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University of Bahrain
College of Business Administration
Department of Economics and Finance
Econ 341 - Monetary Economics
Problem Set 7 (Chapter 25)
AlShawa
1. According to the Monetarists, the aggregate demand curve slopes downward because an
increase in the price level means a(n) _____ in the real money supply and therefore a _____
level of real spending.
a. increase; higher
b. increase; lower
c. decrease; higher
* d. decrease; lower
2. Keynesians and Monetarists believe that
a. the aggregate demand curve is downward-sloping.
b. changes in the quantity of money cause the aggregate demand curve to shift.
c. changes in government spending and taxes do not cause the aggregate demand curve to
shift.
* d. only (a) and (b) of the above.
3. Factors that cause the aggregate demand curve to shift to the right include
a. higher business confidence.
b. lower interest rates.
c. higher bond prices.
* d. all of the above.
4. If workers expect an increase in the price level, the _____ curve will shift to the _____.
a. AD; right
b. AD; left
c. SRAS; right
* d. SRAS; left
5. The less interest-sensitive is money demand,
a. the more effective is fiscal policy.
* b. the more effective is monetary policy.
c. the steeper is the AD curve.
d. the flatter is the SRAS curve.
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6. Which combination of policies would be the most contractionary?
a. An increase in government spending and an increase in taxes.
b. An increase in government spending and a decrease in taxes.
* c. A decrease in government spending and an increase in taxes.
d. A decrease in government spending and an decrease in taxes.
7. Evidence suggesting that prices and wages are slow to adjust in response to aggregate
demand and supply changes would tend to support
a. the view that activist macro policy is necessary to maintain full employment.
b. the view that activist macro policy is not necessary to maintain full employment.
c. the Keynesian position regarding macro policy.
* d. both (a) and (c) of the above.
8. If the price level and the nominal wage rise by the same percentage, real GDP will _____,
and the economy moves along the _____ curve.
a. increase; AD
b. increase; SRAS
c. not change; SRAS
* d. not change; LRAS
9. If we observe an increase in the price level and an increase in real GDP, then
a. the money supply has fallen.
b. the price of raw materials has increased.
c. the capital stock has increased.
* d. the expectation of future profits has increased.
10. Monetarists argue that the Fed should pursue
a. an interest-rate targeting strategy.
b. an exchange-rate targeting strategy.
c. a discretionary monetary policy.
* d. a constant growth rate rule.
11. Keynesians argue that if crowding out does occur, it will be _____ in the short run.
* a. incomplete.
b. complete.
c. temporary.
d. none of the above.
12. If there is a recessionary gap and the Fed wants to eliminate this gap, the Fed should
* a. make an open market purchase.
b. make an open market sale.
c. increase the discount rate.
d. increase the required reserve ratio.
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13. When output is below the natural rate level, nominal wages will begin to _____, shifting the
_____ curve to the _____.
a. fall; AD; right
b. rise; AD; left
* c. fall; SRAS; right
d. rise; SRAS; left
14. In the above figure, the initial effect of a decrease in taxes is illustrated as a movement from
a. point 4 to point 2.
b. point 2 to point 1.
* c. point 1 to point 2.
d. point 1 to point 4.
15. In the above figure, the final effect of a decrease in taxes is illustrated as a movement from
a. point 1 to point 2.
* b. point 2 to point 3.
c. point 4 to point 3.
d. point 1 to point 3.
16. According to aggregate demand and supply analysis, the negative supply shocks of 19731975 and 1978-1980 had the effect of
a. increasing output and lowering unemployment.
b. decreasing output and raising unemployment.
c. raising the price level.
* d. doing only (b) and (c) of the above.
17. According to aggregate demand and supply analysis, the favourable supply shocks of 19951999 had the effect of
a. increasing output.
b. lowering unemployment.
c. lowering inflation.
* d. all of the above.
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18. In the AD-AS model, after a negative supply shock hits the economy,
a. the output level will increase, the price level will increase and interest rates will increase.
b. the output level will decrease, the price level will decrease and interest rates will
decrease.
c. the output level will decrease, the price level will decrease and interest rates will
increase.
* d. the output level will decrease, the price level will increase and interest rates will
decrease.
After a negative supply shock, the SRAS curve will shift left, the output level will
decrease and the price level will increase. Lower output/income level will cause the
demand for money to decrease and interest rates will decrease.
19. While monetarists might accept the Keynesian assertion that wages and prices are slow to
adjust, they are still likely to oppose the use of activist macro policy
* a. because they regard activist policy as destabilizing due to long and variable lags
associated with macro policy.
b. because they regard activist policy as biased toward fighting inflation.
c. for both of the above reasons.
d. for none of the above reasons.
20. Efforts by the Fed to halt the slowdown in the economy can be interpreted as a response to
counteract the
* a. leftward shift of the AD curve.
b. leftward shift of the SRAS curve.
c. rightward shift of the LRAS curve.
d. all of the above.