Deck 17: Monetary Theory and Policy

Question 1

The demand for money varies

A)directly with both the price level and the level of real GDP
B)inversely with both the price level and the level of real GDP
C)inversely with the price level and directly with the level of real GDP
D)directly with the price level and inversely with the level of real GDP
E)inversely with the level of nominal GDP

Answer 1

A

Question 2

The demand for money

A)d and e are correct
B)all of the following are correct
C)decreases as the average selling price of a unit of output increases
D)increases as GDP increases
E)is increased by credit card usage

Answer 2

D

Question 3

The demand for money is based primarily on money's role as a(n)

A)store of wealth
B)medium of exchange
C)standard of value
D)interest-bearing asset
E)non-interest-bearing asset

Answer 3

B

Question 4

In deciding how much money to hold, you should compare the

A)disadvantage of liquidity with the advantage of earning more interest
B)advantage of liquidity with the disadvantage of losing interest
C)disadvantage of storing wealth with the advantage of having a medium of exchange
D)advantage of storing wealth with the advantage of having a medium of exchange
E)advantage of liquidity with the disadvantage of storing wealth

Question 5

People will hold __________ money as the interest rate __________ because they will __________ other financial assets.

A)more; decreases; buy
B)more; increases; sell
C)more; decreases; sell
D)less; increases; sell
E)less; decreases; buy

Question 6

When the demand for money is shown on a graph, the __________ is on the vertical axis, and the __________ is on the horizontal axis.

A)quantity of money; interest rate
B)interest rate; quantity of money
C)real GDP; quantity of money
D)nominal GDP; quantity of money
E)price level; quantity of money

Question 7

Speaking of the demand for money

A)makes no sense in a modern society in which most people use credit cards
B)makes no sense in a modern society in which most people use checks
C)makes sense in a modern society in which most people use checks, since demand deposits are included in M1, but it does not make sense in a society in which the primary payment is by credit card
D)makes sense in a modern society in which most people use credit cards, since credit cards are included in M1, but it does not make sense in a society in which the primary payment is by check
E)is relevant even in a society in which primary payment is by credit card, since eventually all accounts must be settled with money

Question 8

The money demand curve shifts to the right whenever there is a decrease in the interest rate.

Question 9

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 10

What is the opportunity cost of holding money rather than some other financial asset?

A)the forgone interest income
B)the forgone utility
C)time
D)the forgone leisure
E)the forgone profit

Question 11

Which of the following best explains why the demand for money depends upon the interest rate?

A)Money is an interest-earning asset.
B)Money is not an interest-earning asset.
C)The alternatives to holding money are not interest-earning assets.
D)The alternatives to holding money earn more interest than money does.
E)People must pay interest on loans.

Question 12

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 GDP increases
D)upward because people demand more money as GDP decreases
E)downward because people demand more money as the price level increases

Question 13

The relationship between the interest rate and the quantity of money demanded

A)is a direct relationship
B)is an inverse relationship
C)is nonexistent
D)is a direct relationship when the interest rate is low and an inverse relationship when the interest rate is high
E)is an inverse relationship when the interest rate is low and a direct relationship when the interest rate is high

Question 14

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

Question 15

The money demand curve describes how the quantity of money demanded varies with

A)nominal GDP
B)real GDP
C)the price level
D)the interest rate
E)consumption

Question 16

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 17

The money demand curve will shift when there is a change in

A)interest rates
B)velocity
C)the money supply
D)the opportunity cost of holding money
E)nominal GDP

Question 18

The higher the interest rate, the more of their wealth people will hold as money.

Question 19

If the price level rises, the money demand curve will shift to the right.

Question 20

The demand for money is depicted by a curve downward sloping curve because if the interest rate falls, the opportunity cost of holding assets in the form of money decreases.

Question 21

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 (to the left) 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 22

Exhibit 16-1

Referring to Exhibit 16-1, an increase in the price level will cause a move from

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

Question 23

A decrease in the interest rate 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 24

If the price level rises, then the

A)money supply will increase
B)money supply will decrease
C)quantity of money supplied will increase
D)quantity of money supplied will decrease
E)demand for money will increase

Question 25

If the money supply increases, the interest rate will __________ and people will want to hold a __________ quantity of money.

A)rise; greater
B)rise; smaller
C)not change; greater
D)fall; greater
E)fall; smaller

Question 26

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 27

Which of the following is not assumed to be constant along the money demand curve?

A)the price level
B)the interest rate
C)real GDP
D)nominal GDP
E)individual's tastes and preferences

Question 28

Which of the following, other things constant, will shift the money demand curve to the left?

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 29

When people exchange money for financial assets, the interest rate rises.

Question 30

Which of the following would 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 31

As the price level rises, money __________ causing interest rates to __________ and investment spending to __________.

A)demand rises; fall; fall
B)demand rises; rise; fall
C)demand falls; rise; rise
D)supply rises; rise; fall
E)supply falls; fall; rise

Question 32

The opportunity cost of holding money

A)includes bank service charges
B)is the interest foregone on potential interest-earning assets
C)varies inversely with the rate of interest
D)affects relatively few individuals
E)is determined exclusively by the Fed

Question 33

If the interest rate rises, people hold

A)less money because its opportunity cost has increased
B)more money because its opportunity cost has increased
C)less money because its opportunity cost has declined
D)more money because its opportunity cost has declined
E)the same amount of money

Question 34

The supply of money is depicted diagrammatically as a vertical line because the quantity of money supplied is totally dependent on the rate of interest.

Question 35

Exhibit 16-1

Referring to Exhibit 16-1, an increase in the interest rate will cause a move from

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

Question 36

If the money supply decreases, the opportunity cost of holding money __________ and people will want to hold __________ quantity of money.

A)rises; a greater
B)rises; a smaller
C)does not change; the same
D)falls; a greater
E)falls; a smaller

Question 37

The equilibrium interest rate is determined by

A)the Fed
B)Congress
C)the demand for money alone
D)the supply of money alone
E)both the supply of and demand for money

Question 38

Exhibit 16-1

Referring to Exhibit 16-1, an increase in the level of real GDP will cause a move from

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

Question 39

Which of the following, other things constant, will shift the money demand curve to the right?

A)an increase in the interest rate
B)a decrease in the interest rate
C)an increase in real GDP
D)a decrease in real GDP
E)a decrease in the price level

Question 40

When the money supply increases, people get rid of their excess money by buying real assets, such as durable goods.

Question 41

In the aggregate demand-aggregate supply model, an increase in the money supply will cause in the short run 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 42

Exhibit 16-2

Given the demand for money in Exhibit 16-2, if the supply of money is given by the supply curve labelled S, the equilibrium interest rate and quantity of money would be

A)r and m
B)r* and m*
C)r' and m'
D)r and m'
E)cannot tell from the information given

Question 43

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)nothing happens to the quantity of money demanded

Question 44

In a macroeconomic model, increases in the money supply decrease the interest rate, increase investment, and thus raise employment and real GDP.

Question 45

An increase in the money supply will

A)increase the demand for money at each interest rate
B)decrease the demand for money at each interest rate
C)lead people to try to exchange money for interest-bearing assets
D)lead people to try to exchange interest-bearing assets for money
E)increase the interest rate

Question 46

If the Fed wanted to stimulate the economy, it might

A)buy bonds to lower the money supply
B)sell bonds to lower the money supply
C)raise the discount rate to increase the money supply
D)lower the discount rate to increase the money supply
E)increase the required reserve ratio to lower the money supply

Question 47

In the short run, a decrease in the money supply will cause a decrease in Gross Domestic Product and a decrease in the price level.

Question 48

Which one of the following statements is correct?

A)The lower the interest rate, the higher the opportunity cost of holding assets in the form of money.
B)A vertical money supply curve means that 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 transactions demand for money increases whenever the price level decreases.

Question 49

Of the following, the major influence on the supply of money is

A)interest rates
B)prices
C)the transactions demand for money
D)GDP
E)the Fed

Question 50

As the interest rate decreases,

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)GDP decreases

Question 51

In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run

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 52

An increase in the money supply will cause a decrease in planned investment spending.

Question 53

As 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 54

If there is a decrease in the supply of money, which one of the following is most likely to happen?

A)the demand for money will increase
B)planned investment spending will increase
C)interest rates will rise
D)aggregate expenditure will increase
E)the demand for money will decrease

Question 55

The demand curve for investment is graphed with __________ on the vertical axis and __________ on the horizontal axis.

A)the interest rate; investment
B)investment; the interest rate
C)the price level; investment
D)investment; the price level
E)real GDP; investment

Question 56

When an increase in the money supply reduces the interest rate, investment and nominal GDP increase.

Question 57

If the quantity of money supplied exceeds the quantity of money demanded,

A)this is evidence of a failed fiscal policy
B)this indicates that the supply of money curve is horizontal
C)the interest rate will fall
D)the quantity of money demanded will increase
E)the transactions money demand curve will shift to the right

Question 58

If the Fed buys bonds, then 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 59

An increase in the interest rate will

A)have no effect on investment, since investment is autonomous
B)increase investment, since it will be more profitable to hold stocks and bonds
C)increase investment, since people will be less willing to hold money
D)decrease investment only if firms have to borrow money to make investments
E)decrease investment regardless of whether firms have to borrow money to make an investment

Question 60

Exhibit 16-2

Each of the following can cause the supply of money to shift from S to S* in Exhibit 16-2, except

A)an increase in the required reserve ratio
B)the sale of US Treasury securities by the Fed
C)a decrease in the required reserve ratio
D)a decrease in the discount rate
E)an increase in excess reserves in the banking system

Question 61

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be ineffective in changing aggregate demand.

A)responsive; sensitive
B)responsive; insensitive
C)not responsive; sensitive
D)not responsive; insensitive
E)none of the above

Question 62

If the Fed decreases the money supply, causing the interest rate to rise, GDP

A)increases by the same amount as the increase in the interest rate
B)decreases by more 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 more than the decrease in investment because of the multiplier
E)decreases by less than the decrease in investment because of the multiplier

Question 63

What would be the ultimate effect of a reduction in the money supply?

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)such a monetary policy would have no impact at all

Question 64

A decrease in the money supply causes interest rates to __________, investment spending to __________ and Gross Domestic Product to __________.

A)fall; rise; fall
B)fall; fall; rise
C)rise; rise; rise
D)rise; fall; fall
E)rise; fall; rise

Question 65

If the Fed sells government securities to banks, eventually we 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 66

An increase in the money supply causes interest rates to __________, investment spending to __________ and aggregate demand to __________.

A)rise; rise; rise
B)rise; fall; rise
C)rise; fall; fall
D)fall; rise; fall
E)fall; rise; rise

Question 67

As a result of 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 68

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 spending multiplier
E)the spending multiplier must be stable

Question 69

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rates, then monetary policy will be __________ in changing Gross Domestic Product.

A)sensitive; sensitive; effective
B)responsive; insensitive; ineffective
C)responsive; insensitive; effective
D)not responsive; sensitive; effective
E)not responsive; insensitive; effective

Question 70

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 a major impact on investment
C)will have no effect on aggregate demand
D)will have a major impact on aggregate demand
E)mean the money supply curve will not be vertical

Question 71

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 72

If the Fed sells U.S. government securities to drain reserves from banks, which of the following will probably 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 73

If the Fed increases the money supply, GDP

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 74

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 75

If the Fed sells government securities to banks, eventually we expect

A)the price level to increase
B)planned investment expenditures to increase
C)aggregate demand to increase
D)short-run aggregate supply to increase
E)interest rates to increase

Question 76

To eliminate a contractionary gap, the Fed can __________ the money supply, which would __________.

A)increase; increase the interest rate and investment
B)increase; decrease the interest rate and increase investment
C)decrease; increase the interest rate and investment
D)decrease; decrease the interest rate and investment
E)decrease; increase the interest rate and decrease investment

Question 77

If the Fed decreases the money supply, GDP

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 78

What is the effect of an expansionary monetary policy on the demand for investment curve?

A)It causes the curve to shift left.
B)It causes the curve to shift right.
C)It causes downward movement along the curve.
D)It causes an upward movement along the curve.
E)It has no effect on the quantity of investment demanded.

Question 79

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be effective in changing aggregate demand.

A)responsive; sensitive
B)responsive; insensitive
C)not responsive; sensitive
D)not responsive; insensitive
E)none of the above

Question 80

Planned investment expenditures will eventually increase after

A)the money supply decreases
B)the demand for money increases
C)the interest rate falls
D)the Fed sells government securities
E)business managers are pessimistic about future market conditions for their product