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Chapter 20Practice Quiz Tutorial

Monetary Policy

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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 peoplea. 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%

4%

500 2,000

E1

Expansionary Monetary Policy

MD

MS1 Surplus

1,000

MS2

E2

1,500

Inte

rest

Rat

e

Billions of dollars

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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%

4%

500 2,000

E1

Decrease in the Money Supply

MS1

1,000

MS2

E2

1,500

ShortageIn

tere

st R

ate

Billions of dollars

MD

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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 bondsa. 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 anda. lower 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.

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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 crowding-out 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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16%

12%

8%

4%

500 2,000

E1

MD

MS1 Surplus

1,000

MS2

E2

1,500

Inte

rest

Rat

e

Billions of dollars

Exhibit 20-13Expansionary Monetary Policy

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11. Starting from an equilibrium at E1 in Exhibit 20-13, 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 and the interest rate to decrease.

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12. Beginning from an equilibrium at E2 in Exhibit 20-13, 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