Chapter 15

Question 1

The demand for money is the relationship between discount rate and how much money people want to hold.True False

Answer 1

FALSE

Question 2

Why do people demand money balances (i.e., hold currency and checking account balances) as a way of holding their wealth, rather than, financial investments? a. Some amount of money is demanded for everyday market transactions like parking fees, lunch, and buying groceries. b. Money balances generally earn a higher return than other financial investments. c. Holding money balances serves as a way of protecting one’s assets from the effects of inflation. d. People demand money balances to increase money supply in the economy.

Answer 2

Some amount of money is demanded for everyday market transactions like parking fees, lunch, and buying groceries.

Question 3

Other things constant, the quantity of money demanded varies inversely with the: a. exchange rate. b. commercial loan rate. c. discount rate. d. market interest rate.

Answer 3

market interest rate.

Question 4

Which of the following explains why the demand for money curve reveals an inverse relationship between interest rates and the quantity of money demanded? a. As interest rates rise, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. b. As interest rates fall, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. c. As interest rates rise, the opportunity cost of holding money falls, and people respond by converting their interest-bearing financial assets into cask or checking account balances. d. As interest rates rise, people find it advantageous to borrow money, which increases the quantity of money demanded.

Answer 4

As interest rates rise, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments.

Question 5

The overall price level and real GDP both decline as one moves downward along the demand for money curve.True False

Answer 5

FALSE

Question 6

If real GDP increases, ceteris paribus, the demand for money decreases.True False

Answer 6

FALSE

Question 7

The quantity of money supplied is determined primarily by ________ . a. the Congress and the President b. public sector banks c. the Federal Reserve d. the commercial banks

Answer 7

the Federal Reserve

Question 8

A ________ money supply curve implies that the quantity of money supplied is independent of the interest rate. a. horizontal b. vertical c. upward sloping d. downward sloping

Answer 8

vertical

Question 9

Other things constant, if the Fed increases the money supply, the money supply curve shifts leftward.True False

Answer 9

TRUE

Question 10

If at the prevailing interest rate the demand for money is $3 trillion, and the supply of money is $2.5 trillion, then which of the following is true? a. There is excess money supply, interest rates must fall in order to achieve an equilibrium in the money market. b. There is a shortage of money, interest rates must fall in order to achieve an equilibrium in the money market. c. There is a shortage of money, interest rates must rise in order to achieve an equilibrium in the money market. d. There is excess money supply, interest rates must rise in order to achieve an equilibrium in the money market.

Answer 10

There is a shortage of money, interest rates must rise in order to achieve an equilibrium in the money market.

Question 11

Which of the following is a part of the sequence of events that links the change in the money supply by the Fed to investment demand? a. An increase in the money supply lowers the interest rate, which in turn reduces the quantity of investment demanded. b. An increase in the money supply lowers the interest rate, which in turn increases the quantity of investment demanded. c. An increase in the money supply raises the interest rate, which in turn reduces the quantity of investment demanded. d. An increase in the money supply raises the interest rate, which in turn increases the quantity of investment demanded.

Answer 11

An increase in the money supply lowers the interest rate, which in turn increases the quantity of investment demanded.

Question 12

Suppose at the prevailing interest rate of 4 percent the money supply and the quantity of money demanded are both $2 trillion. At a 5 percent interest rate, the quantity of money demanded is $1.5 trillion, while at a 3 percent interest rate it is $2.5 trillion. If the Fed conducts an open-market purchase of $50 billion, and if the money multiplier is 10, then at what interest rate will the money supply equal the quantity of money demanded? a. An interest rate of 5 percent and a quantity of $1.5 trillion. b. An interest rate of 4 percent and a quantity of $2 trillion. c. An interest rate of 3 percent and a quantity of $2.5 trillion. d. An interest rate of 4 percent and a quantity of $2.5 trillion.

Answer 12

An interest rate of 3 percent and a quantity of $2.5 trillion.

Question 13

If the Fed engages in an open market sale of U.S. government securities, what is the likely impact of this monetary policy move? a. The supply of money and the interest rate will both increase. b. The supply of money will increase but the interest rate will decrease. c. The supply of money will decrease but the interest rate will increase. d. The supply of money and the interest rate will both decrease.

Answer 13

The supply of money will decrease but the interest rate will increase.

Question 14

If the investment demand curve is very steep, then Fed monetary policy will have a relatively small impact on planned investment, and thus on aggregate demand.True False

Answer 14

TRUE

Question 15

The extent to which a given change in investment affects aggregate demand depends: a. on the change in interest rate. b. on the size of the spending multiplier. c. on the change in money supply. d. on the change in investment.

Answer 15

on the size of the spending multiplier.

Question 16

For a given shift in the aggregate demand curve, the flatter the short-run aggregate supply curve, the smaller the increase in real GDP and the larger the increase in the price level.True False

Answer 16

FALSE

Question 17

If the aggregate supply curve is upward-sloping, then the short-run effect of an increase in the money supply is an increase in both real output and the price level.True False

Answer 17

TRUE

Question 18

Given ‘M’ represents money supply, ‘V’ represents velocity of money, ‘P’ represents the price level, and ‘Q’ represents the total domestic output. Which of the following correctly describes the equation of exchange? a. MV = P + Q b. MV = P - Q c. MV = P ??Q d. MV = P/Q

Answer 18

MV = P ??Q

Question 19

The velocity of money is the total number of times per year that a dollar is used to purchase final goods and services.True False

Answer 19

FALSE

Question 20

The equation of exchange shows that the total spending in an economy is always greater than the total receipts.True False

Answer 20

TRUE

Question 21

According to the quantity theory of money, if the velocity of money is stable or at least predictable, then the equation of exchange can be used to predict the effects of changes in the money supply on nominal GDP.True False

Answer 21

TRUE

Question 22

In the long run, a decrease in money supply, with the velocity of money stable or not decreasing, results in inflation.True False

Answer 22

FALSE

Question 23

The frequent use of credit cards and easy access to automatic teller machines have caused: a. the demand for money to increase. b. the money supply in the economy to decrease. c. the price level in the economy to decrease. d. the velocity of money to increase

Answer 23

the velocity of money to increase

Question 24

The ________ often workers get paid, other things constant, the lower their average money balances, so the ________ active the money supply and the greater its velocity. a. less; less b. more; less c. less; more d. more; more

Answer 24

more; more

Question 25

Other things constant, a fall in the inflation rate causes the velocity of money to increase.True False

Answer 25

FALSE

Question 26

The most famous hyperinflation was in ________ between August 1922 and November 1923, when inflation averaged 322 percent per month. a. U.S. b. Japan c. Germany d. Israel

Answer 26

Germany

Question 27

When the Fed chooses to target interest rates, it loses the ability to target monetary aggregates.True False

Answer 27

TRUE

Question 28

An increase in the price level or in the real GDP, with velocity stable, shifts the : a. money demand curve leftward. b. money supply curve leftward. c. money demand curve rightward. d. money supply curve rightward.

Answer 28

money demand curve rightward.

Question 29

For interest rates to remain stable during economic contractions, the money supply would have to grow at the same rate as the demand for money.True False

Answer 29

FALSE

Question 30

A policy of maintaining stable interest rates during economic fluctuations will tend to reinforce these fluctuations. A policy of maintaining a constant growth rate in the money supply will tend to cause interest rates to fluctuate, which can cause undesirable fluctuations in investment.True False

Answer 30

TRUE

Question 31

Which of the following is (are) true regarding monetary policy targeting? a. Since 1982, the Fed has emphasized money aggregate targets. b. Milton Friedman said that the Fed should pay more attention to interest rates and should focus less on growth of money supply. c. In the short run, it is useless to target interest rates as a tool of policy. d. In 1979, the Fed deemphasized interest rates and targeted specific money aggregates.

Answer 31

In 1979, the Fed deemphasized interest rates and targeted specific money aggregates.

Question 32

When specific monetary aggregates are targeted by the central banks, in the short run, interest rates become more volatile.True False

Answer 32

TRUE

Question 33

Other things constant, the quantity of money demanded varies directly with the market interest rate.True False

Answer 33

FALSE

Question 34

For a given money demand curve, an ________ in the money supply drives down the interest rate, and a ________ in the money supply drives up the interest rate. a. decrease; increase b. decrease; decrease c. increase; decrease d. increase; increase

Answer 34

increase; decrease

Question 35

How can the money supply impact interest rates and investment? a. M↑ → i↓ →I↑→AD↑→Y↑ b. M↓ → i↓ →I↑→AD↑→Y↑ c. M↑ → i↑ →I↑→AD↑→Y↑ d. M↑ → i↓ →I↑→AD↓→Y↑

Answer 35

M↑ → i↓ →I↑→AD↑→Y↑

Question 36

For a given shift of the aggregate demand curve, the ________ the short-run aggregate supply curve, the ________ the increase in the real GDP and the ________ the increase in the price level. a. steeper; larger; smaller b. steeper; smaller; larger c. more flat; smaller; smaller d. steeper; larger; larger

Answer 36

steeper; smaller; larger

Question 37

For four decades, the Fed has reflected its monetary policy in the ________ ________ ________ ? a. aggregate supply curve b. aggregate demand curve c. federal funds rate d. discount rate

Answer 37

federal funds rate

Question 38

On December 16, 2008, the FOMC announced it would lower its target for the federal funds rate to between ________ and ________ ? a. 0 ; .50 b. 1; 1.85 c. 0; .25 d. 1; 2

Answer 38

0; .25

Question 39

The current Federal Reserve Chairman is ________ ? a. Alan Greenspan b. Bill Clinton c. Warren Buffet d. Ben Bernanke

Answer 39

Ben Bernanke

Question 40

The equation of exchange is? a. M x V = P x Y b. M x P = V x Y c. M x Y = V x P d. none of the above represent the equation of exchange

Answer 40

M x V = P x Y

Question 41

The velocity of money is the average number of times per year that what occurs? a. The quantity of money increases b. The supply of money changes c. Each dollar is used to purchase final goods and services d. The Federal Reserve changes the Federal Funds Rate

Answer 41

Each dollar is used to purchase final goods and services

Question 42

The theory that if the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on nominal GDP is called ________ . a. velocity of money theory b. quantity theory of money c. supply of money theory d. inflation theory of money

Answer 42

quantity theory of money

Question 43

The relationship between the interest rate and how much money people want to hold

Answer 43

demand for money

Question 44

The quantity of money, M, multiplied by its velocity, V, equals nominal GDP, which is the product of the price level, P, and real GDP, Y; or M × V = P × Y

Answer 44

equation of exchange

Question 45

Fed purchases of long-term assets to stabilize financial markets, reduce long-term interest rates, and improve the investment environment

Answer 45

quantitative easing

Question 46

If the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on nominal GDP

Answer 46

quantity theory of money

Question 47

Consists of financial institutions, such as mortgage companies and brokerage firms, that do not rely on deposis to make loans

Answer 47

shadow banking system

Question 48

Bank regulators assessed the soundness of large banks to determine which ones needed more financial capital to weather a bad economy

Answer 48

stress test

Question 49

The average number of times per year each dollar is used to purchase final goods and services

Answer 49

velocity of money