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Chapter 26 Tutorial
Monetary Policy
©2000 South-Western College Publishing
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1. Keynes gave which of the following as a motive
for people holding money?
a. Transactions demand.
b. Speculative demand.
c. Precautionary demand.
d. All of the above.
D. These are the three motives for holding
currency and checkable deposits (M1)
rather than stocks, bonds, or other
nonmoney forms of wealth.
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2. A decrease in the interest rate, other things
being equal, causes a (an)
a. upward movement along the demand curve
for money.
b. downward movement along the demand
curve for money.
c. rightward shift of the demand curve for
money.
d. leftward shift of the demand curve for
money.
B. At a lower interest rate, money is demanded
because the opportunity cost of holding
money is lower.
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3. Assume the demand for money curve is
stationary and the Fed increases the money
supply. The result is that people
a. increase the supply of bonds, thus driving up
the interest rate.
b. increase the supply of bonds, thus driving
down the interest rate.
c. increase the demand for bonds, thus driving
up the interest rate.
d. increase the demand for bonds, thus driving
down the interest rate.
D.
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16%
12%
8%
Interest Rate
Expansionary Monetary Policy
MS1 MS2 Surplus
E1
E2
MD
4%
Billions of dollars
500 1,000 1,500 2,000
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4. Assume the demand for money curve is fixed
and the Fed decreases the money supply. The
result is a temporary
a. excess quantity of money demanded.
b. excess quantity of money supplied.
c. increase in the price of bonds.
d. increase in the demand for bonds.
A.
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16%
12%
8%
Interest Rate
Decrease in the Money Supply
MS2 MS1
Shortage
E2
E1
MD
4%
Billions of dollars
500 1,000 1,500 2,000
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5. Assume the demand for money curve is
fixed and the Fed increases the money
supply. The result is that the price of
bonds
a. rises.
b. remains unchanged.
c. falls.
d. none of the above.
A. The result is an excess beyond the amount
people wish to hold and they buy bonds
which drives the price of bonds upward.
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6. Using the aggregate supply and demand model,
assume the economy is in equilibrium on the
intermediate portion of the aggregate supply
curve. A decrease in the money supply will
decrease the price level and
a. lower both the interest rate and the real
GDP.
b. raise both the interest rate and real GDP.
c. lower the interest rate and raise real GDP.
d. raise the interest rate and lower real GDP.
D. The decrease in money supply increases the
interest rate which decreases investment.
Since investment is a component of
aggregate demand, the aggregate demand
curve shifts leftward and real GDP declines.9
7. Based on the equation of exchange, the
money supply in the economy is calculated as
a. M = V/PQ.
b. M = V(PQ).
c. MV = PQ.
d. M = PQ - V.
C. The equation of exchange is
MV = PQ rewritten,
M = PQ/V
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8. The V in the equation of exchange
represents the
a. variation in the GDP.
b. variation in the CPI.
c. variation in real GDP.
d. average number of times per year a
dollar is spent on final goods and services.
D. In the equation of exchange, GDP is
defined as PQ and the CPI is an index to
measure the price level (P).
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9. Which of the following is not an issue in the
Keynesian-monetarist debate?
a. The importance of monetary vs. fiscal policy.
b. The importance of a change in the money
supply.
c. The importance of a crowding-out effect.
d. All of the above are part of the debate.
D. Monetarists believe the effects of monetary
policy are more powerful than fiscal policy.
They view the shape of the investment
demand curve as less steep, so the crowdingout effect is significant. Keynesians disagree.
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10. Keynesians reject the influence of monetary
policy on the economy. One argument
supporting this Keynesian view is that the
a. money demand curve is horizontal at any
interest rate.
b. aggregate demand curve is nearly flat.
c. investment demand curve is nearly vertical.
d. money demand curve is vertical.
C. If the investment demand curve is nearly
vertical, changes in money supply and
resulting changes in interest rate have little
effect on investment and aggregate demand.
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Expansionary Monetary Policy
6%
4%
MS1 MS2
Interest Rate
8%
E1
E2
MD
2%
Billions of dollars
200
400
600
800
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11. Starting from an equilibrium at E1 in Exhibit
12, a rightward shift of the money supply curve
from MS1 to MS2 would cause an excess
a. demand for money, leading people to sell
bonds.
b. supply of money, leading people to buy
bonds.
c. supply of money, leading people to sell
bonds.
d. demand for money, leading people to buy
bonds.
B. An excess quantity of money supplied causes
people to buy bonds. The greater demand for
bonds causes the price of bonds to increase
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and the interest rate to decrease.
12. Beginning from an equilibrium at E2 in
Exhibit 12, a decrease in the money supply
from $600 billion to $400 billion causes people
to
a. sell bonds and drive the price of bonds
down.
b. buy bonds and drive the price of bonds up.
c. buy bonds and drive the price of bonds
down.
d. sell bonds and drive the price of bonds up.
A. An excess quantity of money demanded
causes people to sell bonds. The greater
supply of bonds on the market causes the
price of bonds to decrease and the interest
rate to increase.
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END
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