Question 1

Empirical studies indicate that the velocity of money tends to increase when interest rates rise. Which of the following best explains why this is true?

Accepted Answer

A)  When the velocity of money is high, banks will increase their lending interest rates.
B)  An increase in the growth rate of GDP will cause the velocity of money to increase.
C)  The higher interest rates increase the cost of holding money balances and, thereby, increase the velocity of money.
D)  Both the velocity of money and interest rates will rise when the inflation rate falls.E) B) and C)
F) A) and B)

Question 2

In the short run, an unanticipated shift to a more expansionary monetary policy is most likely to result in

Accepted Answer

A)  an increase in short-term interest rates.
B)  a reduction in aggregate demand.
C)  a reduction in the inflation rate.
D)  an increase in employment.E) A) and C)
F) B) and C)

Question 3

A decrease in the required reserve ratio would be

Accepted Answer

A)  a restrictive policy because it lowers the amount of total reserves in the banking system.
B)  a restrictive policy because it lowers the amount of excess reserves in the banking system.
C)  an expansionary policy because it raises the amount of required reserves in the banking system.
D)  an expansionary policy because it raises the amount of total reserves in the banking system
E)  an expansionary policy because it raises the amount of excess reserves in the banking system.F) A) and D)
G) A) and C)

Question 4

According to the modern view, the impact of expansionary monetary policy will

Accepted Answer

A)  be the same in the long run as in the short run.
B)  be the same regardless of whether the effects of the policy are anticipated or unanticipated.
C)  initially be an increase in real output if the policy is unanticipated, but in the long run, the primary result will be a higher price level (inflation) .
D)  initially be an increase in prices if the policy is unanticipated, but in the long run, the primary result will be larger real output.E) A) and D)
F) C) and D)

Question 5

Which of the following is inconsistent with the view that Fed monetary policy was excessively expansionary during 2010-2013?

Accepted Answer

A)  Short-term interest rates that were near zero throughout these years.
B)  A rapid increase in the monetary base throughout these years.
C)  A tripling of Fed asset holdings from less than $1 trillion in 2008 to approximately $3 trillion in 2012.
D)  Growth of nominal GDP during 2010-2012 at a rate similar to that of recent decades.E) All of the above
F) B) and C)

Question 6

A shift to a more expansionary monetary policy will have its greatest effect on

Accepted Answer

A)  the interest rate on a 30-year fixed-rate mortgage.
B)  the interest rate on 10-year government bonds.
C)  short-term interest rates.
D)  the 15-year corporate bond interest rate.E) A) and B)
F) A) and D)

Question 7

If the Fed unexpectedly shifts to a more expansionary monetary policy, which of the following will most likely occur in the short run?

Accepted Answer

A)  a decrease in the real interest rate
B)  an increase in unemployment
C)  a decrease in real GDP
D)  an increase in the nominal interest rateE) A) and D)
F) None of the above

Question 8

What effect does restrictive monetary policy have on short-term real interest rates?

Accepted Answer

A)  Restrictive monetary policy tends to push short-term interest rates upward.
B)  Restrictive monetary policy tends to push short-term interest rates downward.
C)  The effect of restrictive monetary policy on short-term interest rates is unpredictable.
D)  Restrictive monetary policy has no effect on short-term interest rates.E) A) and B)
F) A) and C)

Question 9

The "quantitative easing" policies of the Fed during, and following, the financial crisis of 2008-2009, resulted in

Accepted Answer

A)  rapid growth of both the money supply and nominal GDP.
B)  rapid growth of the money supply and a substantial increase in the rate of inflation.
C)  low interest rates and a sharp decline in the velocity of the money supply.
D)  low interest rates and a sharp increase in the velocity of the money supply.E) B) and C)
F) B) and D)

Question 10

If the U.S. government decided to pay off the national debt by creating money, what would be the most likely effect?

Accepted Answer

A)  a substantial reduction in real GDP
B)  a deflationary collapse
C)  rapid inflation
D)  an increase in the trade surplusE) A) and D)
F) B) and C)

Question 11

Which of the following weakened the demand stimulus effects of the fed's low interest rate policy during the years following the 2008-2009 recession?

Accepted Answer

A)  Rising stock prices in response to the low-interest rate policy.
B)  The lower cost of borrowing to undertake business investment.
C)  An increase in the velocity of money.
D)  A reduction in earnings of senior citizens and others from money market accounts, saving deposits, and similar forms of savings.E) C) and D)
F) All of the above

Question 12

Which of the following is true?

Accepted Answer

A)  Monetary policy influences long-term real interest rates more than short-term interest rates.
B)  Short-term interest rates are primarily determined by real factors and the expected inflation.
C)  A shift to a more expansionary monetary policy will tend to reduce short-term interest rates.
D)  A shift to a more expansionary monetary policy will tend to reduce the expected rate of inflation in the future.E) A) and B)
F) A) and C)

Question 13

When the Fed purchases additional securities and shifts to a more expansionary monetary policy,

Accepted Answer

A)  the inflation rate will rise almost immediately.
B)  the growth of output and employment will increase quickly.
C)  several months will typically pass before the shift in policy exerts much impact on output and employment.
D)  this policy will eventually lead to a decline in the general level of prices if it is continued for a prolonged period of time.E) C) and D)
F) A) and C)

Question 14

Cross country data illustrates that rapid expansion in the supply of money over a lengthy period of time (for example, a decade)  leads to

Accepted Answer

A)  rapid growth of real output.
B)  a low real rate of interest.
C)  high rates of inflation.
D)  an inflow of capital and a high rate of investment.E) A) and B)
F) None of the above

Question 15

Suppose the velocity of money is 8, the amount of money in circulation is $200 billion, the index of prices is 150, and real GDP is $10 billion. According to the strict quantity theory of money, if the money supply doubled to $400 billion,

Accepted Answer

A)  the velocity of money would fall to 4.
B)  the index of prices would increase to 300.
C)  real GDP would increase to $20 billion.
D)  the velocity of money would rise to 16.E) C) and D)
F) A) and B)

Question 16

Which of the following will increase interest rates in the short run?

Accepted Answer

A)  an decrease in reserve requirements
B)  the sale of bonds by the Federal Reserve in the open market
C)  a decrease in real GDP
D)  an decrease in the price levelE) B) and C)
F) A) and B)

Question 17

Large or persistent inflation is almost always caused by

Accepted Answer

A)  excessive government spending.
B)  excessive growth in the quantity of money.
C)  foreign competition.
D)  higher-than-normal levels of productivity.E) B) and D)
F) A) and D)

Question 18

If changes in monetary policy are going to help stabilize the economy, they must

Accepted Answer

A)  be expansionary.
B)  be restrictive.
C)  reduce the real rate of interest.
D)  be properly timed.
E)  stimulate aggregate demand.F) A) and B)
G) D) and E)

Question 19

Which of the following best describes the relationship between the velocity of money and the demand for money?

Accepted Answer

A)  The demand for money is not related to the velocity of money.
B)  When the demand for money increases, the velocity of money increases.
C)  The demand for money must be stable for the velocity of money to increase.
D)  When the demand for money declines, the velocity of money increases.E) All of the above
F) A) and B)

Question 20

Equilibrium in the loanable funds market is initially present at a stable price level (zero inflation)  and a nominal (and real)  interest rate of 4 percent. If a shift to expansionary monetary policy eventually leads to actual and expected inflation of 6 percent,

Accepted Answer

A)  both the nominal and real interest rates will rise to 10 percent.
B)  the nominal interest rate will rise to 10 percent, but the real interest rate will remain at 4 percent.
C)  the real interest rate will rise to 10 percent, but the nominal interest rate will remain at 4 percent.
D)  both the real and nominal interest rates will remain at 4 percent.E) B) and D)
F) None of the above

Exam 14: Modern Macroeconomics and Monetary Policy

Which of the following weakened the demand stimulus effects of the fed's low interest rate policy during the years following the 2008-2009 recession?

Correct AnswerverifiedShow Answer

According to the modern view, the impact of expansionary monetary policy will

Correct AnswerverifiedShow Answer

Equilibrium in the loanable funds market is initially present at a stable price level (zero inflation) and a nominal (and real) interest rate of 4 percent. If a shift to expansionary monetary policy eventually leads to actual and expected inflation of 6 percent,

Correct AnswerverifiedShow Answer

When the Fed purchases additional securities and shifts to a more expansionary monetary policy,

Correct AnswerverifiedShow Answer

Large or persistent inflation is almost always caused by

Correct AnswerverifiedShow Answer

Which of the following will increase interest rates in the short run?

Correct AnswerverifiedShow Answer

A decrease in the required reserve ratio would be

Correct AnswerverifiedShow Answer

Which of the following best describes the relationship between the velocity of money and the demand for money?

Correct AnswerverifiedShow Answer

If the U.S. government decided to pay off the national debt by creating money, what would be the most likely effect?

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

What effect does restrictive monetary policy have on short-term real interest rates?

Correct AnswerverifiedShow Answer

In the short run, an unanticipated shift to a more expansionary monetary policy is most likely to result in

Correct AnswerverifiedShow Answer

Cross country data illustrates that rapid expansion in the supply of money over a lengthy period of time (for example, a decade) leads to

Correct AnswerverifiedShow Answer

Suppose the velocity of money is 8, the amount of money in circulation is $200 billion, the index of prices is 150, and real GDP is $10 billion. According to the strict quantity theory of money, if the money supply doubled to $400 billion,

Correct AnswerverifiedShow Answer

Which of the following is inconsistent with the view that Fed monetary policy was excessively expansionary during 2010-2013?

Correct AnswerverifiedShow Answer

If the Fed unexpectedly shifts to a more expansionary monetary policy, which of the following will most likely occur in the short run?

Correct AnswerverifiedShow Answer

The "quantitative easing" policies of the Fed during, and following, the financial crisis of 2008-2009, resulted in

Correct AnswerverifiedShow Answer

If changes in monetary policy are going to help stabilize the economy, they must

Correct AnswerverifiedShow Answer

Empirical studies indicate that the velocity of money tends to increase when interest rates rise. Which of the following best explains why this is true?

Correct AnswerverifiedShow Answer

A shift to a more expansionary monetary policy will have its greatest effect on

Correct AnswerverifiedShow Answer

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