CHAPTER ELEVEN

Suppose that in an economy real GDP is $100, the price level index is 4, and the money supply is $50. What would the velocity of money be in this economy?

8

With output held constant, hyperinflation is likely to occur under which of the following conditions?

An increase in both the money supply and the velocity of money

Which one of the following statements best describes the chain of events that causes expansionary monetary policy to increase GDP?

Expansionary monetary policy lowers interest rates, which increases investment, which increases aggregate demand, which increases GDP

An increase in the quantity of imports will always lower the rate of inflation.

FALSE

If the supply of federal funds decreases and the Fed does nothing in response, the federal funds rate would tend to decrease.

FALSE

Money neutrality means that changes in the money supply won't change the rate of inflation

FALSE

Open market operations involve the Federal Reserve changing the reserve requirements of private banks.

FALSE

The Fed can increase the supply of money using open market operations by selling government bonds

FALSE

The United States data from 2000-2003 indicate that as the Fed lowered the federal funds rate, business investment increased.

FALSE

The difference between the M1 and M2 measures of money is that M2 includes the value of credit card balances while M1 doesn't.

FALSE

The discount rate is the interest rate determined in the private market for overnight loans of reserves among banks

FALSE

The federal funds rate is the rate the Fed charges banks for short-term loans.

FALSE

The quantity equation states that M/V = P × Y

FALSE

The quantity theory of money states that increases in prices must lead to increases in real GDP.

FALSE

Which one of the following statements is FALSE?

"Tight money" policies tend to increase the money supply growth rate.

What is the main policy recommendation of monetarists?

The Fed should keep the growth rate of the money supply constant.

Suppose the federal funds rate is currently at its target level. Then suppose the demand for federal funds increases. Which one of the following statements is TRUE?

The Fed would likely respond by increasing the supply of federal funds to keep the federal funds rate at its target level.

Which one of the following statements best summarizes the Federal Reserve's monetary policy over the years 2000-2006?

The Federal Reserve initially lowered the federal funds rate to avoid a recession but then increased the federal funds rate to avoid inflation.

Suppose the demand for federal funds increases, but the Fed's target level remains unchanged. Which one of the following statements is MOST LIKELY to be TRUE?

The Federal Reserve would act to keep the interest rate unchanged, but the amount of federal funds lent would increase.

Which one of the following is NOT likely to be a result of deflation?

Wealth will be redistributed from creditors to debtors.

Money neutrality implies that...

increasing the money supply will not affect the level of output.

The accelerator principle implies that the best predictor of business investment growth is which of the following variables?

Increases in GDP

What is the main difference between M1 and M2 as measures of money?

M2 includes the value of savings accounts while M1 does not.

Which one of the following is NOT likely to be a result of a high rate of inflation?

People will be more likely to postpone major purchases.

What does Classical monetary theory state will happen with an increase in the money supply?

Prices will rise and GDP will remain the same

Contractionary monetary policy would most likely be implemented when the inflation rate is considered to be too high.

TRUE

The quantity theory of money assumes that the velocity of money (V) is constant.

TRUE

The theory of monetarism states that the money supply should grow at a constant rate.

TRUE

When the Federal Reserve buys government bonds from a private bank, the private bank's reserves at the Federal Reserve will increase.

TRUE

With GDP and the money supply constant, an increase in the velocity of money will tend to put upward pressure on prices.

TRUE

How does the Federal Reserve affect the supply of money using open market operations?

The Fed buys government bonds from banks, which increases the banks' reserves with the Fed and allows them to make new loans.

The quantity theory of money assumes that the money supply is directly related to what variable?

The price level

What tends to be the relationship between the prime rate and the federal funds rate in the United States?

The prime rate tends to be three percentage points higher than the federal funds rate

Which one of the following is NOT included in the M2 measure of money?

The value of credit card balances