Principles of Economics 1A - Macroeconomics

Chapter 15

____    1.   In deciding how much money to hold, you should compare the

a.	disadvantage of liquidity with the advantage of earning more interest
b.	advantage of liquidity with the disadvantage of losing interest
c.	disadvantage of storing wealth with the advantage of having a medium of exchange
d.	advantage of storing wealth with the advantage of having a medium of exchange
e.	advantage of liquidity with the disadvantage of storing wealth

 ____    2.   The money demand curve describes how the quantity of money demanded varies with

a.	nominal GDP
b.	real GDP
c.	the price level
d.	the interest rate
e.	consumption

____    3.   The demand for money varies

a.	directly with both the price level and the level of real GDP
b.	inversely with both the price level and the level of real GDP
c.	inversely with the price level and directly with the level of real GDP
d.	directly with the price level and inversely with the level of real GDP
e.	inversely with the level of nominal GDP

____    4.   If the interest rate rises, people hold

a.	less money because its opportunity cost has increased
b.	more money because its opportunity cost has increased
c.	less money because its opportunity cost has declined
d.	more money because its opportunity cost has declined
e.	the same amount of money

 ____    5.   As the price level rises, money __________ causing interest rates to __________ and investment spending to __________.

a.	demand rises; fall; fall
b.	demand rises; rise; fall
c.	demand falls; rise; rise
d.	supply rises; rise; fall
e.	supply falls; fall; rise

 ____    6.   In the aggregate demand-aggregate supply model, an increase in the money supply will cause in the short run a(n)

a.	increase in both the price level and real GDP
b.	decrease in both the price level and real GDP
c.	increase in real GDP and a decrease in the price level
d.	decrease in real GDP and an increase in the price level
e.	increase in the price level only

____    7.   If the Fed buys bonds, then the money supply

a.	increases, the interest rate falls, and the quantity of money demanded increases
b.	falls, the interest rate falls, and the quantity of money demanded increases
c.	increases, the interest rate increases, and the quantity of money demanded increases
d.	falls, the interest rate increases, and the quantity of money demanded falls
e.	falls, the interest rate falls, and the quantity of money demanded falls

____    8.   If the Fed decreases the money supply, causing the interest rate to rise, GDP

a.	increases by the same amount as the increase in the interest rate
b.	decreases by more than the increase in the interest rate because of the multiplier
c.	decreases by the same amount as the decrease in investment
d.	decreases by more than the decrease in investment because of the multiplier
e.	decreases by less than the decrease in investment because of the multiplier

 ____    9.   If the Fed sells U.S. government securities to drain reserves from banks, which of the following will probably occur?

a.	The demand for money will increase and the interest rate will rise.
b.	The money supply will increase and the interest rate will fall.
c.	The interest rate will rise and the quantity of money demanded will fall.
d.	The money supply will decrease and the interest rate will fall.
e.	The interest rate will fall and the quantity of money demanded will increase.

____   10.   To eliminate a contractionary gap, the Fed can __________ the money supply, which would __________.

a.	increase; increase the interest rate and investment
b.	increase; decrease the interest rate and increase investment
c.	decrease; increase the interest rate and investment
d.	decrease; decrease the interest rate and investment
e.	decrease; increase the interest rate and decrease investment

____   11.   Which monetary policy would be appropriate to close a contractionary gap?

a.	a tax cut
b.	a decrease in government purchases
c.	an increase in reserve requirements
d.	the Fed's purchase of U.S. government securities
e.	the Fed's raising the discount rate

Exhibit 15-1

____   12.   In the situation shown in Exhibit 15-1, how could the Fed return the economy to potential output?

a.	decrease government spending
b.	increase taxes
c.	decrease taxes
d.	decrease the money supply
e.	increase the money supply

____   13.   The steeper the short-run aggregate supply curve, the __________ the change in price level and the __________ the change in real Gross Domestic Product for a given shift in the aggregate demand curve.

a.	larger; larger
b.	larger; smaller
c.	smaller; larger
d.	smaller; smaller
e.	real GDP and the price level are not affected by the shape of the aggregate supply curve

____   14.   The equation of exchange states that the quantity of money multiplied by the velocity of money equals

a.	real Gross Domestic Product
b.	the price level
c.	nominal Gross Domestic Product
d.	the turnover rate
e.	the demand for money

____   15.   If the money supply increases when there is much idle capacity in the economy,

a.	most of the resulting rise in nominal GDP will be a result of price increases
b.	most of the resulting rise in nominal GDP will be a result of increases in real output
c.	most of the resulting rise in real GDP will be a result of increases in the price level
d.	most of the resulting rise in real GDP will be a result of increases in the interest rate
e.	only nominal GDP will change; real GDP will be unaffected

____   16.   In the long run, an increase in aggregate demand

a.	increases the price level and real output, but the effect on the price level is larger
b.	increases the price level and real output, but the effect on output is larger
c.	affects only real output
d.	affects only the price level
e.	has no effect at all

____   17.   In an economy in which velocity is constant and real output grows at an average rate of 4 percent per year, a 4 percent average rate of growth in the money supply would result in

a.	a constant price level
b.	a slowly increasing price level
c.	a rapidly increasing price level
d.	constant real GDP
e.	constant nominal GDP

____   18.   Which of the following statements best describes the historical relationship between increases in the money supply (M1) and inflation in the U.S.?

a.	All three major episodes of inflation since 1914 were preceded and accompanied by an increase in the growth rate of M1.
b.	There is no strong evidence of any relationship between inflation and increases in the money supply in the 20th century.
c.	Since the formation of the Fed in 1914, there have been no significant periods of inflation
d.	In all three major episodes of inflation since 1914, increases in the growth rate of M1 occurred after the inflation subsided.
e.	There were significant periods of inflation during each decade of the 20th century and each was preceded and accompanied by an increase in the growth rate of M1.

____   19.   Hyperinflation

a.	was primarily a 19th century phenomenon
b.	is always accompanied by extremely rapid growth in the money supply
c.	is always accompanied by rapid shrinkage of the money supply
d.	occurs when an economy grows too rapidly
e.	is really nothing to worry about since it affects only nominal GDP (and not real GDP)

____   20.   If interest rates are to remain constant, the money supply should change

a.	in the opposite direction to a change in aggregate demand
b.	in the same direction as a change in money demand
c.	only when investment changes
d.	only when the demand for money decreases
e.	only when the inflation rate changes

____   21.   If the Fed targets the interest rate, then

a.	the money supply will grow at a more controlled rate
b.	monetary policy will reinforce fluctuations in economic activity
c.	the price level will be more stable in the long run
d.	money demand will be more stable
e.	velocity will be less stable

____   22.   If the Federal Reserve is targeting the money supply when the demand for money decreases, their proper response is to

a.	decrease the money supply
b.	keep the money supply on a path of constant, predictable growth
c.	increase the money supply to match the increase in the demand for money
d.	stimulate inflation to increase the demand for money
e.	stimulate a decrease in the price level to increase the demand for money

Economics 1A  Quiz 12 Answers

1.  B

2.  D

3.  A

4.  A

5.  B

6.  A

7.  A

8.  D

9.  C

10.  B

11.  D

12.  D

13.  B

14.  C

15.  B

16.  D

17.  A

18.  A

19.  B

20.  B

21.  B

22.  B

B