Chapter 21 Money and Banking

Which of the following would not shift the aggregate expenditures curve? a. A change in the real interest rate b. Changes in consumer or business confidence c. Fiscal policy changes d. Changes in net exports that result from exchange rate changes

a. A change in the real interest rate

Which of the following would cause an increase in the potential output of a country? a. An increase in the capital stock b. A temporary decrease in exports c. An increase in the money supply d. A decrease in the labor force

a. An increase in the capital stock

Which of the following statements is correct? a. The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and inversely with potential output. b. The long-run real interest rate varies inversely with changes in non-interest sensitive components of aggregate demand and inversely with potential output. c. The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and directly with potential output. d. The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and does not vary with potential output.

a. The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and inversely with potential output.

An inflation rate above the target rate will result in: a. a movement up along the monetary policy reaction curve and a movement up the dynamic aggregate demand curve. b. a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve. c. a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve. d. a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve.

a. a movement up along the monetary policy reaction curve and a movement up the dynamic aggregate demand curve.

If policymakers are aggressive in keeping current inflation near the target inflation rate then the monetary policy reaction curve will: a. be steep. b. be flat. c. have an undefined slope. d. be vertical.

a. be steep.

Evidence points out that since the mid-1950's just about every recession was preceded by rising interest rates. This suggests that the recessions were: a. caused in part by the actions of the Federal Reserve. b. the result of changes in consumer confidence. c. due to increases in oil prices and other production costs. d. caused by simultaneous shifts in aggregate demand and aggregate supply.

a. caused in part by the actions of the Federal Reserve.

The economy is in both a short- and long-run equilibrium if: a. current inflation equals expected inflation and current output equals potential output. b. the aggregate demand curve intersects the short-run aggregate supply curve. c. the long-run aggregate supply curve is at potential output. d. the short-run aggregate supply curve intersects the long-run aggregate supply curve at potential output.

a. current inflation equals expected inflation and current output equals potential output.

In the long run, current output will: a. equal potential output. b. be less than potential output. c. be above potential output. d. only equal potential output if unemployment is zero.

a. equal potential output.

If the axes in the model for the monetary policy reaction curve are the real interest rate (vertical axis) and the rate of inflation (horizontal axis), then the monetary policy reaction curve would: a. have a positive slope. b. have a negative slope. c. have a zero slope. d. be vertical.

a. have a positive slope.

Consumption can be sensitive to changes in the real interest rate because: a. higher interest rates can increase the cost of durable goods like automobiles. b. higher interest rates will result in less saving. c. lower real interest rates will decrease spending on durable goods and increase spending on non-durable goods. d. lower interest rates increase savings.

a. higher interest rates can increase the cost of durable goods like automobiles.

The conditions for long-run equilibrium include each of the following, except: a. imports equal exports. b. current inflation is steady and equals target inflation. c. current output equals potential output. d. current inflation equals expected inflation.

a. imports equal exports.

With the economy at its potential level of output, the federal government undertakes a large military buildup; all other things equal, the impact on the long-run real interest rate will be to: a. increase. b. decrease. c. remain constant since output is at its potential level. d. change at the same rate as inflation.

a. increase.

Of all of the components of aggregate demand, the most interest sensitive is: a. investment. b. government purchases. c. consumption. d. net exports.

a. investment.

If the level of current output suddenly falls below the potential level of output, central bankers would: a. lower the real interest rate. b. raise the real interest rate. c. keep the real interest rate constant and focus on only changing the nominal interest rate. d. attempt to shift the aggregate expenditures curve.

a. lower the real interest rate.

Business cycles are viewed as: a. movements in the short-run equilibrium. b. situations where aggregate demand does not equal short-run aggregate supply. c. inevitable; every economy must experience them. d. movements in the long-run equilibrium.

a. movements in the short-run equilibrium.

The long-run aggregate supply curve intersects the horizontal axis at the: a. potential level of output. b. current level of output. c. expected rate of inflation. d. actual rate of inflation.

a. potential level of output.

The FOMC targets the federal funds rate, but if they are going to alter the course of the economy they must influence the: a. real interest rate as well. b. long-term nominal interest rate as well. c. real exchange rate as well. d. nominal exchange rate as well.

a. real interest rate as well.

Aggregate supply is the quantity of: a. real output supplied at each level of inflation. b. nominal output supplied at each level of inflation. c. real output supplied at each level of real interest rate. d. output the country wants at each level of inflation.

a. real output supplied at each level of inflation.

If monetary policymakers fear a recession resulting from increased pessimism on the part of business people, and they want to avoid the recession, they would: a. shift the monetary policy reaction curve to the right. b. shift the monetary policy reaction curve to the left. c. likely lower their target rate for inflation. d. encourage fiscal policymakers to act.

a. shift the monetary policy reaction curve to the right.

The effect on the monetary policy reaction curve resulting from policymakers decreasing their inflation target would be: a. the monetary policy reaction curve shifting to the left. b. a movement up the existing monetary policy reaction curve. c. a movement down the existing monetary policy reaction curve. d. the monetary policy reaction curve shifting to the right.

a. the monetary policy reaction curve shifting to the left.

In the long run the inflation rate equals the level implied by: a. the rate of money growth. b. aggregate demand. c. the exchange rate. d. fiscal policy.

a. the rate of money growth.

Which of the following statements is incorrect? a. The point where the short-run and long-run supply curves intersect corresponds to the potential level of output. b. Any point on the short-run aggregate supply curve reflects current inflation equals target inflation. c. Inflation and output are unrelated in the long run. d. In the long run, inflation is determined by monetary policy.

b. Any point on the short-run aggregate supply curve reflects current inflation equals target inflation.

For central bankers to alter the real interest rate by changing the nominal interest rate, which of the following must be true? a. The rate of inflation has to remain constant. b. Inflation expectations are quite stable. c. The expected rate of inflation has to change. d. The change in the expected rate of inflation must equal the change in the nominal interest rate.

b. Inflation expectations are quite stable.

What should be the impact on aggregate expenditures from an increase in the real interest rate? a. It should increase b. It should decrease c. It should remain constant d. The impact is indeterminate

b. It should decrease

Which of the following is not a part of aggregate expenditure? a. Consumption b. The nominal interest rate c. Government purchases d. Net exports

b. The nominal interest rate

Which of the following would not be included in aggregate expenditures? a. Your purchase of a new car b. The value of 100 shares of Microsoft stock you purchased c. The purchase of new textbooks by your local school district d. The value of blue jeans produced in the U.S. and exported to Japan

b. The value of 100 shares of Microsoft stock you purchased

Which of the following statements is most correct? a. When the real interest rate increases the reward for saving decreases. b. When the real interest rate decreases current consumption becomes less expensive and the reward for saving decreases. c. When the real interest rate decreases the cost of current consumption increases. d. When the real interest rate increases the level of saving always decreases.

b. When the real interest rate decreases current consumption becomes less expensive and the reward for saving decreases.

To an economist, the term "inflation" refers to: a. any price increases. b. a continually rising price level. c. a one-time change in the average price level. d. increases in prices of important goods like food and energy

b. a continually rising price level.

An inflation rate below the target rate will result in: a. a movement up along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve. b. a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve. c. a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve. d. a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve.

b. a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.

The monetary policy reaction curve: a. is the guideline the Fed publishes in setting their interest rate target. b. approximates the behavior of central bankers. c. has remained fairly constant over the years. d. is set by Congress and given to the Fed as a guideline to follow.

b. approximates the behavior of central bankers.

A decrease in the inflation target by the central bank would: a. have no impact on the positioning of the dynamic aggregate demand curve. b. cause the dynamic aggregate demand curve to shift to the left. c. cause the dynamic aggregate demand curve to shift to the right. d. be reflected by a movement down and along the existing dynamic aggregate demand curve

b. cause the dynamic aggregate demand curve to shift to the left.

Each of the following factors contribute to the slope of the dynamic aggregate demand curve, except the: a. strength of the effect of inflation on real balances. b. current level of technology. c. extent to which monetary policymakers react to a change in current inflation. d. size of the response of aggregate expenditures to changes in the interest rate.

b. current level of technology.

A monetary policy reaction curve requires the central bank to have a(n): a. money growth target. b. inflation target. c. unemployment target. d. economic growth target.

b. inflation target.

The dynamic aggregate demand curve illustrates that the relationship between inflation and real output is: a. direct. b. inverse. c. independent. d. undefined.

b. inverse.

The relationship between the long-run real interest rate and potential output: a. is direct. b. is inverse. c. is constant since the long-run real interest rate is primarily determined by risk. d. depends on the actions of central bankers.

b. is inverse.

When the monetary policymakers raise the target inflation rate they: a. raise the current real inflation rate at every level of current inflation. b. lower the current real interest rate at every level of current inflation. c. in effect shift the monetary policy reaction curve to the left. d. in effect move up along the current monetary policy reaction curve.

b. lower the current real interest rate at every level of current inflation.

The fact that central bankers tend to respond to higher rates of inflation by increasing the real interest rate is: a. one reason the dynamic aggregate demand curve shifts left. b. one reason the dynamic aggregate demand curve slopes downward. c. one reason the dynamic aggregate demand curve shifts right. d. why the monetary policy reaction curve has a negative slope.

b. one reason the dynamic aggregate demand curve slopes downward.

If government purchases increase and as a result push current output above potential output, monetary policymakers are likely to: a. lower the real interest rate. b. raise the real interest rate. c. keep the real interest rate constant and focus on only changing the nominal interest rate. d. purchase Treasury securities.

b. raise the real interest rate.

The aggregate demand curve shows the quantity of: a. nominal output demanded at each level of inflation. b. real output demanded at each level of inflation. c. output made available at each level of inflation. d. real output demanded at each level of real interest rate.

b. real output demanded at each level of inflation.

If policymakers are not aggressive about keeping inflation close to the target rate, the slope of the monetary policy reaction curve would be: a. steep. b. relatively flat. c. horizontal. d. negative.

b. relatively flat.

Evidence points out that since the mid-1950's just about every recession was preceded by: a. low interest rates. b. rising interest rates. c. falling interest rates. d. negative real interest rates.

b. rising interest rates.

Recent policy statements by the FOMC announce and explain its: a. targets for money growth with no mention of interest-rate targets. b. short-term interest-rate and balance-sheet adjustments with no mention of money growth targets. c. decisions for long-term interest rates. d. decisions for money-growth targets but also mentioning short-term interest-rate decisions.

b. short-term interest-rate and balance-sheet adjustments with no mention of money growth targets.

The dynamic aggregate demand curve has a negative slope for all of the following reasons except: a. the reduction in real wealth caused by inflation. b. the fact that high rates of inflation are good for the stock market. c. the redistribution that occurs as inflation has a greater impact on the poor than it does on the wealthy. d. higher current inflation leads policymakers to increase the real interest rate, which depresses various components of aggregate expenditures.

b. the fact that high rates of inflation are good for the stock market.

A characteristic of long-run equilibrium is the economy is producing its potential output. This is: a. the maximum level of output the economy could produce at any time. b. the level of output the economy produces when its resources are used at normal rates. c. defined as using 80 percent of the economy's resources at any time. d. the level of output consistent with an unemployment rate of 7.5%.

b. the level of output the economy produces when its resources are used at normal rates.

Empirical evidence suggests that over the last several decades: a. the nominal and real federal funds rates are related inversely. b. the nominal and real federal funds rates are highly positively correlated. c. while the FOMC has had a lot of influence over the nominal federal funds rate, they have been less successful at changing the real federal funds rate. d. there is no correlation between the nominal and real federal funds.

b. the nominal and real federal funds rates are highly positively correlated.

If a point lies on the monetary policy reaction curve, and at this point the inflation rate equals the target rate of inflation, we know that: a. the real interest rate corresponding to this point is above the long-run real interest rate. b. the real interest rate corresponding to this point is equal to the long-run real interest rate. c. the real interest rate corresponding to this point is below the long-run real interest rate. d. current output is above potential output.

b. the real interest rate corresponding to this point is equal to the long-run real interest rate.

If output and inflation are unrelated in the long run, the long-run aggregate supply curve must be: a. horizontal. b. vertical. c. upward sloping. d. non-existent.

b. vertical.

Which of the following would not be included in aggregate expenditures? a. New military equipment purchased by the federal government b. New computers purchased by a law firm c. Social security payments made by the government to retirees d. Tuition payments made by college students

c. Social security payments made by the government to retirees

A rightward shift in the dynamic aggregate demand curve could result from: a. a decrease in government purchases. b. an increase in investment resulting from a lower inflation rate. c. a rightward shift of the monetary policy reaction curve. d. a leftward shift of the monetary policy reaction curve.

c. a rightward shift of the monetary policy reaction curve.

The Fed hopes to impact short-run inflation and output by altering: a. the production function. b. aggregate supply. c. aggregate demand. d. fiscal policy.

c. aggregate demand.

If the economy is in long-run equilibrium: a. inflation should be accelerating. b. current output should be greater than potential output. c. current inflation should equal expected inflation. d. current inflation should be less than expected inflation.

c. current inflation should equal expected inflation.

Select the answer which best completes the following statement: "at any point along the long-run aggregate supply curve..." a. expected inflation equals current inflation and current output is below potential output. b. the economy is moving toward its potential output level. c. current output equals potential output and expected inflation equals current inflation. d. expected inflation is moving toward current inflation.

c. current output equals potential output and expected inflation equals current inflation.

Increases in the real interest rate in the U.S. will cause net exports to: a. decrease, because the dollar depreciates. b. increase, because the dollar depreciates. c. decrease, because the dollar appreciates. d. increase, because the dollar appreciates.

c. decrease, because the dollar appreciates.

In the U.S., most of the recessions are associated with: a. ill-timed fiscal policy. b. decreasing net exports. c. decreases in investment. d. large decreases in consumption.

c. decreases in investment.

In the long run, if we ignore changes in velocity, inflation will: a. be zero. b. equal the rate of money growth c. equal money growth less the growth in potential output. d. equal money growth plus the growth in potential output.

c. equal money growth less the growth in potential output.

The slope of the monetary policy reaction curve is determined by: a. how strongly the economy reacts to changes in the nominal interest rate. b. how strongly the inflation rate impacts peoples' decisions. c. how aggressively policymakers change interest rates in response to deviations between current and target inflation rates. d. people's expectations for inflation.

c. how aggressively policymakers change interest rates in response to deviations between current and target inflation rates.

If a recession were the result of monetary policy, we should observe: a. inflation increasing as output decreases. b. potential output decreasing. c. inflation slowing as output falls. d. a high rate of money growth.

c. inflation slowing as output falls.

If the slope of the monetary policy reaction curve is relatively flat, it means that central bankers are: a. very concerned about keeping inflation close to the target rate. b. not concerned at all about inflation. c. less concerned about keeping inflation close to its short-run target. d. not going to let inflation deviate from its target at all.

c. less concerned about keeping inflation close to its short-run target.

The point where the central bank's target inflation rate is consistent with the long-run real interest rate lies: a. above the monetary policy reaction curve. b. below the monetary policy reaction curve. c. on the monetary policy reaction curve. d. on the horizontal (inflation) axis.

c. on the monetary policy reaction curve.

One way inflation reduces aggregate demand is by: a. increasing nominal GDP. b. increasing velocity. c. reducing real balances. d. increasing wealth.

c. reducing real balances.

The self-correcting mechanism to return the economy to potential output from output gaps is the change in: a. potential output. b. aggregate demand. c. short-run aggregate supply. d. the real interest rate by the central bank.

c. short-run aggregate supply.

In the short run, the aggregate supply curve is: a. vertical. b. horizontal. c. upward sloping. d. downward sloping.

c. upward sloping.

Which of the following statements is most accurate? a. Potential output is determined by current output. b. When an expansionary gap exists, current output is below potential output. c. Current output cannot exceed potential output. d. During a recessionary gap, current output is below potential output.

d. During a recessionary gap, current output is below potential output.

Which component of aggregate expenditures is the least sensitive to changes in the real interest rate? a. Investment b. Consumption c. Net exports d. Government purchases

d. Government purchases

What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate? a. The monetary policy reaction curve shifts to the left b. A movement up the existing monetary policy reaction curve c. A movement down the existing monetary policy reaction curve d. The monetary policy reaction curve shifts to the right

d. The monetary policy reaction curve shifts to the right

Short-run movements in inflation and output are ultimately attributed to changes in: a. aggregate demand. b. aggregate supply. c. foreign policy. d. aggregate demand and aggregate supply.

d. aggregate demand and aggregate supply.

The debate over the causes of recessions in the U.S. in recent years has included arguments about: a. monetary policy, but not higher oil prices. b. decreases in exports. c. higher oil prices, but not monetary policy. d. both monetary policy and higher oil prices.

d. both monetary policy and higher oil prices.

The intersection of the aggregate demand curve and the short-run aggregate supply curve determines: a. current inflation, but not current output. b. potential output. c. current output, but not current inflation. d. current output and current inflation.

d. current output and current inflation.

The potential output of a country would increase as a result of each of the following, except: a. an increase in population. b. an increase in capital per worker. c. technological innovation that increases labor productivity. d. depreciation of the capital stock.

d. depreciation of the capital stock.

A decrease in the real interest rate in the U.S. will cause net exports to: a. increase because exports will remain constant but imports will decrease. b. decrease because exports will decrease and imports will increase. c. decrease because exports will increase but imports will increase. d. increase because exports will increase and imports will decrease.

d. increase because exports will increase and imports will decrease.

If inflation is very high, say 50 or 100 percent a year, monetary policymakers wishing to lower it will shift their focus to controlling: a. the long-term interest rate. b. the short-term interest rate. c. the exchange rate. d. money growth.

d. money growth.

If most people expect the inflation rate will increase, the: a. long-run aggregate supply curve would shift right. b. aggregate demand curve would shift right. c. short-run aggregate supply curve would shift to the right. d. short-run aggregate supply curve would shift to the left

d. short-run aggregate supply curve would shift to the left

Potential output of the country when viewed over long periods of time: a. rises in spurts and then starts a downward trend that can last years. b. is surprisingly constant. c. always decreases. d. tends to rise over time.

d. tends to rise over time.

A decrease in taxes would cause: a. the dynamic aggregate demand curve to shift to the left. b. a movement down and along the existing dynamic aggregate demand curve. c. a movement up and along the existing dynamic aggregate demand curve. d. the dynamic aggregate demand curve to shift to the right.

d. the dynamic aggregate demand curve to shift to the right.

It has been argued that the information technology age has greatly increased productivity and potential output. If this is true: a. the long-run real interest rate is also higher as a result. b. nominal long-run interest rates should have increased. c. we should have seen lower short-run interest rates than we have seen. d. the long-run real interest rate is lower as a result.

d. the long-run real interest rate is lower as a result.

Given the equation of exchange, MV = PY, when central bankers control short-term nominal interest rates by adjusting the level of reserves in the banking system, their actions are expected to primarily affect: a. the rate of growth of V. b. the value of V. c. potential Y as opposed to current Y. d. the rate of growth of M.

d. the rate of growth of M.

In the short run, the point on the aggregate demand curve where an economy will end up depends on: a. the money supply. b. the long-run rate of inflation. c. potential output. d. the short-run aggregate supply curve.

d. the short-run aggregate supply curve.