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Macro Chapter 14 study guide questions
Multiple Choice
Identify the choice that best completes the statement or answers the question.
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1. A decrease in the nominal (or money) interest rate would
a. encourage people to hold smaller money balances.
b. encourage people to hold larger money balances.
c. force the Fed to increase the money supply.
d. cause the real interest rate to rise.
2. According to monetarists, which of the following would most likely eliminate inflation?
a. a steady increase in federal expenditures at an annual rate of approximately 3 percent
b. indexing of wages, taxes, and pensions to the rate of inflation
c. a steady expansion in the money supply at a rate no greater than the long-run growth of
real output
d. a steady 3 percent increase in the size of the budget deficit
3. Given the strict quantity theory of money, if the quantity of money doubled, prices would
a. fall by half.
b. double.
c. remain constant.
d. increase somewhat but less than double.
4. If the growth rate of real GDP is 3 percent, velocity is constant, and the money supply grows at 9 percent, the
rate of inflation will be approximately
a. 3 percent.
b. 6 percent.
c. 9 percent.
d. 12 percent.
5. When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand
because
a. real interest rates will fall, stimulating business investment and consumer purchases.
b. the dollar will appreciate on the foreign exchange market, leading to a decrease in net
exports.
c. lower interest rates will tend to decrease asset prices (such as the prices of homes), which
decreases wealth and thereby decreases current consumption.
d. all of the above are true.
6. The most likely short-run impact of an unanticipated decrease in the money supply is a(n)
a. decrease in the real interest rate, which in turn reduces investment and real GDP.
b. increase in the real interest rate, which in turn reduces investment and real GDP.
c. increase in real output, which causes the interest rate to rise and in turn reduces investment
and real GDP.
d. decrease in real output, which causes the real interest rate to rise.
7. An unanticipated increase in the money supply will initially exert its primary impact on
a. output and employment rather than on prices.
b. prices; output and employment will be largely unaffected.
c. interest rates; rising interest rates will stimulate additional saving.
d. prices if the economy operates at an output level below its long-run supply constraint.
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8. Whichh of the follow
wing is true?
a. An
A unanticipatted shift to a more
m
expansiionary monetaary policy willl temporarilyy stimulate
ouutput and emp
ployment.
b. Persistent grow
wth of the mooney supply att a rapid rate will cause infflation.
c. Both
B
a and b are true.
d. None
N
of the ab
bove is true.
_____ 9. In thee short run, an
n unanticipateed increase in the money suupply will
a. inncrease interest rates and shhift the aggreegate demand curve to the left.
b. inncrease interest rates and shhift the aggreegate demand curve to the right.
c. loower interest rates
r
and shifft the aggregaate demand cuurve to the lefft.
d. loower interest rates
r
and shifft the aggregaate demand cuurve to the rigght.
_____ 10. Suppoose the econo
omy is experieencing full em
mployment. An
A unanticipatted increase in the money supply will
a. raaise real GDP
P and the pricee level in the short run, butt in the long run
r will causee no change
inn real GDP an
nd only a highher price level.
b. loower real GDP
P and the pricce level in thee short run, buut in the long run will causse no
chhange in real GDP and onlly a lower price level.
c. caause no chang
ge in real GD
DP in either the short run orr long run butt will increasee the price
leevel.
d. caause the pricee level to rise in the short run
r but will inncrease real GDP
G
in the lonng run.
_____ 11. In thee equation of exchange,
e
V stands for
a. veelocity, or thee annual rate at
a which monney changes hands
h
in the purchase
p
of finnal
prroducts.
b. thhe investmentt component of
o aggregate demand.
d
c. thhe amount of money in circculation.
d. a constant equaal to 3.1416, discovered byy classical ecoonomists.
Use thhe figure belo
ow to answer the followingg question(s).
Figurre 14-9
a SRAS1 ind
dicate the inittial conditionss in an econom
my, with the current level of output, Y2, being the
AD1 and
full em
mployment leevel, and the current
c
price level being P1.
____ 12. Refer to Figure 14-9. If the Fed unexpectedly increases the money supply, the short-run impact of this policy
will be a movement to
a. P1 and Y2.
b. P2 and Y1.
c. P2 and Y3.
d. P3 and Y2.
____ 13. Refer to Figure 14-9. If the Fed unexpectedly increases the money supply, in the long run, the impact of the
unanticipated expansionary policy will be a movement to
a. P1 and Y2.
b. P2 and Y1.
c. P2 and Y3.
d. P3 and Y2.
____ 14. Which of the following is a true statement?
a. Expansionary monetary policy has the same effect in the long run regardless of whether it
is originally anticipated or unanticipated.
b. Expansionary monetary policy increases real output only when it is unanticipated, and the
increase is only in the short run.
c. The primary long-run impact of expansionary monetary policy is a higher price level (or
inflation).
d. All of the above are true.
____ 15. When the Fed unexpectedly increases the money supply,
a. real interest rates will rise and the foreign exchange value of the dollar will appreciate.
b. real interest rates will rise and the foreign exchange value of the dollar will depreciate.
c. real interest rates will fall and the foreign exchange value of the dollar will appreciate.
d. real interest rates will fall and the foreign exchange value of the dollar will depreciate.
____ 16. The Taylor rule was designed to provide a measure of
a. the real interest rate.
b. the consistency of monetary policy with price stability and full employment.
c. the inflation rate that will minimize the rate of unemployment.
d. the growth rate of excess reserves available to commercial banks.
____ 17. Which of the following contributed to the dramatic rise in housing prices between 2002 and mid-year 2006?
a. the low interest rate policy of the Federal Reserve
b. the Fed’s restrictive monetary policy, which led to high interest rates
c. the tightening of loan standards by commercial lenders
d. the substantial excess reserves of commercial banks
____ 18. During the nine months following July 2008, the Fed doubled the monetary base and generated huge excess
reserves within the commercial banking system. This policy increases the danger of
a. a contraction in the money supply that will increase the length and severity of the
recession.
b. rapid future growth of the money supply and inflation.
c. higher future interest rates, which will increase the length and severity of the recession.
d. a credit contraction because banks are unable to extend future loans.
____ 19. Which of the following will make it difficult for the Fed to institute shifts in monetary policy in a manner that
will promote economic stability?
a. the inability of the Fed to alter the money supply
b. the long and variable time lags between shifts in monetary policy and impact on output and
employment
c. a velocity rate of money that is relatively constant
d. the inability of the Fed to shift monetary policy without the approval of Congress
Critical Thinking and Application
20. Answer the following questions:
a. What is the equation of exchange? Explain each component.
b. What assumptions are placed on the equation of exchange to generate the quantity theory of
money?
c. Explain the quantity theory of money and what it implies about the impact of changes in the
money supply on real output and prices.
21. Indicate how changes in monetary policy are transmitted to the goods and services market? Discuss for the
case of an expansion in the money supply.
22. Beginning from full-employment equilibrium, illustrate graphically how each of the following would impact
the economy.
a. the short-run impact of an unanticipated decrease in the money supply
b. the long-run impact of an unanticipated decrease in the money supply
23. Write out the equation of exchange. What assumptions did the classical economists make about the variables
that compose the equation, and what did this lead them to conclude about money and prices?
24. According to the monetarists, what is the primary cause of a recession? Explain the steps by which reductions
in the money supply lead to reductions in real output.
Macro Chapter 14 study guide questions
Answer Section
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