Chapter 15 Flashcards
The demand for money is the relationship between discount rate and how much money people want to hold.True False
FALSE
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.
Some amount of money is demanded for everyday market transactions like parking fees, lunch, and buying groceries.
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.
market interest rate.
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.
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.
The overall price level and real GDP both decline as one moves downward along the demand for money curve.True False
FALSE
If real GDP increases, ceteris paribus, the demand for money decreases.True False
FALSE
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
the Federal Reserve
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
vertical
Other things constant, if the Fed increases the money supply, the money supply curve shifts leftward.True False
TRUE
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.
There is a shortage of money, interest rates must rise in order to achieve an equilibrium in the money market.
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.
An increase in the money supply lowers the interest rate, which in turn increases the quantity of investment demanded.
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.
An interest rate of 3 percent and a quantity of $2.5 trillion.
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.
The supply of money will decrease but the interest rate will increase.
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
TRUE
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.
on the size of the spending multiplier.
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
FALSE
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
TRUE
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
MV = P ??Q
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
FALSE
The equation of exchange shows that the total spending in an economy is always greater than the total receipts.True False
TRUE
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
TRUE
In the long run, a decrease in money supply, with the velocity of money stable or not decreasing, results in inflation.True False
FALSE
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
the velocity of money to increase
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
more; more
Other things constant, a fall in the inflation rate causes the velocity of money to increase.True False
FALSE
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
Germany
When the Fed chooses to target interest rates, it loses the ability to target monetary aggregates.True False
TRUE
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.
money demand curve rightward.
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
FALSE
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
TRUE
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.
In 1979, the Fed deemphasized interest rates and targeted specific money aggregates.
When specific monetary aggregates are targeted by the central banks, in the short run, interest rates become more volatile.True False
TRUE
Other things constant, the quantity of money demanded varies directly with the market interest rate.True False
FALSE
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
increase; decrease
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↑
M↑ → i↓ →I↑→AD↑→Y↑
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
steeper; smaller; larger
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
federal funds rate
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
0; .25
The current Federal Reserve Chairman is ________ ? a. Alan Greenspan b. Bill Clinton c. Warren Buffet d. Ben Bernanke
Ben Bernanke
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
M x V = P x Y
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
Each dollar is used to purchase final goods and services
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
quantity theory of money
The relationship between the interest rate and how much money people want to hold
demand for money
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
equation of exchange
Fed purchases of long-term assets to stabilize financial markets, reduce long-term interest rates, and improve the investment environment
quantitative easing
If the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on nominal GDP
quantity theory of money
Consists of financial institutions, such as mortgage companies and brokerage firms, that do not rely on deposis to make loans
shadow banking system
Bank regulators assessed the soundness of large banks to determine which ones needed more financial capital to weather a bad economy
stress test
The average number of times per year each dollar is used to purchase final goods and services
velocity of money