Question 1

Which of the following statements is FALSE?

Accepted Answer

A)   Both monetary and interest rate targets cannot be pursued simultaneously.
B)   A reduction in the required reserve ratio increases the money supply and pushes down the equilibrium interest rate.
C)   An open market purchase reduces the money supply and pushes down the equilibrium interest rate.
D)   An open market sale decreases the money supply and pushes up the equilibrium interest rate.E) A) and B)
F) None of the above

Question 2

-Refer to the above figure. Which panel is consistent with the Fed selling bonds?

Accepted Answer

A)   Panel A
B)   Panel B
C)   Panel C
D)   Panel DE) None of the above
F) A) and B)

Question 3

As a result of an increase in the money supply, some banks may end up with excess reserves. What is the likely result?

Accepted Answer

A)   Banks will make more loans, thereby contributing to an increase in aggregate demand.
B)   Banks will make more loans, thereby contributing to a decrease in aggregate demand.
C)   Banks will raise interest rates.
D)   Banks will spend the excess reserves by paying their employees more.E) A) and B)
F) B) and C)

Question 4

Suppose a family is holding $1000 in its checking account for normal transactions, $500 in cash for emergencies, and $1500 as a store of value when the interest rate is 4 percent. If the interest rate rises to 10 percent, which of the following patterns of holding money would be most likely and why?

Accepted Answer

A)   Transactions demand-$1000; Precautionary demand-$350; Asset demand-$500, because the opportunity cost of holding money has increased. The reduction money balances held as an asset is greatest because interest-bearing assets are much more attractive when interest rates are higher.
B)   Transactions demand-$500; Precautionary demand-$500; Asset demand-$1400, because the opportunity cost of holding money balances has risen. The reduction in money balances held for transaction purposes falls the most because people start using credit cards more when the opportunity cost of holding money increases.
C)   Transactions demand-$1000; Precautionary demand-$500; Asset demand-$500, because only the asset demand is responsive to changes in the interest rate.
D)   Transactions demand-$800; Precautionary demand-$600; Asset demand-$1500, because people can economize on their money balances for making transactions, but the possibility of an emergency increases with the interest rate. People will also expect rates to go higher, so they will hold money as an asset until the rates increase further.E) C) and D)
F) B) and D)

Question 5

According to traditional Keynesians, monetary policy is ineffective in affecting the economy during a recession because

Accepted Answer

A)   an increase in the money supply will have little impact on interest rates.
B)   an increase in the money supply will only lead to higher interest rates.
C)   an increase in the money supply will only lead to lower investment spending.
D)   an increase in the money supply will raise the amount of government debt.E) A) and B)
F) None of the above

Question 6

The short-run effect of an increase in the supply of money is

Accepted Answer

A)   an increase in both real Gross Domestic Product (GDP)  and the price level.
B)   an increase in the price level but not in real Gross Domestic Product (GDP) .
C)   an increase in real Gross Domestic Product (GDP)  but not in the price level.
D)   an increase in the price level, a decrease in real Gross Domestic Product (GDP) , but an increase in nominal national income.E) C) and D)
F) A) and D)

Question 7

What happens when the Fed aims to change interest rates?

Accepted Answer

A)   It asks Congress to legislate new interest rates.
B)   It buys or sells government bonds on the open market to achieve the desired rate.
C)   It buys or sells dollars on the foreign exchange market to achieve the desired rate.
D)   It announces a new discount interest rate.E) All of the above
F) C) and D)

Question 8

-In the above figure, suppose the economy is at a short-run equilibrium at point B and the interest rate is r2. Which of the following policy options for the Fed will help solve the short-run situation?

Accepted Answer

A)   lowering the differential between the discount rate and the federal funds rate
B)   open market purchase of government securities
C)   lowering the required reserve ratio
D)   open market sale of government securitiesE) A) and B)
F) None of the above

Question 9

An increase in the money supply will

Accepted Answer

A)   increase aggregate supply.
B)   decrease aggregate supply.
C)   increase aggregate demand.
D)   decrease aggregate demand.E) A) and B)
F) A) and C)

Question 10

The demand for money curve depicts

Accepted Answer

A)   an inverse relationship between the quantity of money demanded and the quantity of bonds demanded.
B)   a direct relationship between the quantity of money demanded and the quantity of bonds demanded.
C)   an inverse relationship between the quantity of money demanded and the interest rate.
D)   a direct relationship between the quantity of money demanded and the interest rate.E) A) and C)
F) C) and D)

Question 11

Which of the following is a TRUE statement about the relationship between the price of bonds and the interest rate?

Accepted Answer

A)   The prices of bonds are directly related to the interest rate.
B)   The prices of bonds increase when the interest rates rise.
C)   The prices of bonds are unrelated to the interest rate.
D)   The prices of bonds are inversely related to the interest rate.E) C) and D)
F) A) and D)

Question 12

-Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new long-run equilibrium is given by point

Accepted Answer

A)   A.
B)   B.
C)   C.
D)   D.E) A) and C)
F) B) and D)

Question 13

The direct effect of an increase in the money supply is to

Accepted Answer

A)   raise interest rates as people increase their saving.
B)   increase interest rates as people anticipate higher inflation in the future.
C)   increase aggregate demand as people try to spend their excess money balances.
D)   decrease aggregate demand as people anticipate future economic problems.E) A) and C)
F) All of the above

Question 14

The hypothesis that changes in the money supply lead to proportional changes in the price level is called

Accepted Answer

A)   the equation of exchange.
B)   the Keynesian multiplier.
C)   the theory of empirical relativity.
D)   the quantity theory of money and prices.E) A) and B)
F) C) and D)

Question 15

The price of bonds and the interest rate are

Accepted Answer

A)   inversely related.
B)   positively related.
C)   unrelated.
D)   related, but we are not sure how.E) None of the above
F) B) and D)

Question 16

In economics, the demand for money is basically a demand for

Accepted Answer

A)   high returns.
B)   status.
C)   liquidity.
D)   investment.E) C) and D)
F) B) and D)

Question 17

Operations of the Trading Desk of the Federal Reserve Bank of New York are typically conducted

Accepted Answer

A)   no more often than once per month.
B)   once a year.
C)   no more often than once per week.
D)   within a one-hour period during each day.E) B) and C)
F) A) and C)

Question 18

-Using a graph above, show the short-run and long-run effects of an expansionary monetary policy.

Accepted Answer

In the above figure, E1 is the original ...

Question 19

An increase in the money supply will affect aggregate demand

Accepted Answer

A)   only if the increase in the money supply causes interest rates to rise.
B)   only if the increase in the money supply causes people to buy less goods and services.
C)   only if the increase in the money supply causes people to increase their saving.
D)   if the increase in the money supply causes interest rates to fall and/or causes people to buy more goods and services.E) A) and D)
F) C) and D)

Question 20

One result of a contractionary monetary policy would be

Accepted Answer

A)   a decline in the price level.
B)   an increase in the money supply.
C)   an increase in business investment.
D)   lower interest rates.E) A) and B)
F) A) and C)

Exam 16: Domestic and International Dimensions of Monetary Policy

The hypothesis that changes in the money supply lead to proportional changes in the price level is called

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One result of a contractionary monetary policy would be

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The short-run effect of an increase in the supply of money is

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The direct effect of an increase in the money supply is to

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Which of the following is a TRUE statement about the relationship between the price of bonds and the interest rate?

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As a result of an increase in the money supply, some banks may end up with excess reserves. What is the likely result?

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An increase in the money supply will

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-Refer to the above figure. Which panel is consistent with the Fed selling bonds?

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Operations of the Trading Desk of the Federal Reserve Bank of New York are typically conducted

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-Using a graph above, show the short-run and long-run effects of an expansionary monetary policy.

Correct AnswerverifiedIn the above figure, E1 is the original ...View AnswerShow Answer

Which of the following statements is FALSE?

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In economics, the demand for money is basically a demand for

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-Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new long-run equilibrium is given by point

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-In the above figure, suppose the economy is at a short-run equilibrium at point B and the interest rate is r2. Which of the following policy options for the Fed will help solve the short-run situation?

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According to traditional Keynesians, monetary policy is ineffective in affecting the economy during a recession because

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An increase in the money supply will affect aggregate demand

Correct AnswerverifiedShow Answer

The price of bonds and the interest rate are

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What happens when the Fed aims to change interest rates?

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The demand for money curve depicts

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In the above figure, E1 is the original ...
View Answer

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