Deck 25: Monetary Policy,interest Rates,and Economic Activity

Question 1

Over the last 45 years,the price level has

A) been cut in half.
B) remained constant.
C) doubled.
D) risen fivefold.
E) risen and fallen frequently.

Answer 1

D

Question 2

The quantity of money demanded varies inversely with

A) the level of real GDP.
B) the interest rate.
C) bond prices.
D) the level of intended spending.
E) the price level.

Answer 2

B

Question 3

Holding money because of uncertainty concerning the future is called the ________ demand for money.

A) precautionary
B) speculative
C) transactions
D) aggregate
E) penultimate

Answer 3

A

Question 4

The amount of money held for speculative reasons

A) increases if bond prices are expected to decline soon.
B) decreases if GDP remains the same.
C) is affected by expected bond prices but not by expected bond interest rates.
D) varies directly with the transactions demand for money.
E) decreases as the number of different assets counted as fiat money rises.

Question 5

The transactions demand for money

A) reflects the need for money in the event of unpredictable occurrences.
B) is of major importance in a barter economy.
C) decreases as household income increases.
D) reflects expectations of lower stock and bond prices.
E) increases as real GDP rises.

Question 6

In the United States,the quantity of money is determined

A) entirely by commercial banks through their lending procedures.
B) entirely by the public through their willingness to hold currency.
C) primarily by the amount of gold flowing into or out of the country.
D) primarily by Congress, which legislates the amount of money to be printed by the Treasury.
E) primarily by the Federal Reserve but to some degree by the private sector.

Question 7

The fact that there is NO notation on a $10 bill about what the government will give in exchange for it is an indication that

A) the note is not legal tender.
B) our paper currency no longer has much value.
C) the Fed has issued more money than the economy can handle.
D) the value of money has little to do with its intrinsic value.
E) the government does not want people to hoard money.

Question 8

The money supply exerts an influence on GDP and thus on unemployment by affecting

A) the volume of government tax revenues.
B) total intended spending.
C) the rate of change in labor force participation.
D) the profitability of banking institutions.
E) the mix between currency and demand deposits.

Question 9

Holding money to fund current purchases is called the ________ demand for money.

A) precautionary
B) speculative
C) transactions
D) aggregate
E) penultimate

Question 10

The current value of U.S.currency depends on

A) the price level.
B) interest rates.
C) the velocity of circulation rate.
D) the value assigned to it by the Fed.
E) its gold content.

Question 11

If the price level were to rise,people would find that to purchase the same goods and services as before,they would need

A) higher interest rates.
B) consumer surpluses.
C) greater money balances.
D) functional finance.
E) special drawing rights.

Question 12

Our money has value because

A) it is backed by gold.
B) its supply is unlimited.
C) it is guaranteed by banks.
D) people accept it in payment for goods and services.
E) it is the result of public and private debt.

Question 13

The value of a dollar

A) has steadily declined since the Revolutionary War.
B) is determined by the amount of gold held by the government.
C) is inversely related to the price level.
D) is set by government fiat.
E) depends on the mix of money and near money.

Question 14

If prices double,the value of a dollar would

A) double.
B) remain the same (be unaffected).
C) be halved.
D) decline by twice that amount.
E) fall to zero.

Question 15

The opportunity cost of holding idle money balances

A) increases as bond prices rise.
B) increases as interest rates rise.
C) decreases as profit rates rise.
D) allows individuals to benefit from rapid inflation.
E) is nonexistent for most high-income households.

Question 16

In addition to the level of real GDP,the transactions demand for money is positively related to the

A) capital output ratio.
B) exchange rate.
C) expected rate of return.
D) interest rate.
E) price level.

Question 17

Many economists today agree that many of the recessions of the twentieth century can be traced to

A) significant reductions in the rate of growth of the money supply.
B) consumers' efforts to save more money than their incomes would allow.
C) faulty investments by both firms and consumers.
D) falling interest rates.
E) increases in aggregate demand and supply.

Question 18

Periods of inflation are generally characterized by a decline in

A) the value of money.
B) the price level.
C) total intended spending.
D) nominal GDP.
E) the supply of money.

Question 19

Severe inflations often result when

A) the economy is in a serious depression.
B) governments excessively increase the money supply.
C) price levels are falling.
D) the value of money rises rapidly.
E) the public's desire to hold money balances increases.

Question 20

In general,when people hold excess money balances,they

A) use them to bid up interest rates.
B) hoard them indefinitely.
C) use them to buy financial assets.
D) supplement them by borrowing.
E) use them to force down the prices of stocks and bonds.

Question 21

The income velocity of circulation refers to the

A) turnover of money.
B) current interest rate.
C) rate of inflation.
D) speed with which economic recovery is realized.
E) nominal GDP divided by real GDP.

Question 22

Holding interest rates and the price level constant,a direct (upward-sloping)relationship exists between the quantity of money demanded and the

A) level of real GDP.
B) interest rate.
C) price of money.
D) angle of the 45-degree line.
E) opportunity cost of holding money balances.

Question 23

In a Keynesian model,a decrease in the money supply

A) causes interest rates to fall.
B) shifts the investment function upward.
C) shifts the C + I + G + (X - M₁) line downward.
D) leads to an increase in the GDP.
E) has no effect on the level of economic activity.

Question 24

Using monetary policy to help eliminate an inflationary gap

A)
B) is ineffective if the short-run aggregate supply curve is very steep.
C) leads to an increase in unemployment, at least temporarily.
D) produces a permanent increase in the price level.
E) is futile unless fiscal policy simultaneously creates a budget surplus.

Question 25

A rise in bond prices must mean that

A) interest rates have fallen.
B) interest rates have risen.
C) bond purchases and sales will cease.
D) money is tight and credit is no longer available.
E) the amount of money demanded for investment will fall.

Question 26

The average number of times per year a dollar is used to make transactions for final goods and services is called the

A) price level.
B) quantity theory of money.
C) interest rate.
D) nominal GDP.
E) velocity of circulation.

Question 27

Using monetary policy to help close a recessionary gap

A) shifts the aggregate supply curve to the left.
B) is ineffective if the short-run aggregate supply curve is close to horizontal.
C) requires that people not spend excess money balances to ensure falling wages and prices.
D) leads to increased unemployment unless price levels rise.
E) has inflationary consequences if the short-run aggregate supply curve is very steep.

Question 28

A decrease in the money supply

A) shifts the aggregate demand curve to the left.
B)shifts the aggregate demand curve to the right.
C) shifts the aggregate supply curve to the left.
D) shifts the aggregate supply curve to the right.
E) affects neither the aggregate demand nor the aggregate supply curve, only the interest rate.

Question 29

An increase in the price level

A) decreases interest rates.
B) increases the transactions demand for money.
C) increases the prices of financial assets.
D) increases the value of existing money balances.
E) decreases imports.

Question 30

The demand curve for money (holding real GDP and the price level constant)is the relationship between

A) money and near monies.
B) levels of income and demand for money.
C) the money supply and the level of GDP.
D) the transactions and precautionary demands for money.
E) the interest rate and the quantity of money demanded.

Question 31

In a Keynesian model,an increase in the money supply results in

A) a decrease in the interest rate and increases in investment and GDP.
B) decreases in the interest rate, investment, and GDP.
C) increases in the interest rate, investment, and GDP.
D) an increase in the interest rate with decreases in both investment and GDP.
E) a decrease in the interest rate, with the effect on investment and GDP uncertain.

Question 32

A fall in bond prices must mean that

A) interest rates have fallen.
B) interest rates have risen.
C) bond purchases and sales will cease.
D) money is easy and credit is readily available.
E) the amount of money demanded for investment will rise.

Question 33

Monetarists regard the rate of growth of the money supply as the principal determinant of nominal GDP.By nominal GDP,they mean GDP

A) unadjusted for changes in the price level.
B) measured in constant dollars.
C) excluding the government.
D) divided by the money supply.
E) corrected for the velocity of circulation.

Question 34

Which of the following best describes the equation of exchange?

A) GDP = PQ
B) MV = PQ
C) MQ = GDP
D) MP = VQ
E) GDP = V/Q

Question 35

It is not just the interest rate that influences the investment function but also the

A) level of net exports.
B) distribution of income.
C) slope of the 45-degree line.
D) availability of credit.
E) phases of the moon.

Question 36

Interest rates and bond prices

A) have identical values most of the time.
B) are largely unaffected by monetary policy.
C) are unrelated in their behavior.
D) move in opposite directions.
E) rise and fall together.

Question 37

In a Keynesian model,an increase in the money supply will increase GDP by

A) increasing the rate of interest, thereby increasing savings.
B) lowering the rate of interest and shifting the investment function upward.
C) causing prices to rise and thereby trading off inflation against unemployment.
D) causing an increase in government expenditures.
E) shifting the transactions demand for money.

Question 38

Under which of the following aggregate supply conditions does an increase in the money supply have the LEAST impact on real GDP?

A) an aggregate supply curve shifting to the right
B) a vertical aggregate supply curve
C) an upward-sloping aggregate supply curve
D) a horizontal aggregate supply curve
E) an aggregate supply curve shifting up

Question 39

An increase in the money supply

A) shifts the aggregate demand curve to the left.
B)shifts the aggregate demand curve to the right.
C) shifts the aggregate supply curve to the left.
D) shifts the aggregate supply curve to the right.
E) affects neither the aggregate demand nor the aggregate supply curve, only the interest rate.

Question 40

The velocity of circulation is equal to

A) the reciprocal of the marginal propensity to consume.
B) nominal GDP divided by the money supply.
C) real GDP times the price level.
D) the money supply divided by the price level.
E) nominal GDP divided by real GDP.

Question 41

One would expect the crude quantity theory of money to best predict the effect of an increase in the money supply during periods

A) of pronounced recession.
B) when the velocity of the circulation of money is falling.
C) of rapid growth in real output.
D) of high unemployment.
E) of full employment.

Question 42

Economists who favor the use of interest rates as an indicator of monetary tightness argue that an increase in the demand curve for money

A) is difficult to accommodate unless banks are willing to hold excess reserves.
B) signals an impending recession unless interest rates are allowed to rise.
C) leads to a recession unless the quantity of money is increased.
D) results in increased inflationary pressures unless interest rates are allowed to rise.
E) results in a recession unless the quantity of money is reduced.

Question 43

If the rate of inflation is 8 percent and a lender receives $11,000 at the end of the year for a loan of $10,000,the real rate of interest is approximately ________ percent.

A) 13
B) 11
C) 6
D) 3
E) 2

Question 44

The Fed's ability to simultaneously control the rate of growth of the money supply and the level of interest rates is impeded by changes in the

A) supply of money.
B) interest rates.
C) demand curve for money.
D) required reserve ratio.
E) number of banks in the Federal Reserve System.

Question 45

Before deciding on a course of action,the Fed is faced with the problem of

A) forecasting the economy's short-term movements.
B) obtaining approval from Congress.
C) clearing its actions with the member banks.
D) getting the consent of Wall Street.
E) consulting with Milton Friedman.

Question 46

The crude quantity theory is a useful predictor of long-term trends in

A) government spending.
B) taxes.
C) price levels.
D) unemployment.
E) business expectations.

Question 47

The crude quantity theory of money states that

A) the money supply is fixed.
B) the equation of exchange is invalid.
C) the velocity of money changes as prices increase.
D) nominal and real GDP are normally identical.
E) the price level is proportional to the money supply.

Question 48

The money supply multiplied by its velocity of circulation equals

A) the rate of inflation.
B) the amount of unemployment.
C) nominal GDP.
D) the Consumer Price Index.
E) government spending.

Question 49

Economists who favor the use of the rate of growth of the money supply as an indicator of monetary tightness or ease argue that if the Fed increases the money supply to keep interest rates stable,it is in danger of

A) promoting a recession.
B) reducing the demand for money.
C) reducing the monetary base.
D) increasing the price level.
E) pursuing a tight money policy.

Question 50

On December 5,1996,Fed chair Alan Greenspan voiced concern over escalating asset values brought about by what he termed

A) conspicuous consumption.
B) fine tuning.
C) the invisible hand.
D) rational expectations.
E) irrational exuberance.

Question 51

According to the classical view of the equation of exchange,which of the following two factors are constant?

A) price level and output
B) price level and velocity
C) money supply and velocity
D) velocity and output
E) money supply and price level

Question 52

To monetarists,the monetary base is important because

A) it is unaffected by policy actions of the Fed.
B) unlike the money supply, interest rates are not affected by changes in the monetary base.
C) it is based on the gold certificate holdings of the Fed.
D) the total money supply is dependent on as well as made from it.
E) it constitutes the broadest possible definition of the money supply.

Question 53

If a firm borrows money at the rate of 11 percent per year and the rate of inflation is 4 percent,the real rate of interest on the loan is ________ percent.

A) 4
B) 7
C) 11
D) 15
E) 18

Question 54

Two important indicators of monetary tightness or ease are the

A) discount rate and the prime rate of interest.
B) level of short-term interest rates and the rate of growth of the money supply.
C) size of the government deficit and the tax rate.
D) size of the money supply and its rate of growth.
E) levels of real output and interest rates.

Question 55

In 1996 the Fed tried to address its concern that the stock market might be overvalued by

A) reducing interest rates.
B) "talking" the market down.
C) encouraging households to spend more on consumption.
D) increasing excess reserves in the banking system.
E) applying the rule of reason principle.

Question 56

The monetary base is defined as

A) total demand deposits.
B) total demand deposits minus free reserves.
C) bank reserves plus currency outside member banks.
D) the interest rate on federal funds.
E) M1.

Question 57

For the crude quantity theory of money to hold,it must be assumed that

A) the money supply is held constant.
B) velocity varies directly with the money supply.
C) velocity varies inversely with the money supply.
D) the economy operates at less than full employment.
E) the ratio of velocity to real output is constant.

Question 58

In deciding on a policy,the Fed is faced with two difficult problems: The inability of experts to agree on the best measure of the degree of tightness of monetary policy and

A) a lack of data on financial markets.
B) a need for approval from Congress and the president.
C) the long lag between an action taken by the Fed and its effect on the economy.
D) an inability to decide on a proper definition of the monetary base.
E) the lack of an adequate research staff.

Question 59

Adhering to a monetary rule,according to some economists,is superior to discretionary attempts to "lean against the wind" because

A) it would virtually eliminate business fluctuations.
B) the success of monetary policy since World War II has demonstrated the effectiveness of such a rule.
C) the Fed would be free to concentrate on manipulating interest rates.
D) the lag between policy actions and their economic impact is highly variable and unpredictable.
E) it would allow for more successful fine-tuning of the economy.

Question 60

A rapid rate of growth in the money supply accompanied by falling interest rates indicates

A) rapidly falling reserves in the commercial banking system.
B) a deflationary monetary policy.
C) an expansionary fiscal policy.
D) a balanced budget multiplier.
E) monetary policy is easy.

Question 61

The more sophisticated quantity theory of money most accurately predicts a change in the nominal value of GDP resulting from a change in the money supply when

A) price levels remain constant.
B) the level of output remains constant.
C) velocity remains constant.
D) unemployment remains constant.
E) average prices and output both remain constant.

Question 62

In his testimony to Congress in 1975,Fed chair Arthur Burns argued that the high dynamic variable in the business cycle is NOT the stock of money but

A) the price level.
B) real output.
C) interest rates.
D) personal consumption expenditures.
E) the velocity of the circulation of money.

Question 63

The more sophisticated version of the quantity theory of money differs from the crude quantity theory by assuming that

A) the circulation velocity of money is constant.
B) the economy does not always operate at a full-employment level of GDP.
C) fiscal policy is the primary means of stimulating the economy.
D) the money supply has no effect on the price level.
E) controlling inflation is more important than reducing unemployment.

Question 64

According to the more sophisticated quantity theory of money,if the money supply is increased

A) the velocity of circulation will fall.
B) both nominal and real GDP will rise if the economy is at less than full employment.
C) nominal GDP will fall.
D) nominal GDP will rise, but real GDP will fall if the economy is below full employment.
E) nominal GDP will remain the same.

Question 65

Most economists tend to agree that

A) Milton Friedman's models are best.
B) changes in the money supply merely influence the velocity of circulation.
C) the money supply should be decreased when the economy is in a serious depression.
D) inflation is rarely a serious problem.
E) increases in the money supply result in increases in nominal GDP.

Question 66

After the stock market crash of 1987,the financial emergency of 1998,and September 11,2001,the Federal Reserve Bank pursued a policy of

A) tightening the money supply and raising interest rates sharply.
B) maintaining steady growth in the money stock to reassure business.
C) flooding the banking system with excess liquidity to ease the threat of personal and corporate bankruptcies.
D) temporary tax reductions on interest, dividends, and capital-gains income.
E) borrowing reserves from the International Monetary Fund.

Question 67

The data on the circulation velocity of money since 1920 indicate that the velocity

A) has steadily decreased over time.
B) is quite stable in the short run.
C) tends to increase during depressions and decrease during booms.
D) has been fairly stable over the long run but not over the business cycle.
E) has been directly proportional to GDP.

Question 68

Milton Friedman and his followers propose that the

A) Fed be given powers over tax rates.
B) functions of the Fed be taken over by the Council of Economic Advisers.
C) Fed conform to a rule specifying a fixed, agreed-upon rate of growth in the money supply.
D) Fed be directly responsible to the Joint Economic Committee of Congress.
E) Fed be given powers to control wages and prices.

Question 69

The more sophisticated version of the quantity theory of money concludes

A) nominal GDP is proportional to the money supply.
B) real GDP is proportional to the money supply.
C) the money supply should be kept constant to ensure steady growth in GDP with declining prices.
D) investment expenditures are quantitatively more important than consumption expenditures.
E) the circulation velocity of money is extremely volatile.

Question 70

The severity of the 1982 recession has been attributed to

A) the Reagan administration's tax cut.
B) the Federal Reserve System's tight monetary policies undertaken by Chair Paul Volker.
C) the large deficits in our balance-of-payments accounts.
D) the OPEC-sponsored oil embargo.
E) a rapidly falling price level caused by large federal budget deficits.

Question 71

The economic situation experienced by the country in the mid-1970s was different from that in preceding times mainly because

A) inflation was higher than it had ever been.
B) total unemployment reached record levels.
C) it faced high unemployment coupled with high inflation.
D) the federal budget steadily decreased as a percentage of GDP.
E) this was the first time the Fed held to a tight monetary policy.

Question 72

If the velocity of circulation is seven and the money supply declines by 10 percent,nominal GDP declines by ________ percent.

A) 0
B) 3
C) 7
D) 10
E) 70