Homework 7

Because the Fed determines the money supply, the: a) money supply curve is downward sloping b) money supply curve is upward sloping c) money supply curve is vertical d) money supply curve is horizontal

c

During the Christmas shopping season the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will __________. a) increase b) decrease c) remain constant d) equal the real interest rate

a

In accordance with its dual mandate, the Fed should raise the interest rate if inflation __________ or the expansionary gap __________. a) increases; increases b) decreases; decreases c) decreases; increases d) increases; decreases

a

In the Keynesian-cross model, an increase in the real interest rate shifts the expenditure line __________ and short-run equilibrium output __________. a) downward; decreases b) upward; decreases c) downward; increases d) upward; does not change e) upward; increases

a

In the short-run, if the Fed decreases interest rates, then consumption and investment __________, planned aggregate expenditure __________, and short-run equilibrium output __________. a) increase; increases; increases b) increase; increases; decreases c) increase; decreases; decreases d) decrease; decreases; increases e) decrease; decreases; decreases

a

The Federal Open Market Committee makes decisions about __________ policy. a) monetary b) fiscal c) exchange rate d) deposit insurance

a

A higher real interest rate __________ saving and __________ consumption spending. a) increases; increases b) increases; decreases c) does not change; does not change d) decreases; increases

b

Suppose that changes in technology cause individuals to demand lower money balances for every nominal interest rate. Suppose the Fed does not adjust the money supply in response. Investigating first the money market and then tracing the effects to the Short-Run Keynesian model, which of the following will happen? a) The nominal interest rate will fall, the PAE curve will shift down, and short-run equilibrium output will fall. b) The nominal interest rate will fall, the PAE curve will shift up, and short-run equilibrium output will rise. c) The nominal interest rate will rise, the PAE curve will shift up, and short-run equilibrium output will rise. d) The nominal interest rate will rise, the PAE curve will shift down, and short-run equilibrium output will fall. e) The nominal interest rate will fall, but there will be no effect on PAE and short-run output since changes in nominal interest rates never affect real interest rates.

b

The Federal Reserve System is: a) a group of twelve commercial banks. b) the central bank of the United States c) the agency of the U.S. government that insures commercial bank deposits. d) the branch of the U.S. Treasury that keeps the U.S. gold reserves.

b

Suppose that consumers become more pessimistic about future income and lower their autonomous consumption. With no government response, this would __________ short-run output. If the Fed wanted to counteract this change, it should __________ the Federal Funds rate. a) increase, increase b) increase, decrease c) decrease, decrease d) decrease, increase e) not effect, not change

c

The money demand curve will shift to the right if: a) the nominal interest rate increases b) the nominal interest rate decreases c) the price level increases d) the price level decreases

c

The opportunity cost of holding money is a) the time spent going to the bank to withdraw funds. b) the risk involved in holding stocks. c) the nominal interest rate. d) the price level

c

If the income-expenditure multiplier equals 4 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 100 units, then a 1,000 unit recessionary gap can be eliminated by __________ the real interest rate by __________ percentage points. a) increasing; 10 b) increasing; 4 c) increasing; 2.5 d) decreasing; 2.5

d

The Federal Reserve had to resort to unconventional methods to try to stimulate the economy after the financial crisis in part because: a) it was no longer allowed to change the reserve requirement b) inflation was too high c) there were no longer any Treasury bonds to buy d) the federal funds rate hit the zero lower bound.

d

The federal funds rate is the interest rate on short-term loans made by: a) the Federal Reserve to commercial banks. b) the federal government to the Federal Reserve. c) the Federal Reserve to the federal government. d) commercial banks to other commercial banks.

d

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 34,000, what real interest rate must the Fed set to bring the economy to full employment? a) 0.03 b) 0.04 c) 0.05 d) 0.06 e) 0.07

e