Econ 120 (Macro) - Chapter 15 Quiz Questions
Suppose you have just received $10,000 from a relative. You are trying to decide whether to put the $10,000 in a non-interest-bearing checking account so that you can use it whenever you want or to use it to buy a U.S. Treasury bond. If the interest rate on the bond is 7 percent per year, the opportunity cost of holding the $10,000 as money is _____.
$700 per year
Identify the correct statement.
Central banks around the world coordinate their activities during economic turmoil.
Which of the following is true of monetary policy targeting?
In 1979, the Fed deemphasized interest rates and targeted specific money aggregates.
Which of the following is a risk associated with quantitative easing?
Inflation
Which of the following is true of the federal funds rate?
It serves as a benchmark for determining other short-term interest rates.
Given M represents money supply, V represents velocity of money, P represents the average price level, and Y represents real gross domestic product (GDP), which of the following correctly describes the equation of exchange?
MV = P × Y.
Which of the following is true of the demand for money?
The greater the value of transactions to be financed in a given period, the greater the demand for money.
Identify the correct statement about the money demand curve.
The price level and real GDP are assumed to be constant along the demand for money curve.
Which of the following is true?
When M1 velocity became unstable during the 1980s, the Fed switched from targeting M1 to targeting M2.
When there is an increase in the demand for money in the United States economy, the Fed tries to keep the interest rate unchanged:
by increasing the supply of money.
The equation of exchange was first developed by _____.
classical economists
There was an increase in money supply in the U.S. economy by 85 percent between 2003 and 2013, which:
did not result in inflation.
An increase in money supply during an expansionary period in an economy will lead to a(n):
increase in aggregate demand and will add to the instability in the economy.
When specific monetary aggregates are targeted by central banks, _____.
interest rates become more volatile in the short run
A zero rate of inflation in an economy can:
lead to deflation in the economy.
An increase in the supply of money is most likely to increase the price level in the long run as the _____ is a vertical line at an economy's potential output.
long-run aggregate supply curve
Other things constant, the quantity of money demanded varies inversely with the:
market interest rate.
It has been observed that in recent years major economies have not made significant use of _____ to guide policy in the short run.
money aggregates
With the velocity of money remaining stable, an increase in nominal GDP shifts the:
money demand curve rightward.
The primary cause of the recession of 2007-2008 in the United States was:
mortgage defaults in the United States.
Holding wealth in the form of money involves sacrifice of interest that could have been earned by holding financial assets other than money. The interest foregone is the _____ of holding money.
opportunity cost
With the spread of the global financial crisis in 2008, the Fed teamed up with the U.S. Treasury to:
provide bailouts to insurance companies.
A decline in the price level in an economy will:
result in a leftward shift of the money demand curve.
In the long run, an increase in money supply:
results in inflation if the velocity of money is stable or at least not decreasing.
People demand money balances as a way of holding their wealth rather than financial investments because:
some amount of money is required for everyday market transactions.
For a given shift of the aggregate demand curve, the steeper the short-run aggregate supply curve, _____.
the smaller the increase in real GDP and larger the increase in the price level
The equation of exchange shows that:
the total spending in an economy is always equal to the total receipts.
Which of the following was a consequence of defaults on Russian bonds in 1998?
The Fed lowered the federal funds rate to supply more funds abroad.
Which of the following statements is true?
The Fed seeks a target rate of 2 percent inflation to maintain price stability.
For a given money demand curve, which of the following is likely to be true if there is an increase in money supply?
The interest rate will decrease.
If the short-run equilibrium output of an economy is below the potential output and the actual price level is below the expected price level, which of the following is likely to be true if there is no government intervention according to classical economic theory?
The short-run aggregate supply curve will shift rightward and close the recessionary gap.
Identify the factor that can result in an increase in the velocity of M1.
The use of debit cards to make payments.
Which of the following statements is true?
The velocity of M1 increased steadily in the U.S. economy in the years 1993-2007.
If at the prevailing interest rate, the quantity of money demanded is $3 trillion and the quantity of money supplied is $2.5 trillion, then which of the following is true?
There is a shortage of money, and interest rates must increase in order to achieve an equilibrium in the money market.
If the Fed engages in an open market sale of U.S. government securities, the likely impact is:
a decrease in the supply of money but an increase in the interest rate.
In 2008, the target federal funds rate was between 0 and 0.25 percent, the lowest in the history of the United States. The primary reason for this was to:
aid economic recovery from the Great Recession of 2007-2008.
The _____ is the interest rate banks charge one another for overnight lending of reserves at the Fed.
federal funds rate
The velocity of money measures spending on:
final goods and services only.
If the aggregate supply curve is upward sloping, then the short-run effect of an increase in money supply is a(n)_____.
increase in both real output and the price level
If the quantity of money in an economy increases by 3 percent and the velocity of money is constant at 6, _____.
nominal gross domestic product increases by 3 percent
Through a variety of aggressive asset purchases to stabilize financial markets since late 2008, the Fed added more than $3 trillion to its balance sheet. These purchases are called _____.
quantitative easing
An increase in money supply will:
shift the supply of money curve rightward.
The money demand curve _____.
slopes downward because the lower the interest rate, the lower the opportunity cost of holding money
The supply of money in the United States is determined primarily by _____.
the Federal Reserve
The _____ is the average number of times per year each dollar is used to purchase final goods and services.
velocity of money
A(n) _____ money supply curve implies that the quantity of money supplied is independent of the interest rate.
vertical
Which of the following is a part of the sequence of events that links the change in money supply to the demand for investment?
An increase in the money supply lowers the interest rate, which in turn increases the quantity of investment demanded.
Which of the following is true of the demand for money?
As interest rates rise, the opportunity cost of holding money rises and people respond by converting cash or checking account balances into interest-bearing financial investments.
Following the financial crisis of 2008, the Dodd-Frank Act _____.
brought the shadow banking system under the Fed's regulatory control
A decrease in the supply of money in an economy will result in a(n):
decrease in aggregate demand and real GDP, at a given price level.
The introduction of interest-bearing checking accounts has _____.
decreased the velocity of money
If real GDP increases, ceteris paribus, the _____.
demand for money increases
In recent years, the Fed has targeted _____ as a guide to monetary policy.
the federal funds rate
The demand for money is the relationship between:
the interest rate and how much money people choose to hold.
The better money serves as a store of value, _____.
the lower its velocity
For interest rates to remain stable during economic contractions, _____.
the money supply will have to decrease at the same rate as the demand for money
At interest rates above the equilibrium level, _____.
the opportunity cost of holding money is higher, so the quantity of money demanded is less than the quantity of money supplied
Over the years, nonbank financial intermediaries in the United States that do not depend on customer deposits to give loans have started to represent a major share of all lending in the economy. This is referred to as _____.
the shadow banking system
The extent to which a given change in investment affects aggregate demand depends on:
the size of the spending multiplier.
According to the quantity theory of money, the equation of exchange can be used to predict the effects of changes in the money supply on nominal gross domestic product (GDP) if:
the velocity of money is stable or at least predictable.
Other things constant, a reduction in the inflation rate causes _____.
the velocity of money to decrease
The frequent use of credit cards and easy access to automatic teller machines have caused:
the velocity of money to increase.
