ch 16 econ

If money supply and money demand both increased by the same amount, then:

there would be no change in the nominal interest rate.

When money demand increases, the Fed cannot keep both the money supply and the interest rate from rising.

true

If the amount of money in circulation is $50 million and nominal GDP is $150 million, then the velocity of money is:

3

Which of the following is an impact of a contractionary policy?

A decrease in the money supply

Which of the following statements is true?

If nominal interest rates rise in an economy, the quantity of money demanded will decrease.

Which of the following will be a direct impact of the sale of a U.S. government bond to a bank by the Fed? The demand for money will increase. The supply of money will decrease. The supply of money will remain unchanged. The supply of money will increase. The demand for money will decrease.

The supply of money will decrease.

If the Fed sells bonds, the short-run impact of this policy will tend to include: an increase in real output. a reduction in unemployment. an increase in real interest rates. a decrease in real interest rates. an increase in the inflation rate.

an increase in real interest rates.

If the Fed wanted to reduce the federal funds interest rate, it might: sell government securities. pay higher interest on banks' reserves. increase the required reserve ratio. increase the discount rate. buy government securities.

buy government securities.

An increase in the interest rates will:

cause people to hold less money, which in turn means that the velocity of money increases.

When an economy is initially at full employment, a(n):

contractionary monetary policy can result in decreased real output, but only in the short run.

The most likely short-run impact of an unanticipated increase in the money supply is a(n):

decrease in the real interest rate, which in turn stimulates investment and GDP.

When the economy is in a recession, a(n): expansionary monetary policy can potentially result in increased real output in both the short run and the long run. expansionary monetary policy can potentially result in increased real output, but only in the short run. contractionary monetary policy can potentially result in increased real output, but only in the short run. contractionary monetary policy can potentially result in increased real output in both the short run and the long run. expansionary monetary policy can further increase the recessionary gap due to the impact of the negative sentiments in the market.

expansionary monetary policy can potentially result in increased real output in both the short run and the long run.

If monetary authorities persistently expand the money supply at a rapid rate, the probable result will be: the rapid growth of real GDP. deflation. a high rate of unemployment. inflation. low nominal interest rates.

inflation

In its original role as the lender of last resort, the Fed was supposed to:

keep the money supply from drying up during periods of economic panic.

Which of the following statements is true? The price level in an economy is negatively related to the quantity of money in the economy. In an economy, the velocity of money is not constant over time. Control over the money supply implies that the Fed has precise control over real GDP. A high velocity of money represents a low level of inflation in an economy. In an economy, the velocity of money is constant over time.

In an economy, the velocity of money is not constant over time.

If inflation is the major problem in an economy, which of the following would be an appropriate monetary policy response?

The sale of government bonds

Rising reserve requirements, other things being equal, would tend to: decrease the money supply. increase aggregate demand. increase the dollar volume of loans made by the banking system. depreciate the value of the currency. increase the money supply.

decrease the money supply.

When money demand decreases, the Fed can choose between:

decreasing interest rates or decreasing the supply of money to restore equilibrium in the money market.

Changing reserve requirements is the most important method the Federal Reserve uses to change the supply of money. false true

false

Expansionary monetary policy would be an appropriate policy response to an inflationary gap.

false

In the United States, fiscal policy is the responsibility of the Federal Reserve Board of Governors and the Federal Open Market Committee. false true

false

The chief function of the Federal Reserve is to be the federal government's tax collection institution. false true

false

Other things equal, the level of real GDP will tend to increase in the short run: if there is an increase in the discount rate. if reserve requirements are increased. if there is an open market sale by the Fed. if there is a reduction in the discount rate. if the Fed pays higher interest on reserves

if there is a reduction in the discount rate.

A combination of the Fed's purchases of government securities and a decrease in reserve requirements would:

increase the money supply.

Expansionary and contractionary monetary policy can cause the exchange value of the dollar to change in response. true false

true

Higher rates of interest increase the opportunity cost of holding money balances.

true

If unemployment is a major problem in an economy, which of the following would be an appropriate monetary policy response? A decrease the discount rate The sale of government bonds A decrease in income taxes An increase in public investments An increase in the reserve ratio

A decrease the discount rate

Which of the following statements is true of the Fed?

All decisions of the Fed are subject to approval by the chairperson of the Fed.

Which of the following would tend to increase unemployment in an economy in the short run?

An increase in the discount rate

Which of the following actions of the Fed is likely to lead to a decrease in money supply?

An increase in the interest rate it pays on reserves

Which of the following is true about the equation of exchange?

According to the equation of exchange, nominal GDP is equal to the product of the money supply and velocity of money.

Which of the following is the primary cause of hyperinflation? High interest rates High levels of taxation An excessive increase in money supply A decrease in government purchases Large subsidies on necessity goods

An excessive increase in money supply

Which of the following statements is true of an expansionary monetary policy? An expansionary monetary policy will definitely result in inflation in an economy with a high rate of unemployment. An expansionary monetary policy will result in inflation if there is full employment in an economy. An expansionary monetary policy causes interest rates to rise in an economy. An expansionary monetary policy causes investment in an economy to decrease. An expansionary monetary policy shifts the aggregate demand curve to the left.

An expansionary monetary policy will result in inflation if there is full employment in an economy.

Figure 16-2 shows the short-run macroeconomic equilibrium of an economy. Based on the situation depicted in the graph below, which of the following would be an appropriate monetary policy response? Figure 16-2 A decrease in reserve requirements An increase in the discount rate A decrease in the interest rate paid on reserves A decrease in the discount rate The purchase of government bonds

An increase in the discount rate

Which is potentially the most powerful tool available to the Fed to control the supply of money? Moral suasion Open market operations Discount rate changes Changes in reserve requirements Changes in the federal funds rate

Changes in reserve requirements

If inflation is the major problem in an economy, which of the following would be an appropriate monetary policy response? Providing more cash transfers Buying government bonds Increasing the discount rate Decreasing the volume of cash transfers Decreasing reserve requirements

Increasing the discount rate

Which of the following policies is most frequently adopted when the Fed is attempting to adjust the money supply? Changing reserve requirements Changing the interest rate it pays on reserves Changing the federal funds rate Changing the discount rate Open market operations CONTINUE

Open market operations

Which of the following would constitute contractionary monetary policy by the Fed?

Open market sales of government securities and an increase in the discount rate

Which of the following statements is true? The quantity of money demanded varies directly with the nominal rate of interest. Rising national income will shift the money demand curve to the right, leading to a new higher equilibrium nominal interest rate in the short run. Money market equilibrium occurs at the nominal interest rate where the aggregate demand equals the quantity of money supplied. Rising national income will increase the demand for money, leading to a new lower equilibrium real interest rate in the short run. Rising national income will decrease the demand for money, leading to a new higher equilibrium nominal interest rate in the short run.

Rising national income will shift the money demand curve to the right, leading to a new higher equilibrium nominal interest rate in the short run.

Which of the following statements is true? The quantity of money demanded varies inversely with the nominal interest rate, while the supply of money remains unaffected by the nominal interest rate. The quantity of money demanded varies directly with the nominal interest rate, and the supply of money varies inversely with the nominal interest rate. The supply of money varies inversely with the nominal interest rate, while the quantity of money demanded remains unaffected by the nominal interest rate. The quantity of money demanded varies inversely with the nominal interest rate, and the supply of money varies directly with the nominal interest rate. The quantity of money supplied varies inversely with the nominal interest rate, while the supply of money remains unaffected by the nominal interest rate.

The quantity of money demanded varies inversely with the nominal interest rate, while the supply of money remains unaffected by the nominal interest rate.

If inflation is the major problem in an economy, which of the following would be an appropriate monetary policy response? A decrease in the interest paid on reserves The sale of government bonds An increase in tax rates A decrease in reserve requirements A decrease in government spending

The sale of government bonds

When the Fed unexpectedly increases the money supply, it will cause: an increase in aggregate demand because the dollar will depreciate on the foreign exchange market, leading to a decrease in net exports. an increase in aggregate demand because the dollar will appreciate on the foreign exchange market, leading to an increase in net exports. an increase in aggregate demand because real interest rates will rise, stimulating business investment and consumer purchases. an increase in aggregate demand because lower interest rates will tend to increase asset prices, stimulating current consumption. an increase in aggregate demand because higher interest rates will tend to increase asset prices, which increases wealth and thereby stimulates current consumption.

an increase in aggregate demand because lower interest rates will tend to increase asset prices, stimulating current consumption.

If the Fed buys a U.S. government bond from a member, the: banking system has more reserves and the rates of interest will increase. banking system has more reserves and the money supply tends to grow. banking system has more reserves and the money supply tends to fall. banking system has less reserves and the money supply tends to fall. banking system has less reserves and the money supply tends to grow.

banking system has more reserves and the money supply tends to grow.

The money supply is almost perfectly inelastic because: the Fed makes more money available in response to higher interest rates. commercial banks can face losses at lower rates of interest. people will want to be supplied with more loans as interest rates rise. banks generally find loans more profitable than keeping their assets as cash. the Fed lowers the discount rate as interest rates rise.

banks generally find loans more profitable than keeping their assets as cash.

The Fed has imperfect control over the money supply: because of unpredictable changes in reserve requirements. because money supply is also determined by demand-side factors. because the Fed does not know how much reserves will change when it buys or sells securities. because the public responds to open market operations in an unpredictable fashion. because of unpredictable changes in public desire to hold cash and banks' desires to hold excess reserves.

because of unpredictable changes in public desire to hold cash and banks' desires to hold excess reserves.

An unexpected change in the nominal interest rate will: change the real interest rate by a greater amount than change in the nominal interest rate in the short run. change the real interest rate by a smaller amount than the change in the nominal interest rate in the long run. change the real interest rate by the same amount as the change in the nominal interest rate in the short run. change the real interest rate by a greater amount than the change in the nominal interest rate in the long run. change the real interest rate by a smaller amount than the change in the nominal interest rate in the short run.

change the real interest rate by the same amount as the change in the nominal interest rate in the short run.

The Federal Reserve banks are owned by: the American people as a whole. commercial banks. the Federal Government. the chairman of the Federal Reserve Board of Governors. the citizens of each Federal Reserve district

commercial banks.

The Fed would engage in a(n) _____ if it wanted to close an inflationary gap. contractionary monetary policy expansionary fiscal policy associated borrowing policy contractionary fiscal policy expansionary monetary policy CONTINUE

contractionary monetary policy

In the long run, an expansionary monetary policy will: decrease real output if the economy is protected from foreign interventions. increase real output when actual output is currently beyond the economy's long-run capacity. increase real output when the economy is currently at full employment. increase real output when the economy currently operates below its capacity. decrease real output at virtually any output level.

decrease real output at virtually any output level.

When the economy is initially at full employment, an: expansionary monetary policy will not tend to decrease the price level in the short run and the long run. expansionary monetary policy will not tend to decrease the price level in the short run but not in the long run. expansionary monetary policy will tend to increase the price level in the short run but not in the long run. expansionary monetary policy will tend to increase the price level in the long run but not in the short run. expansionary monetary policy will tend to increase the price level in the short run and the long run.

expansionary monetary policy will tend to increase the price level in the short run and the long run.

Open market operations directly change the rate of interest at which banks can borrow funds from the Fed.

false

The Fed is a part of the executive branch of the federal government. false true

false

The interest rate that the Fed charges banks for borrowing funds is called the federal funds rate. false true CONTINUE

false

The money supply is very sensitive to changes in the rate of interest.

false

There are 50 Reserve Banks in the Federal Reserve System, one for each state.

false

If the money supply grew by 6 percent, velocity fell by 2 percent, and price level remained the same, then real GDP would: increase by 12 percent. decrease by 8 percent. decrease by 4 percent. increase by 8 percent. increase by 4 percent.

increase by 4 percent.

Assume that the central bank of a country purchases $5,000 worth of government treasury bonds from a firm, which promptly deposits the money in a national Bank. Assuming that the required reserve ratio is 25 percent and banks keep zero excess reserves, the money supply will ultimately:

increase by a maximum of $20,000. CONTINUE

Other things equal, an expansionary monetary policy will tend to _____ in the short run.

increase money supply and decrease interest rates

According to the equation of exchange, an increase in money supply in an economy, other things equal, would:

increase nominal GDP.

Higher rates of inflation would tend to:

increase velocity and increase nominal GDP.

If nominal GDP is $954 billion and velocity is 9, then the money supply: is equal to $122 billion. is equal to $106 billion. is greater than $8 trillion. is equal to $115 billion. is equal to $98 billion.

is equal to $106 billion.

If the demand for money decreases, but the Fed keeps the money supply the same, then: both nominal interest rates and aggregate demand will increase. nominal interest rates will fall and aggregate demand will increase. both nominal interest rates and aggregate demand will decrease. both nominal interest rates and aggregate supply will increase. nominal interest rates will rise and aggregate supply will fall. CONTINUE

nominal interest rates will fall and aggregate demand will increase.

When the money supply decreases, other things being equal, _____. real interest rates rise and investment spending falls nominal interest rates and investment spending fall real interest rates and investment spending rise real interest rates and investment spending fall real interest rates fall and investment spending rises

real interest rates rise and investment spending falls

If the Fed was trying to reduce demand-pull inflation, it might: increase the rate of interest on reserves. sell government securities, raise reserve requirements, and raise the discount rate. sell government securities, lower reserve requirements, and lower the discount rate. sell government securities, lower reserve requirements, and raise the discount rate. buy government securities, lower reserve requirements, and raise the discount rat

sell government securities, raise reserve requirements, and raise the discount rate.

One uniquely American aspect of central banking is that: the dual banking system created two parallel central banks. the Federal Reserve is a private institution with no governmental supervision. the U.S. Treasury runs the Federal Reserve as an extension of the Executive Branch. the United States has 50 central banks, one for each state. the United States has 12 central banks rather than one. CONTINUE

the United States has 12 central banks rather than one.

The equation of exchange states that: the reciprocal of the reserve requirement equals the deposit expansion multiplier. the money supply times the velocity of money equals the price level times the quantity of goods and services produced. government spending equals taxes plus the federal budget deficit. the price level times the velocity of money equals the money supply times the quantity of goods and services produced. the price level times the money supply equals the velocity of money times the quantity of goods and services produced.

the money supply times the velocity of money equals the price level times the quantity of goods and services produced.

The velocity of money can be defined as: the speed at which economic activity takes place in an economy. the speed at which tax cuts are spent in an economy. the rate at which the currency of a country appreciates during an inflationary gap in an economy. the speed at which the multiplier effect takes place in an economy. the turnover rate of money in an economy.

the turnover rate of money in an economy.

A contractionary monetary policy would be an appropriate policy response to an inflationary gap. true false

true

If the money supply increases in an economy, the price level will rise as long as the velocity of money and real GDP remain constant.

true

In the long run, inflation results from increases in a nation's money supply that exceed increases in its output of goods and services.

true

Monetary policy can influence interest rates, which in turn can change spending. true false

true

Most of the key decisions of the Federal Reserve are actually made by its Federal Open Market Committee. true false

true

The Open Market Committee oversees the money supply through the Fed's sale and purchase of government securities. true false

true

Velocity represents the average number of times that a dollar is used in purchasing final goods and services in a one-year period. true false

true

Figure 16-1 shows the short-run macroeconomic equilibrium of an economy. Based on the situation depicted in the graph below, which of the following would be an appropriate monetary policy response? Figure 16-1 An increase in the discount rate An increase in the interest rate on reserves The purchase of government bonds An increase in reserve requirements The sale of government bonds

The purchase of government bonds

When the Fed wants to expand the money supply through open market operations, it:

purchases government securities.

If the money supply increased by 4 percent and velocity increased by 4 percent, assuming that the rate of inflation is zero, _____.

real GDP would increase by 8 percent

In an economy, if the velocity of money is equal to 2, the value of real GDP is equal to $300 million, and the price level is 10, then the value of nominal GDP will be equal to: $150 million. $600 million. $3 billion. $1.5 billion. $6 billion. CONTINUE

$3 billion.

A combination of an increase in the discount rate and reserve requirements would:

decrease the money supply.

A one percentage point change in the required reserve ratio would change the money supply by less than one percent, other things being equal. false true CONTINUE

false

Investment in the U.S. economy would increase if: the Fed purchases a government bond. the Fed sells a government bond. the Fed raises the reserve requirement. the Fed increases the interest paid on reserves. the Fed raises the reserve requirement.

the Fed purchases a government bond.

In the United States, decisions regarding purchases and sales of government securities are made by: the Federal Open Market Committee. the largest commercial bank of the country. the Discount Committee. the Federal Funds Committee. the President of the United States.

the Federal Open Market Committee.

In order to determine the velocity of money, we need to know: the money demand and real GDP. the interest rate and nominal GDP. nominal GDP and real GDP. the money supply and nominal GDP. the money supply and the price level.

the money supply and nominal GDP.

If the economy's real GDP is growing at 3 percent each year and velocity is constant, for the price level to increase, _____. the money supply would have to decrease at 3 percent per year the money supply would have to remain stable the money supply would have to grow at exactly 3 percent per year the money supply would have to grow at less than 3 percent per year the money supply would have to grow at more than 3 percent per year

the money supply would have to grow at more than 3 percent per year

When nominal interest rates are higher, _____. the opportunity cost of holding monetary assets is lower and the quantity of money demanded, but not the demand for money, is greater both the opportunity cost of holding monetary assets and the quantity of money demanded are higher the opportunity cost of holding monetary assets is higher and therefore the quantity of money demanded is higher the opportunity cost of holding monetary assets is lower and the demand for money is higher the opportunity cost of holding monetary assets is higher and the quantity of money demanded, but not the demand for money, is lower CONTINUE

the opportunity cost of holding monetary assets is higher and the quantity of money demanded, but not the demand for money, is lower

The federal funds market rate is: the rate charged by banks on loans to the public. the rate at which the central bank provides funds to commercial banks. the rate of interest that the Fed pays the commercial banks on their reserves. the rate charged on loans provided by one bank to another to meet the reserve requirement. always set higher than the discount rate.

the rate charged on loans provided by one bank to another to meet the reserve requirement.