded as higher real incomes are accompanied by ________ interest rates.
A) an increasing, rising
B) an increasing, falling
C) a decreasing, falling
D) a constant, rising
E) a constant, falling

Accepted Answer

The answer of Moving upward along an LM curve, ________...

Question 15

In deriving an LM curve, higher incomes shift the money demand schedule to the ________, yet the unchanged real money supply continues to be equally demanded so long as the interest rate ________.
A) right, rises
B) right, falls
C) left, rises
D) left, falls

Accepted Answer

Higher incomes lead to higher transactions demand for money, which shifts the money demand curve to the right. Since the real money supply is fixed, the equilibrium interest rate must rise to equate the demand for and supply of real money balances. Thus, the LM curve shifts to the right.

Question 16

A decrease in real GDP causes
A) movement downward along a money demand schedule.
B) movement upward along a money demand schedule.
C) a rightward shift of the money demand schedule.
D) a leftward shift of the money demand schedule.

Accepted Answer

A decrease in real GDP leads to a decrease in income and spending, which decreases the demand for money. Thus, the demand for money curve shifts to the left, resulting in a leftward shift of the money demand schedule.

Question 17

The money supply consists of
A) currency alone.
B) currency and checking accounts.
C) checking and savings accounts.
D) currency and checking and savings accounts.
E) checking accounts alone.

Accepted Answer

The money supply typically includes both currency (physical cash and coins) and checking accounts, as these are the most liquid forms of money that can be quickly and easily used for transactions.

Question 18

Which variable is assumed to remain exogenous in all the models constructed in Chapters 3 and 4?
A) the money supply
B) the interest rate
C) the price level
D) the equilibrium GDP
E) autonomous consumption

Accepted Answer

The answer of Which variable is assumed to remain exogenous...

Question 19

On a money demand diagram with the interest rate on the vertical axis, the real money balance demand schedule would be a vertical line under the assumption that
A) a lower interest rate raises the demand for real money.
B) a lower interest rate lowers the demand for real money balances.
C) the interest rate has no effect on the demand for real money balances.
D) balances.
E) a higher real GDP raises the demand for real money balances.

Accepted Answer

According to the assumption given in the question, the interest rate has no effect on the demand for real money balances. Therefore, the real money demand schedule would be a vertical line, indicating that the quantity demanded of real money balances is fixed at any given interest rate.

Question 20

Holding nonmonetary assets and converting them to money when necessary is justifiable so long as
A) nonmonetary assets pay an interest rate above that available on money.
B) nonmonetary assets pay an interest rate below that available on money.
C) money, and not nonmonetary assets, are generally used in transactions.
D) money and nonmonetary assets are both used as bartering items.

Accepted Answer

The answer of Holding nonmonetary assets and converting them to...

Quiz 4: Monetary and Fiscal Policy in the Is-Lm Model

Money is assumed to earn

Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P) = 600. Should Y fall to 3,900, the same quantity of real money balances

"Real money balances" refers to

In the early stages of macroeconomic model building, the money supply is regarded as a policy that is under control by the Federal Reserve.

Suppose that banks pay 4 percent interest on checking accounts while U.S. Savings Bonds pay 6 percent interest. Under these conditions

Along a downward-sloping money demand schedule, as the interest rate falls

An increase in real GDP causes the demand for real money balances to

From any point above the current LM curve, money market equilibrium can be restored by some combination of a income and a interest rate.

At all points below the current LM curve,

In deriving LM curves, holding the real money supply constant while raising real GDP causes us to

Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P) = 600. Should Y rise to 4,200, the same quantity of real money balances

The LM curve is the set of combinations of such that .

Suppose that we are at a point on the money demand schedule where (M/P) = 500. At a constant interest rate, the quantity of money demanded increases when real income so that .

Moving upward along an LM curve, quantity of real money balances is equally demanded as higher real incomes are accompanied by interest rates.

In deriving an LM curve, higher incomes shift the money demand schedule to the , yet the unchanged real money supply continues to be equally demanded so long as the interest rate .

A decrease in real GDP causes

The money supply consists of

Which variable is assumed to remain exogenous in all the models constructed in Chapters 3 and 4?

On a money demand diagram with the interest rate on the vertical axis, the real money balance demand schedule would be a vertical line under the assumption that

Holding nonmonetary assets and converting them to money when necessary is justifiable so long as