esther boa4

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MONETARY ECONOMICS – TRIAL QUESTIONS PART A 1. All payments received from foreign countries and all payments made to them are called the: A) Capital account B) Trade balance C) Balance of payments D) Current account 2. The two main parts of the balance of payments are the: A) Capital and current accounts B) Consumption and investment accounts C) Public and private accounts D) Foreign and domestic accounts 3. Which of the following accounts is part of the balance of payments accounts? A) Investment account B) Capital account C) Financing account D) Stock account 4. Which of the following items is NOT a component of the balance of payment account? A) Commercial account B) Capital account C) Current account D) Statistical discrepancy 5. The current account includes all of the following actions EXCEPT: A) Imports of goods and services B) exports of goods and services C) Income flowing into the country D) Federal Reserve purchases of T-bills 6. In 2006, the U.S. was negative but the U.S. was positive. A) Balance of trade; income flow B) Income flow; balance of trade C) Balance of trade; current account D) Current account; balance of trade 7. A French engineer comes to the United States to work on a one-year project and earns $75,000. In the balance of payments, this transaction is a(n) of $75,000. A) Transfer outflow B) Income outflow

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Page 1: Esther Boa4

MONETARY ECONOMICS – TRIAL QUESTIONS PART A 1. All payments received from foreign countries and all payments made to them are called the: A) Capital account B) Trade balance C) Balance of payments D) Current account 2. The two main parts of the balance of payments are the: A) Capital and current accounts B) Consumption and investment accounts C) Public and private accounts D) Foreign and domestic accounts 3. Which of the following accounts is part of the balance of payments accounts? A) Investment account B) Capital account C) Financing account D) Stock account 4. Which of the following items is NOT a component of the balance of payment account? A) Commercial account B) Capital account C) Current account D) Statistical discrepancy 5. The current account includes all of the following actions EXCEPT: A) Imports of goods and services B) exports of goods and services C) Income flowing into the country D) Federal Reserve purchases of T-bills 6. In 2006, the U.S. was negative but the U.S. was positive. A) Balance of trade; income flow B) Income flow; balance of trade C) Balance of trade; current account D) Current account; balance of trade 7. A French engineer comes to the United States to work on a one-year project and earns $75,000. In the balance of payments, this transaction is a(n) of $75,000. A) Transfer outflow B) Income outflow

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C) Export D) Income inflow 8. If American farmers sell corn to a Russian grain dealer, then the account is A) Current; debited B) Current; credited C) Capital; debited D) Capital; credited 9. Which monetary movement is NOT a component of the current account? A) Net transfers of money B) Net income flows C) Flow of stocks and bonds D) Payments for imports and exports 10. Foreign aid transfers are part of the account. A) Capital B) Foreign aid C) current D) Trade 11. An example of an item included in the current account is: A) The profits made by a Japanese company operating a plant in the United States. B) The stock of General Electric held by a Japanese investor. C) The deposits of a Japanese company in Citibank. D) A bond sold by General Motors to a Japanese investor. 12. The components of the current account include imports of goods and services, exports of goods and services, and: A) Net transfers. B) Increase in U.S.-owned assets abroad. C) Military sales. D) Foreign held money orders. 13. Money spent by the United States to disable land mines in Serbia is included in which account? A) Imports B) Exports C) Capital D) Transfers 14. An investment by a French company in a wine production plant in California is included in the account. A) current B) Financing

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C) Trade D) Capital 15. An example of an item included in the capital account is: A) The profits made by a U.S. shoe company operating a plant in Asia B) Dell computers exported to Germany C) A Pepsi-Cola bottling plant in China D) A stipend paid to a Russian student studying at Yale University 16. If China has a current account surplus, it must have: A) A capital account surplus B) A capital account deficit C) A decrease in foreign aid D) Capital inflows 17. The capital account includes: A) Investments by foreign companies in U.S. plants B) Profits repatriated by to foreign countries from foreign-owned U.S. plants. C) Profits repatriated to U.S. companies from U.S.-owned plants in foreign countries. D) Investments in U.S. companies by U.S. companies. 18. A capital account deficit: A) Must be matched with a current account surplus B) Must be matched with a current account deficit. C) Cannot occur in a democratic country. D) Means that the current account is balanced. 19. Since the mid-1990s, the current account deficits of the United States: A) Have decreased. B) Have been matched by capital account deficits. C) Show that most of the deficits are owed to Mexico. D) Indicate that the United States has become the world's largest debtor nation. 20. The rising current account deficits of the United States have been in part caused by: A) A relatively low savings rate. B) Low oil prices. C) A high demand for exports. D) Low government deficits. 21. If the current account is negative, the: A) Balance of payments is negative. B) Capital account has to be positive. C) Capital account has to be negative as well. D) Balance of payments is positive. 22. If one lira will buy 25 cents, how many liras will one U.S. dollar buy?

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A) 1¤4 lira B) 1 lira C) 2.5 lira D) 4 lira 23. Suppose the current exchange rates between the dollar and the British pound sterling and the dollar and the Japanese yen are $2 = £1 and $0.10 = ¥1. The exchange rate between the pound and the yen is: A) £20 = ¥1. B) £1 = ¥1. C) £2 = ¥1. D) £0.05 = ¥1. 24. If €1 will buy $1.30, then: A) $1 will purchase €0.70 B) $1 will purchase €1.30 C) $1 will purchase €0.77 D) The real exchange rate equals one. 25. The rate at which one currency is exchanged for another currency is called the: A) Transaction rate B) Currency ratio C) Terms of trade D) Exchange rate 26. Currency arbitrage: A) Can yield a profit. B) Is used to smooth out the market. C) Can never yield a profit. D) Is practiced by the central banks of every country. 27. Ignoring transaction costs of foreign exchange, if $1 = €0.80, €1 = 13 pesos, and $1 = 10 pesos, then: A) Purchasing power parity exists B) Currency arbitrage is possible C) The real exchange rate equals the nominal exchange rate D) The real exchange rate exceeds one 28. A nominal exchange rate: A) Takes the price level of both countries into effect B) is equal to e(r) ´ [P(domestic) / P(foreign)] C) Is the price of one country's currency for another's D) Is usually the same as the real exchange rate 29. The is the price of one country's currency for another's, whereas the takes the price levels of both countries into account.

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A) Real exchange rate; nominal exchange rate B) Real exchange rate; purchasing power parity C) Nominal exchange rate; purchasing power parity D) Nominal exchange rate; real exchange rate 30. Robert Mundell is best known for: A) Game theory. B) International economics. C) Interpreting Keynes for an American audience. D) Advocating monetarism as a cure for stagflation. 31. Robert Mundell discussed the problems of moving from a to a A) Flexible exchange rate system; fixed exchange rate system B) Fixed exchange rate system; flexible exchange rate system C) Gold standard; silver standard D) Silver standard; gold standard 32. Consider the following scenario. Inflation in Argentina pushes the price of Argentinian wine up 25%. Inflation in the United States pushes the price of California wine up 10%. If the currency exchange rate remains constant, what happens to the U.S. demand for Argentinian wine? A) The U.S. demand for wine from Argentina decreases B) The U.S. demand for wine from Argentina increases C) The U.S. demand for wine from Argentina remains constant D) California wine is better than Argentinian wine, so there never was a U.S. demand for wine from Argentina. 33. Consider the following scenario. Inflation in Argentina pushes the price of Argentinian wine up 25%. Inflation in the United States pushes the price of California wine up 10%. If the currency exchange rate remains constant, what happens to the U.S. demand for Argentinian currency? A) The U.S. demand for Argentinian currency decreases, so the exchange rate improves in Argentina's favor. B) The U.S. demand for Argentinian currency decreases, so the exchange rate improves in favor of the United States. C) Demand for Argentinian currency increases, so the exchange rate improves in Argentina's favor. D) The U.S. demand for Argentinian currency increases, so the exchange rate improves in favor of the United States. 34. If the domestic price level equals the foreign price level, the real exchange rate: A) Equals one B) Equals the nominal exchange rate C) Exceeds the nominal exchange rate

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D) Is less than the nominal exchange rate 35. Assume that $1 will buy ¥110. If absolute purchasing power parity exists between the United States and Japan, then if the Big Mac meal costs $5 in the United States, it will cost in Japan. A) ¥55. B) ¥22. C) ¥220. D) ¥550. 36. The rate of exchange that allows a specific amount of currency in one country to purchase the same quantity of goods in another country is called: A) The real rate of exchange B) The nominal rate of exchange C) Purchasing power parity D) Current account exchange. 37. Suppose an economist compares different countries with the United States and discovers that the purchasing power parity between Economyland and the United States is 90. A) On average, items that cost $1 to purchase in the United States cost $0.90 in Economyland. B) Every item that costs $1 to purchase in the United States costs $0.90 in Economyland. C) On average, items that cost $0.90 to purchase in the United States cost $1.00 in Economyland. D) Only 90% of what can be purchased in the United States can be purchased in Economyland. 38. What are the two primary reasons for wanting foreign currency? A) Purchase of foreign goods and services and purchase of foreign investments B) Purchase of foreign goods and services and speculation in currency C) Purchase of foreign investments and speculation in currency D) Speculation in currency and hording for economic warfare 39. If the British pound drops in value on the foreign exchange markets, then: A) The pound has appreciated. B) The pound has depreciated. C) Other currencies have depreciated relative to the pound. D) The pound has been pegged. 40. Suppose the exchange rate between the dollar and the euro is €0.70 = $1. Then the exchange rate becomes €0.80 = $1. What can be said about the value of the dollar and the value of the euro? A) The dollar has appreciated against the euro, whereas the euro has depreciated against the dollar B) The dollar has depreciated against the euro, whereas the euro has appreciated against the dollar C) If an American travels to France, her dollars won't buy as much as earlier D) If a German travels to the United States, his euros will buy more than before

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41. Assume that the vertical axis of the graph for the foreign exchange market measures the exchange rate in euros per dollar. As the exchange rate rises: A) American products become more attractive and more dollars are desired B) The euro can buy more dollars C) American goods become less attractive and fewer dollars are demanded D) The dollar depreciates against the euro 42. If the exchange rate between U.S. dollars and euros changes from $1 = €1.2 to $1 = €1.4, then the U.S. dollar and the Euro. A) Appreciates; depreciates B) Depreciates; appreciates C) Depreciates; depreciates D) Appreciates; appreciates. 43. If there is excess demand for a currency, the currency will: A) Appreciate B) Depreciate C) Remain constant D) Move to the gold standard 44. If there is a surplus of euros, then euros will: A) Appreciate B) Depreciate. C) Remain constant D) Move to the gold standard 45. If the dollar appreciates against the Chinese yuan: A) Chinese demand for American exports rises and American imports from China fall B) Chinese demand for American exports falls and American imports from China rise C) More dollars are demanded by the Chinese D) Fewer yuan are demanded by Americans 46. If European products become more popular in world markets because of excellent marketing, then the can be expected to. A) U.S. dollar; rise B) Euro; appreciate C) euro; drop in value D) Euro; undergo no change in value 47. In the case of an excess supply of dollars, which of the following events does NOT occur? A) The value of the dollar depreciates B) U.S. exports rise C) U.S. imports decline

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D) The U.S. current account worsens 48. If the dollar depreciates relative to the Chinese yuan, then American exports to China will: A) Increase B) Decrease C) Remain the same D) Fall to zero 49. Suppose a country has growing internal political, economic, and social turmoil. Many foreign businesses no longer wish to buy either goods or financial securities in this country. The country's currency would be expected to: A) Depreciate B) First depreciate and then appreciate C) Not change in value D) Appreciate 50. Flexible exchange rates result in: A) The quantity of dollars supplied equaling the quantity of dollars demanded. B) Inflation in the appreciating economy. C) Deflation in the depreciating economy. D) U.S. $1 being equal to €1 being equal to 1 of every other currency in the world. 51. If U.S. $1 will buy €1.50, then €1 will buy: A) U.S. $1.5. B) U.S. $0.67. C) U.S. $0.50. D) U.S. $0.33. 52. If the yen is appreciating relative to the British pound, then the: A) Pound is appreciating relative to the yen B) Pound can be either appreciating or depreciating relative to the yen C) yen is worth less relative to the pound D) Pound is depreciating relative to the yen 53. Consider the American dollar and the British pound. When the dollar price per pound rises: A) The dollar depreciates against the pound. B) The pound depreciates against the dollar. C) The dollar appreciates against the pound. D) American imports from Britain rise. 54. Which item is NOT a determinant of the demand for foreign currency? A) Desire for foreign goods and services B) Income C) Exchange rate D) Inflation

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55. Usually, the country that experiences the most rapid income growth also experiences: A) Depreciation of its currency B) Appreciation of its currency. C) No change in the value of its currency. D) Pressure to move to the gold standard. 56. Usually, a country that experiences a more rapid increase in its interest rate also experiences: A) Depreciation of its currency. B) Appreciation of its currency. C) No change in the value of its currency. D) Pressure to move to the gold standard. 57. Which of the following occurrences will NOT cause the dollar to appreciate? A) U.S. income growth is less than that of other countries B) Inflation rates in the United States are higher than those of foreign nations C) Interest rates are rising in the United States relative to foreign countries D) U.S. citizens desire to purchase fewer foreign goods. 58. What happens if a recession hits the American economy and as a result U.S. disposable income falls? A) American imports rise. B) The U.S. current account worsens. C) The U.S. current account improves. D) No change occurs in the U.S. current account. 59. Which of the following fiscal events does NOT worsen a country's current account? A) Inflation B) Drop in disposable income C) Rising incomes D) Economic expansion 60. Suppose interest rates in England are 5% and interest rates in France are 7%. The euro is expected to depreciate by 3% against the British pound. A) Because the euro-pound exchange rate will change, people will invest in other countries such as the United States. B) There will be no flow of funds from England to France because of the exchange rate uncertainty. C) Funds will flow from England to France. D) Funds will flow from France to England. 61. Countries A and B trade with each other. Trade relations are a very sensitive issue in both countries. Suppose, in order to improve its balance of trade, Country B allows its currency to depreciate against Country A's currency. A) Each country's balance of trade would improve

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B) Country A would experience diplomatic problems because Country B did not ask for permission to appreciate A's currency C) Country A would experience diplomatic problems because its balance of trade would be likely to worsen D) Country B's moves would have no affect on Country A because A's comparative advantage is unchanged 62. As long as assets are perfectly substitutable, an increase in the interest rate in France relative to Canada will cause: A) Capital to move from Canada to France. B) Capital to move from France to Canada. C) An interest rate decrease in Canada. D) Nothing to happen because the assets are perfectly substitutable. 63. If the Federal Reserve lowers interest rates: A) The U.S. dollar appreciates. B) Capital flows into the United States from other countries. C) Capital flows out of the United States into other countries. D) The capital accounts of other countries are unaffected. 64. Currency depreciation shifts the: A) AD line to the left B) AS line to the right C) AD and AS lines to the left D) AD line to the right and the AS line to the left 65. If the dollar appreciates: A) Exports will increase, causing aggregate demand, the aggregate price level, and output to rise in the short run B) Exports will decrease, causing aggregate demand and output to fall, but the aggregate price level rises in the short run C) Imports will decrease, causing aggregate demand, the aggregate price level, and output to rise in the short run D) Exports will decrease, causing aggregate demand, the aggregate price level, and output to fall in the short run 66. Your mother is going to take a trip to Europe in three months, but she has heard that the dollar is expected to depreciate against the euro over the next few months. What should she do? A) Buy dollar-denominated traveler's checks today B) Wait until she gets to Europe to buy euros C) Use credit cards while in Europe D) Buy euro-denominated traveler's checks today 67. The gold standard is, effectively:

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A) A fixed exchange rate. B) A flexible exchange rate. C) A managed exchange rate. D) The only method to cure depressions. 68. An exchange rate system where the government determines the exchange rates is called the…………… exchange rate system. A) Autocratic B) Fixed C) Floating D) Flexible 69. Before the Great Depression, the gold standard was characterized by: A) The free flow of gold between individuals and countries B) A fixed exchange rate between currencies C) The World Bank, which set the price of gold D) Full employment 70. A system is one in which governments determine their exchange rates and then adjust macroeconomic policies to maintain these rates, while a system relies on currency markets to determine the exchange rates consistent with macroeconomic conditions. A) Flexible exchange rate; fixed exchange rate B) Fixed exchange rate; flexible exchange rate C) Flexible exchange rate; Bretton Woods D) Fixed exchange rate; Bretton Woods 71. Under the gold standard, if a country's exports exceeded its imports: A) Its gold stocks were reduced. B) Prices and wages in the country fell. C) Its expenditures increased, but its output fell. D) An inflow of gold into the country occurred. 72. The Bretton Woods Agreement: A) Created a fixed exchange rate system. B) Denounced the creation of the World Bank. C) Resulted in World War II. D) Encouraged countries to devalue their currencies to help their trade deficits. 73. Which action is an effect of a contractionary policy under a fixed exchange rate regime? A) Net transfers rise B) The capital account becomes positive C) The trade balance worsens D) Imports drop and exports rise

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74. Under a fixed exchange rate system, a neutral fiscal policy, and perfect capital mobility, a contractionary monetary policy is ineffective because the: A) Fed's attempt to reduce money supply will be offset by an inflow of gold into the United States B) Fed's attempt to reduce money supply causes interest rates to rise, capital then flows into the United States from other countries, and the American money supply increases. C) capital account is unaffected by the Fed's actions D) Fed's attempt to reduce money supply causes interest rates to fall, capital then flows from the United States to other countries, and the American money supply increases. 75. Under a fixed exchange rate system and a neutral monetary policy, an expansionary fiscal policy will be reinforced by an open economy because of the resultant capital U.S. capital markets, which interest rates. A) Outflow from; reduces B) Outflow from; increases C) Inflow to; reduces D) Inflow to; increases. 76. A fixed exchange rate hinders and reinforces. A) Monetary policy; fiscal policy B) Fiscal policy; monetary policy C) Employment; inflation D) Inflation; employment 77. Under a flexible exchange system, an expansionary monetary policy would: A) Appreciate the currency as foreigners want to invest in a country with rising income. B) Depreciate the currency due to the drop in interest rates. C) Reduce exports. D) Have no effect on the exchange rate. 78. The effects of expansionary fiscal and monetary policies differ under a flexible exchange rate system because they have different effects on: A) Aggregate demand. B) Interest rates. C) The long-run aggregate supply. D) Expectations. 79. Which of the following statements is true? A) Under a fixed exchange rate system and fiscal policy constant, an open economy reinforces monetary policy B) Under a fixed exchange rate system and monetary policy constant, an open economy hampers fiscal policy C) Under a flexible exchange rate system and monetary policy constant, an open economy reinforces fiscal policy D) Under a flexible exchange rate system and fiscal policy constant, an open economy reinforces monetary policy

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80. Under flexible exchange rates and a neutral monetary policy, fiscal policy changes are: A) Unaffected by an open economy. B) Hampered by an open economy. C) Reinforced by an open economy. D) Reinforced by a gold outflow. 81. A flexible exchange rate hinders and reinforces: A) Monetary policy; fiscal policy B) Fiscal policy; monetary policy C) Employment; inflation D) Inflation; employment Answer Key for A 1. C 2. A 3. B 4. A 5. D 6. A 7. B 8. B 9. C 10. C 11. A 12. A 13. D 14. D 15. C 16. B 17. A 18. A 19. D 20. A 21. B 22. D 23. D 24. C 25. D 26. C 27. B 28. C 29. D 30. B 31. B

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32. A 33. A 34. B 35. D 36. C 37. A 38. A 39. B 40. A 41. C 42. B 43. A 44. B 45. B 46. B 47. D 48. A 49. A 50. A 51. B 52. D 53. A 54. C 55. A 56. B 57. B 58. C 59. B 60. D 61. C 62. A 63. C 64. D 65. D 66. D 67. B 68. B 69. A 70. B 71. D 72. A 73. D 74. B 75. C 76. A 77. B

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78. B 79. D 80. B 81. B B. 1. Money: A) Is anything that is accepted in exchange for other goods and services. B) Is anything that is backed by precious metals. C) Is currency. D) Has to have an intrinsic value. 2. Which of the following statements is NOT a characteristic of good money? A) Money is easily standardized. B) Money must have historic value. C) Money must be durable. D) Money must be portable. 3. Which of the following items is NOT a function of money? A) medium of exchange B) unit of account C) method of making change D) store of value 4. Which one of the following items is NOT a function of money? A) Store of value B) Unit of account C) Double coincidence of wants D) Medium of exchange 5. Which of the following lists correctly names money's functions? A) unit of account, store of value, medium of exchange B) barter, double coincidence of wants, unit of account C) transactions costs, medium of exchange, unit of account D) liquidity, barter, medium of exchange 6. The direct exchange of goods and services is called: A) barter. B) medium of exchange. C) GDP. D) stock exchange. 7. If mangos were widely accepted for purposes of exchange, then: A) mangos would be money. B) mangos would lose value.

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C) people would not work for mangos. D) mango plantations would decrease in value. 8. The medium of exchange function of money allows an economy to avoid the problem of: A) double coincidence of wants. B) unemployment. C) loss of purchasing power during an inflation. D) rising interest rates. 9. Gold is easily malleable and can be minted in a variety of sizes. This quality of gold displays what function of money? A) medium of exchange B) unit of account C) store of value D) store of wealth 10. A unit of account is the same thing as a: A) bank account. B) savings account. C) measure of value. D) store of value. 11. Which of the following statements concerning the store of value function of money is correct? A) Money gives us a yardstick for measuring the values of goods and services. B) Money helps us avoid the problem of double coincidence of wants. C) Money helps us save time in purchasing goods and services. D) Money does not lose value in the absence of inflation. 12. Which of the following assets is most liquid? A) a house B) a Picasso C) a corporate bond D) money 13. In the World War II POW camps, cigarettes were widely used as money. What function of money would be least served by this form of money? A) medium of exchange B) unit of account C) store of value D) double coincidence of wants 14. M1 is equal to: A) currency plus demand deposits. B) currency plus demand deposits plus savings deposits.

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C) currency plus demand deposits plus traveler's checks plus other checkable deposits. D) currency. 15. Which of the following fiscal assets is included in M1? A) savings deposits B) checkable deposits C) reserves D) small-denomination time deposits 16. Which of the following statements is true? A) Savings deposits are part of M1 but not part of M2. B) Savings deposits are part of M2 but not part of M1. C) Savings deposits are part of M2. D) Savings deposits are not part of either M1 or M2. 17. Which of the following statements regarding money supply measures is NOT correct? A) M1 is the narrowest measure of the money supply. B) “Near monies” are as liquid as cash. C) Coins form only a small part of M1. D) M2 is about five times the size of M1. 18. Which of the following statements is true? A) Coins represent 90% of currency. B) Paper money represents 90% of M1. C) Paper money represents 90% of currency. D) Coins represent 90% of M1. 19. Which of the following assets is NOT included in M2? A) currency B) demand deposits C) savings deposits D) large-denomination time deposits 20. Another definition of M2 is: A) near money. B) narrow money. C) money doubled. D) M1 doubled. 21. Near monies include: A) savings deposits. B) currency. C) demand deposits. D) traveler's checks.

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22. In recent years, the U.S. Treasury has introduced one-dollar coins. The hurdles faced in so doing include all EXCEPT which one of the following? A) Some industries will incur added costs of dealing with the coins. B) One-dollar coins may cause confusion with similar-sized coins. C) The one-dollar bill continues to be used. D) Over time, the total costs of using coins is greater than the total costs of using bills. 23. One of the lessons of the Sacagawea and Susan B. Anthony dollar coins is that: A) the public does not accept coins that bear likenesses of historical figures. B) paper money is always superior to coins. C) the public will use whatever money is issued by a democratically elected government. D) ultimately it is the public that determines what is good money. 24. Robbie keeps money in his checking account to pay for his sizeable monthly mortgage payment. This is called the demand for money. A) transactions B) precautionary C) speculative D) hoarding 25. The figure shows one of the demands for money: Which of the following terms best describes the category of demand depicted in the figure? A) speculative demand B) transactions demand C) speculative or precautionary demand D) transactions or speculative demand 26. The transactions demand for money: A) is the demand for money as a medium of exchange. B) is the demand for money for unforeseen emergencies. C) is negatively related to interest rates. D) arises because other assets are risky. 27. What are the three sources of the demand for money? A) transactions, precautionary, speculative B) transactions, hoarding, speculative C) transactions, pecuniary, speculative D) transactions, cosmological, hoarding 28. Which name and motive for holding money is correctly matched? A) transactions demand—to have funds for unexpected purchases B) precautionary demand—to have funds for unexpected purchases C) speculative demand—to have funds in case of a recession D) transactions demand—to have funds in case transactions costs fall 29. Which is the correct chain of events if the money supply falls?

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A) People have less money than desired; the demand for bonds falls; the price of bonds falls. B) eople have more money than desired; the demand for bonds rises; the price of bonds falls. C) People have less money than desired; the supply of bonds rises; the price of bonds falls. D) People have more money than desired; the demand for bonds rises; the price of bonds rises. 30. The demand for money is related to the interest due to the demand for money. A) inversely; speculative B) directly; speculative C) inversely: transactions D) directly; transactions 31. To say that interest rates represent the opportunity cost of holding money means that, as interest rates rise: A) the demand for money shifts to the left. B) the demand for money shifts to the right. C) there is a movement upward along the demand curve for money. D) there is a movement downward along the demand curve for money. 32. The supply of money is: A) inversely related to the interest rate. B) determined by the Federal Reserve. C) elastic. D) determined by the holdings of gold by the Federal Reserve. 33. If the money supply is reduced by the Fed, which of the following statements is correct? A) Interest rates fall. B) Bond prices rise. C) The speculative demand for money rises. D) Bond prices fall. 34. If the Federal Reserve decided to reduce the money supply, bondholders would bonds, and the interest rate would . A) sell; rise B) buy; rise C) buy; fall D) sell; fall 35. If the Federal Reserve decides to increase the money supply, A) the interest rate will rise. B) the interest rate will fall. C) the interest rate will be unaffected. D) deflation will occur. 36. If the Fed increases the supply of money in the market, then bond prices will and interest rates will A) fall; rise

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B) rise; fall C) rise; rise D) fall; fall 37. The reason bond prices and interest rates are inversely related is that: A) bond prices are fixed for the life of a bond. B) market interest rates stay the same for the life of a bond. C) the coupon payment is fixed for the life of a bond. D) bonds are always perpetuities. 38. Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price: A) falls to $875. B) falls to $800. C) rises to $1,125. D) falls to $700. 39. Assume that market interest rates are 6% and the bondholder receives a $60 coupon payment per year on a bond with a face value of $1,000. If market interest rates fall to 4%, the bond price: A) rises to $1,400. B) rises to $2,000. C) falls to $500. D) rises to $1,500. 40. The price of a bond is equal to: A) yield/interest payment. B) interest payment/yield. C) yield ´ interest payment. D) yield ´ inflation rate. 41. Kim recently purchased a perpetual bond for $1,000. The bond pays $50 in interest per year. Suppose market interest rates rose to 7% after the purchase. The price of the bond would: A) fall to $700. B) rise to $1,700. C) fall to $714. D) rise to $1,070. 42. The primary purpose of financial markets and institutions is to: A) keep inflation low. B) create money. C) act as an intermediary between savers and borrowers. D) keep interest rates stable. 43. The idea that banks hold only a portion of deposits and lend the rest out is called the: A) fractional reserve banking system.

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B) partial banking system. C) double-entry bookkeeping system. D) loan-maximization system. 44. The fractional reserve banking system refers to a system in which banks: A) hold reserves equal to a fraction of their deposit liabilities. B) keep 100% of their liabilities always on reserve. C) forbid the removal of more than a fraction of demand deposits per day. D) keep only a fraction of each person's demand deposits. 45. An individual bank can, at most, lend out all its: A) checkable deposits. B) excess reserves. C) reserves. D) deposits. 46. If a bank is subject to a reserve requirement of 15%, then it is required to A) place 15% of its deposits in the vault. B) lend out 15% of its deposits. C) place 15% of its deposits in the account with its regional Federal Reserve Bank. D) place 15% of its deposits in the account with its regional Federal Reserve Bank or the vault. 47. Assume that the reserve requirement is 20%. A bank has $20 billion in demand deposits. How much money does the bank have to keep in reserves? A) $20 billion B) $10 billion C) $4 billion D) $0 billion 48. If the reserve requirement is 25%, a new deposit of $1,000 leads to a potential increase in the money supply of: A) $4,000. B) $250. C) $10,000. D) $5,000. 49. If the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of: A) $50. B) $2,500. C) $5,000. D) $4,500. 50. The money multiplier is: A) interest payment/yield. B) yield/interest payment.

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C) 1/1 – MPC. D) 1/reserve requirement. 51. If the reserve requirement is 1%, what is the money multiplier? A) 100 B) 10 C) 1 D) 0 52. New deposits of $1 billion are placed in a bank. The reserve requirement is 20%. How much does the money supply increase, assuming no leakages? A) $1 billion B) $5 billion C) $10 billion D) $20 billion 53. Which of the following statements would NOT be a reason for a reduction in the size of the potential money multiplier? A) A borrower uses a loan for transactions purposes. B) Banks choose to retain excess reserves. C) Borrowers buy an import. D) The marginal propensity to consume drops. 54. If the reserve requirement is 20%, the money multiplier is: A) 4.0. B) 5.0. C) 0.20. D) 0.80. 55. The Federal Reserve System was created in: A) 1789. B) 1913. C) 1946. D) 1978. 56. The national economic objectives that the Fed attempts to achieve include all the following actions EXCEPT: A) promoting economic growth accompanied by full employment. B) maintaining moderate long-term interest rates. C) keeping the price level stable. D) keeping tax rates low. 57. Which of the following statements is correct? A) The Fed's actions are subject to executive branch control. B) Politically controlled banks are better at fighting inflation than are independent central banks. C) The Federal Reserve is considered to be an independent central bank.

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D) The Federal Reserve System is not subject to Congressional oversight. 58. Which item is a basic goal of the Federal Reserve System? A) full employment B) a balanced federal budget C) low interest rates D) export promotion 59. Which of the following statements concerning the structure of the Federal Reserve System is correct? A) The Fed's Board of Governors consists of twelve members. B) The Chairman and Vice-Chairman of the Board of Governors are appointed by the President and confirmed by the Senate for terms of four years. C) There are ten regional Federal Reserve banks. D) The Federal Open Market Committee (FOMC) has a total of seven members. 60. Federal Reserve board members serve for years, but the Chair serves for . A) 4; 14 years B) 14: 4 years C) 4; 4 years D) 14; life 61. Which action is NOT a function performed by the Federal Reserve regional banks? A) distributing coins and currency B) setting reserve requirements C) regulating and supervising member banks D) providing a nationwide payments system 62. Which of the following sentences is NOT an accurate statement of Alan Greenspan's tenure as Federal Reserve chairman? A) Greenspan believed that the information age had changed the structure of the American economy. B) Greenspan believed that productivity gains would allow the economy to grow faster than the historical levels without triggering inflation C) Critics of Greenspan claim that he should have acted quicker to prevent the stock market bubble of the late 1990s. D) Greenspan lasted only 4 years as chairman of the Federal Reserve Board. 63. The report that compiles economic conditions collected by the Federal Reserve Regional Banks is called the: A) Beige Book B) Red Book C) Economic Report D) Reserve Report 64. The main policymaking arm of the Fed is the:

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A) Federal Open Market Committee. B) Council of Economic Advisors. C) Money Committee. D) Beige Book Committee. 65. The Federal Open Market Committee is responsible for: A) setting interest rates. B) running the check-clearing process. C) overseeing the buying and selling of government securities. D) reducing the Fed's reliance of open market operations. 66. Which if the following actions is NOT a tool of monetary policy? A) changing the discount rate B) changing government spending and taxes C) changing reserve requirements D) open market operations 67. Which of the following items is NOT one of the primary tools of the Fed? A) reserve requirements B) open market operations C) tax rates D) discount rate 68. Which power does the Federal Reserve rarely use? A) control of the discount rate B) control of the reserve requirement C) control over open market operations D) control of the federal funds rate 69. If the Fed lowers the reserve requirement ratio: A) the money supply will fall. B) the money multiplier will rise. C) less money will be available for banks to loan. D) the impact will be small but precise. 70. What is the interest rate for money borrowed to satisfy daily reserve requirements? A) federal funds rate B) discount rate C) prime rate D) sub-prime rate 71. If the Fed wanted to use all three of its primary tools to increase the money supply, what should it do? A) raise the reserve requirement, lower the discount rate, and conduct an open market sale B) raise the reserve requirement, raise the discount rate, and conduct an open market sale

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C) lower the reserve requirement, raise the discount rate, and conduct an open market purchase D) lower the reserve requirement, lower the discount rate, and conduct an open market purchase 72. Which of the following statements lists contractionary policies? A) The Fed sells bonds, lowers the discount rate, and raises the reserve requirements. B) The Fed sells bonds, lowers the discount rate, and lowers the reserve requirements. C) The Fed purchases bonds, lowers the discount rate, and lowers the reserve requirements. D) The Fed sells bonds, raises the discount rate, and raises the reserve requirements. 73. In the 1920s, what was the primary tool of monetary management used to implement monetary policy? A) federal funds rate B) discount rate C) open market operations D) reserve requirement 74. The discount rate is: A) now set below the federal funds rate. B) the interest rate banks charge one another when they lend/borrow reserves. C) the Fed's most effective monetary policy tool. D) the rate regional Federal Reserve banks charge depository institutions to borrow reserves. 75. Open market operations involve the purchase and sale of: A) government securities. B) corporate bonds. C) municipal bonds. D) utility bonds. 76. Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $10,000 bond. The impact on the banking system is a(n): A) injection of $10,000 in new reserves. B) reduction of $50,000 in reserves. C) injection of $50,000 in new reserves. D) injection of $2,000 in new reserves. 77. When the Fed wants to decrease the money supply, the Fed: A) buys bonds. B) lowers the federal funds rate. C) sells bonds. D) lowers taxes. 78. Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $100,000 bond. The money supply: A) increases by a maximum of $100,000. B) decreases by $100,000.

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C) increases by a maximum of $20,000. D) increases by a maximum of $500,000. Answer Key B 1. A 2. B 3. C 4. C 5. A 6. A 7. A 8. A 9. B 10. C 11. D 12. D 13. C 14. C 15. B 16. C 17. B 18. C 19. D 20. A 21. A 22. D 23. D 24. A 25. B 26. A 27. A 28. B 29. C 30. A 31. C 32. B 33. D 34. A 35. B 36. B 37. C 38. A 39. D 40. B 41. C 42. C

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43. A 44. A 45. B 46. D 47. C 48. A 49. C 50. D 51. A 52. B 53. D 54. B 55. B 56. D 57. C 58. A 59. B 60. B 61. B 62. D 63. A 64. A 65. C 66. B 67. C 68. B 69. B 70. A 71. D 72. D 73. B 74. D 75. A 76. A 77. C 78. D C. 1. Which of the following channels is NOT a monetary transmissions channel? A) interest-rate channel B) quantity-theory channel C) output channel D) expectations channel

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2. If the Fed wants to pursue a contractionary monetary policy, what should it do with each of its three primary tools? A) lower the reserve requirement ratio, lower the discount rate, and conduct an open market purchaseB) raise the reserve requirement ratio, lower the discount rate, and conduct an open market saleC) raise the reserve requirement ratio, raise the discount rate, and conduct an open market purchaseD) raise the reserve requirement ratio, raise the discount rate, and conduct an open market sale 3. The Federal Reserve wishes to decrease unemployment in the United States. What would be an appropriate policy? A) increase reserve requirement B) increase the discount rate C) buy government bonds on the open market D) sell government bonds on the open market 4. The Federal Reserve wishes to decrease the rate of inflation in the United States. What would be an appropriate policy? A) increase taxes B) decrease the discount rate C) buy government bonds on the open market D) sell government bonds on the open market 5. The quantity theory equation of exchange states: A) Supply = Demand B) GDP = Q ´ P C) M ´ V = P ´ Q D) M = P ´ Q 6. In contemporary terms, the PQ in the equation MV = PQ would be the same as: A) real GDP. B) nominal GDP. C) the money supply. D) national income. 7. According the classical theorists, if the Federal Reserve buys government bonds, the result is a(n): A) increase in employment. B) increase in unemployment. C) increase in inflation. D) decrease in inflation. 8. Suppose the following data are for an economy: Under the classical assumptions, if the money supply were to be increased by $5 million, then: A) velocity would drop to 1.43. B) the price level would increase from 1 to 4. C) GDP would rise to $35.

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D) it would be impossible to predict the effect of a money supply change. 9. Using the equation of exchange, if the money supply is $4 trillion, the price level is 2, and the level of output (real GDP) is $6 trillion, then the velocity of money is: A) 12. B) 3. C) 1.33. D) 2. 10. The M2 velocity of money: A) is smaller than the M1 velocity of money. B) is greater than the M1 velocity of money. C) is roughly the same as the M1 velocity of money. D) never changes. 11. Which of the following statements concerning the quantity theory of money of the Classical school of economics is correct? A) The velocity of money is assumed to be highly unstable. B) Money is held because spending and income do not occur at the same time. C) The short-run effect of changes in the money supply on the price level is the primary concern of the Classical economists. D) In the long run, changes in the money supply can change both the price level and the economy's output level. 12. In the long run, using the equation of exchange of the classical economists, a 10% increase in the money supply (M) will: A) lead to an increase in the price level of something less than 10%, as some of the increase in M will increase the output level. B) cause the price level to rise by more than 10% due to the inflationary effect of increases in M. C) leave the price level unchanged. D) cause the price level to rise by 10%. 13. For classical theorists, the transmission mechanism for money works through: A) the interest rate. B) transactions demand for money. C) the Federal Reserve. D) speculative demand for money. 14. Irving Fisher is primarily known as a(n): A) monetarist. B) Keynesian. C) inventor. D) chairman of the Federal Reserve.

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15. The reason the equation of exchange states that any change in the money supply will be felt directly in the price level is that: A) the classical model has a short-run focus. B) the economy can reach long-run equilibrium at less than full employment. C) the economy is at full employment in the long run and aggregate output is fixed. D) monetary policy has no long-run effects. 16. Which is the correct chain of events according to the quantity theory channel? A drop in the money supply would: A) cause people to hold more money than desired, so they save more and spend less, which lowers prices. B) cause people to hold less money than desired, so they save less and spend more, which lowers prices. C) cause people to hold less money than desired, so they save more and spend less, which lowers prices. D) cause people to hold more money than desired, so they save more and spend less, which raises prices. 17. Which statement is NOT a weakness of the classical quantity theory of money? A) The classical quantity theory of money explains long-term trends. B) The classical quantity theory of money is of limited use for monetary policy. C) The classical quantity theory of money does not adequately take into account near monies. D) The classical quantity theory of money assumes full employment. 18. Which of the following statements concerning the quantity theory is NOT accurate? A) The quantity theory explains price movements in the long run. B) The quantity theory explains why there was massive inflation in Europe after gold and silver were discovered in the New World. C) The quantity theory was developed by John Maynard Keynes. D) The quantity theory explains how prices work in an economy where money is limited to currency and coins. 19. Keynes and monetarists agree that: A) monetary policy is ineffective. B) the economy is self-stabilizing in the long run. C) government economic policy is effective in the short run. D) the interest rate is not important in the long run. 20. Monetarists and classical economists agree that: A) monetary policy is ineffective. B) the economy is self-stabilizing in the long run. C) government economic policy is useful in the short run. D) the interest rate is never important. 21. Which motive for holding money was assumed by the Classical school? A) speculative

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B) transactions C) investment D) precautionary 22. According to Keynes, the demand for money is a(n) function of the . A) direct; interest rate B) inverse; interest rate C) inverse; transactions demand for money D) direct; multiplier 23. According to Keynes, changing the money supply works through the transmission mechanism of: A) interest rate. B) income. C) consumption. D) exports. 24. The phenomenon of hoarding money when the interest rate falls to low levels is called the: A) liquidity trap. B) transactions demand for money. C) precautionary demand for money. D) deflation. 25. The existence of a liquidity trap implies that a(n): A) increase in the money supply will not lower interest rates. B) decrease in the money supply will not lower interest rates. C) decrease in the interest rate will be matched by a corresponding decrease in investment. D) increase in the money supply leads to inflation. 26. The policy implication of the liquidity trap is that increases in the: A) money supply would not increase aggregate supply. B) interest rate would trap people into paying more in mortgage payments and would increase bankruptcies. C) interest rate would cause a cash flow problem for businesses. D) money supply would not increase aggregate demand. 27. A decrease in the money supply, according to Keynes, leads to interest rates and a(n) in investment. A) higher; fall B) higher; increase C) lower; fall D) lower; increase 28. The inflation rate is 14% and the unemployment rate is 4%. What would a Keynesian economist recommend for economic policy? A) increasing the money supply

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B) decreasing the money supply C) increasing federal spending D) decreasing the discount rate 29. Which of the following statements concerning the Keynesian monetary transmission mechanism is correct? A) An increase in the money supply will increase bond prices and reduce interest rates, which will increase investment, aggregate demand, income, and output. B) Monetary policy is needed to move an economy out of a liquidity trap. C) A decrease in the money supply will increase bond prices and reduce interest rates, which will increase investment, aggregate demand, income, and output. D) An increase in the money supply will decrease bond prices and raise interest rates, which will decrease investment, aggregate demand, income, and output. 30. Which of the following statements is NOT a difference between the classical and Keynesian monetary theories? A) Keynes emphasized the role of the speculative demand for money, whereas classical economists focused on the transactions demand. B) Classical economists use the quantity theory channel, while Keynesians uses the interest rate channel. C) Keynesian analysis emphasizes the long run, whereas the classical economists focus on the short run. D) The classical approach says that monetary changes directly affect the price level, while the Keynesian approach states that changes in money affect the economy only indirectly through changes in interest rates and investment. 31. The inflation rate is 1% and the unemployment rate is 14%. What would a Keynesian economist recommend for economic policy? A) increasing the money supply B) decreasing the money supply C) increasing federal spending D) decreasing the discount rate 32. The data for an economy are as followsSuppose the monetary authority doubles the money supply to $300. In a depression, the quantity theory would predict that , and Keynesian theory would predict that . A) velocity would drop to 1; the price level would double to 30 B) the price level would halve to 7.5; velocity would rise to 4 C) the price level would double to 30; velocity would drop to 1 D) the price level would not change; velocity would drop to 1 33. The monetarist model is most closely associated with: A) the Classical school. B) John Maynard Keynes. C) institutionalism.

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D) Marxism. 34. Keynes argued that consumption was a function of , but Friedman said that consumption was also a function of . A) income; wealth B) wealth; income C) savings; investment D) GDP; government spending 35. Which of the following items would Friedman NOT consider part of the demand for money? A) permanent income B) return on financial assets C) expected rate of inflation D) taxes 36. Which item is NOT a major independent variable in Milton Friedman's model of the demand for real money balances? A) permanent income B) family size C) rate of return on assets D) expected inflation 37. Milton Friedman and Anna Schwartz are most famous for: A) monetary theory. B) fiscal theory. C) comparative advantage theory. D) their tenures on the Federal Reserve Board. 38. According to Friedman, if the stock market rises rapidly in value, the: A) demand for money will increase.B) demand for money will decrease.C) demand for money will be unaffected.D) marginal propensity to consume will decrease. 39. In Friedman's demand function for real money balances, the demand for real money balances will be higher the: A) lower is wealth or permanent income. B) lower is the rate of return on other assets. C) higher is the expected inflation rate. D) higher is the rate of return on other assets. 40. Monetarists and Keynesians disagree on which aspect of the money transmission mechanism? A) effect on investment B) effect of the interest rate C) effect of prices

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D) effect on aggregate demand 41. According to the monetarist transmission mechanism: A) an increase in the money supply will affect output and the price level in the long run. B) a decrease in the money supply will increase interest rates as portfolios rebalance, leading to a drop in investment and/or consumption spending. C) the velocity of money is highly unstable. D) an increase in the money supply will affect only output in the long run. 42. In the monetarist transmission mechanism: A) an increase in the money supply will not affect the price level in the long run. B) output can never be above its full-employment level. C) a decrease in the money supply will have no effect on output in the short run.D) the economy will move to its full-employment output level in the long run. 43. Which of the following items is NOT a monetary policy lag? A) implementation B) decision ) recognition D) discussion 44. Which of the following lags is NOT a monetary policy lag? A) recognition lag B) decision lag C) output lag D) implementation lag 45. Which of the following statements concerning monetary policy lags is correct? A) Monetary policy lags are short and predictable. B) The decision lag for monetary policy is longer than that for fiscal policy. C) Information lags occur only in monetary policy, not in fiscal policy. D) Recent studies estimate that the average implementation lag for monetary policy is between a year and 18 months. 46. Monetary policy lags are between quarter(s) and quarters. A) 1; 8 B) 1; 2 C) 1; 24 D) 8; 24 47. The unemployment rate is revised in July to show that the unemployment rate, instead of decreasing to 4.2%, actually increased to 5%. This is an example of lag. A) information B) recognition C) decision

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D) implementation 48. The time policymakers must wait for economic data to be collected, processed, and reported is the lag. A) information B) recognition C) decision D) implementation 49. The time it takes to determine that an economic problem is occurring is called the lag. A) information B) recognition C) decision D) implementation 50. A recognition lag results from the: A) fact that the Federal Reserve meets only once a month. B) inability to predict if a one-month decline in the economy may be a fluke. C) fact that data are collected one month after economic events occur. D) fact that banks are slow to respond to money supply changes. 51. Milton Friedman and Anna Schwartz believed that monetary policy was ineffective because of the __ lag. A) information B) recognition C) decision D) implementation 52. The justification for the monetary rule is: A) that in an open society the monetary authorities should follow rules. B) that a passive monetary policy is less costly than an active one. C) that since the implementation lag is so unpredictable, monetary policy has a tendency to have the wrong effect. D) to bring it up to par with fiscal policy. 53. Regarding monetary policy targets, most economists think the Fed should target: A) income and output in the long run. B) price stability in the long run. C) price stability in the short run. D) the federal funds rate. 54. A major war in the Middle East cuts off the supply of oil to the United States, causing a recession and inflation. With its tools of monetary policy, the Federal Reserve: A) can fight either the recession or the inflation. B) can fight both the recession and the inflation. C) can fight neither the recession nor the inflation.

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D) should not be involved with fighting either the recession or the inflation. 55. Suppose the economy is in full-employment equilibrium. Then a positive demand shock, caused by an increase in investment spending, occurs. What should the Fed do? A) Undertake an expansionary monetary policy to bring output back to full employment. B) Nothing because of the conflict between the twin goals of price stability and full employment when demand shocks occur. C) Undertake a contractionary monetary policy to restore the economy to its full employment equilibrium. D) Reduce the federal funds rate. 56. Monetary policy is least effective in reversing: A) demand-pull inflation. B) a decrease in private spending. C) an adverse supply shock. D) rapid growth in consumption expenditures. 57. Suppose the economy is in full-employment equilibrium. Then a positive supply shock, caused by a fall in oil prices, hits the economy. What happens if the Fed pursues a contractionary monetary policy? A) A contractionary monetary policy will move the economy back to full-employment output but at a much lower price level. B) A contractionary monetary policy will stabilize prices with no effect on output. C) A contractionary monetary policy will move the economy back to full-employment output with little effect on the price level. D) A contractionary monetary policy will move the economy back to full employment output but at a much higher price level. 58. With a negative supply shock, the Federal Reserve has to decide whether to: A) reduce both inflation and unemployment. B) increase both inflation and unemployment. C) increase inflation or decrease employment. D) increase inflation and decrease unemployment, or decrease inflation and increase unemployment. 59. Suppose the economy is in full-employment equilibrium. Then a positive supply shock, caused by a fall in oil prices, hits the economy. What happens if the Fed pursues an expansionary monetary policy? A) An expansionary monetary policy will stabilize prices with no effect on output. B) An expansionary monetary policy will stabilize prices but at a much higher output level. C) An expansionary monetary policy will move the economy back to full-employment output but at a much higher price level. D) An expansionary monetary policy will move the economy back to full-employment output but at a much lower price level. 60. When a negative supply shock occurs, the Fed will:

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A) focus on price level stability, because the economy can also reach the objective of full employment. B) focus on a nominal income or output target since this focus permits the Fed to spread the shock's impact between income and output losses and price level increases. C) be indifferent between using a price level target or an output target. D) use contractionary monetary policy to reach full-employment output. 61. One of the complexities of conducting monetary policy is: A) coordination issues with fiscal policy. B) that there are several sometimes conflicting goals. C) getting permission from the legislature to change policy. D) that low inflation conflicts with financial stability. 62. A monetary rule would make it difficult to: A) have stable monetary growth. B) prevent inflation. C) respond to unforeseen future consequences. D) stabilize the price of gold. 63. The use of monetary targets would be advocated by: A) Milton Friedman. B) John Maynard Keynes. C) Alan Greenspan. D) gold standard theorists. 64. Milton Friedman advocated the use of monetary growth rules for all the following reasons EXCEPT which one? A) Variations in monetary growth are a major source of instability in the economy. B) Lags in discretionary monetary policy are long and variable. C) The private sector economy is inherently stable. D) The velocity of money is highly unstable. 65. Monetary targeting involves setting a steady growth in: A) employment. B) GDP. C) productivity. D) the money supply. 66. If monetary targeting is the policy of the Federal Reserve, a negative demand shock would result in: A) inflation. B) higher interest rates. C) a recession in the short run.

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D) a permanent recession. 67. A policy that targets prices: A) worsens the recessionary impact of an adverse supply shock. B) worsens the recessionary impact of an adverse demand shock. C) cannot be implemented in an open economy. D) worsens inflation if aggregate demand suddenly rises. 68. If the Fed were to use a monetary targeting rule: A) negative supply shocks would immediately be offset by increases in the money supply. B) the inflation rate would fall to 0%. C) negative demand shocks would be partially offset in the short run by a steady low growth rate in the money supply. D) positive demand shocks would be offset by reductions in the money supply. 69. If a monetary targeting rule is used, then when a supply or demand shock hits the economy, the economy: A) immediately moves back to full employment. B) immediately returns to price stability. C) quickly returns to both full employment and price stability. D) gradually returns to full employment after adjustments in wages and prices. 70. If the change in aggregate demand is small or temporary, a monetary growth rule would: A) probably function well. B) not function well. C) lead to a massive recession. D) lead to inflation. 71. The use of inflation targeting as a policy: A) slows down the economy if the inflation falls below the target. B) leads to expansionary policies if the inflation rises above the target. C) is considered more effective than monetary targeting. D) is considered less effective than monetary targeting. 72. Inflation targeting: A) explicitly considers the long-run goal of price stability for monetary policy. B) states that the long-run goal of monetary policy is an output target. C) explicitly considers the short-run goal of price stability for monetary policy. D) puts equal weight on price stability and an output target for monetary policy. 73. Assume that the economy is in full-employment equilibrium. If an inflation targeting rule is used and a positive demand shock hits the economy, the Fed would: A) undertake an expansionary monetary policy to return the economy to full employment. B) use contractionary monetary policy to keep the inflation rate low. C) use expansionary monetary policy to keep the inflation rate low.

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D) use contractionary monetary policy to achieve an output target. 74. Which of the following statements about the Fed's performance is true? A) Paul Volcker was more concerned about short-run unemployment than the interest rate. B) The unemployment rate has been lower than the inflation rate since 1987. C) The high interest rates of the early 1980s have not returned in 25 years. D) Alan Greenspan never raised the interest rate during his tenure as Chairman of the Fed. 75. To say that the Fed is transparent means that the Fed: A) executes decisions in secrecy. B) has a “just trust us” approach to conducting monetary policy. C) has an openness regarding its monetary policy. D) uses a monetary growth rule. 76. A policy of transparency in the Federal Reserve: A) allows investors to sit in on Federal Reserve Board meetings. B) requires the Federal Reserve to act in specific ways in specific situations. C) requires the Federal Reserve to explain why it acted or failed to act in a specific situation. D) allows Wall Street to audit the Federal Reserve books. 77. The transparency in a “look back” sense occurs when the Fed: A) explains what it will do in the future. B) explains why it took a certain action. C) discusses the previous experience of the members of the Board of Governors. D) makes its past financial transactions known to Congress. 78. A disadvantage of the Fed's “tilt” is that it: A) is more difficult to coordinate with fiscal policy. B) is based on future possibilities, not current certainties. C) reduces the value of the money multiplier. D) can tie the Fed's hands. Answer Key C 1. C 2. D 3. C 4. D 5. C 6. B 7. C 8. B 9. B 10. A 11. B 12. D

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13. B 14. A 15. C 16. C 17. A 18. C 19. C 20. B 21. B 22. B 23. A 24. A 25. A 26. D 27. A 28. B 29. A 30. C 31. C 32. C 33. A 34. A 35. D 36. B 37. A 38. A 39. B 40. C 41. B 42. D 43. D 44. C 45. D 46. A 47. A 48. A 49. B 50. B 51. D 52. C 53. B 54. A 55. C 56. C 57. A 58. D

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59. B 60. B 61. B 62. C 63. A 64. D 65. D 66. C 67. A 68. C 69. D 70. A 71. C 72. A 73. B 74. C 75. C 76. C 77. B 78. D

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TRIAL QUESTIONS FOR MONETARY ECONS

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Typically, borrowers have superior information relative to lenders about the potential returns and risks

associated with an investment project. The difference in information is called ________, and it creates

the ________ problem.

1) _______

A) adverse selection; risk sharing

B) adverse selection; moral hazard

C) asymmetric information; risk sharing

D) asymmetric information; adverse selection

2) Money is 2) _______

A) anything that is generally accepted in payment for goods and services or in the repayment of debt.

B) the total collection of pieces of property that are a store of value.

C) a flow of earnings per unit of time.

D) always based on a precious metal like gold or silver.

3) Which of the following statements uses the economists' definition of money? 3) _______

A) The job with New Company gave me the opportunity to earn more money.

B) Betsy is rich�she has a lot of money.

C) I hope that I have enough money to buy my lunch today.

D) I plan to earn a lot of money over the summer.

4) Which of the following statements best explains how the use of money in an economy increases

economic efficiency?

4) _______

A) Money increases economic efficiency because it decreases transactions costs.

B) Money increases economic efficiency because it is costless to produce.

C) Money increases economic efficiency because it discourages specialization.

D) Money cannot have an effect on economic efficiency.

5) In explaining the evolution of money 5) _______

A) paper money is always backed by gold and therefore more desirable than checks.

B) new forms of money evolve to lower transaction costs.

C) government regulation is the most important factor.

D) commodity money, because it is valued more highly, tends to drive out paper money.

6) The present value of an expected future payment ________ as the interest rate increases. 6) _______

A) is constant B) falls C) is unaffected D) rises

7) If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is 7) _______

A) $1000. B) $1210. C) $2000. D) $2200.

8) Which of the following are true for a coupon bond? 8) _______

A) The price of a coupon bond and the yield to maturity are positively related.

B) The yield to maturity is greater than the coupon rate when the bond price is above the par value.

C) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

D) The yield is less than the coupon rate when the bond price is below the par value.

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9) A discount bond 9) _______

A) pays the bondholder the face value at maturity.

B) pays the face value at maturity plus any capital gain.

C) pays the bondholder a fixed amount every period and the face value at maturity.

D) pays all interest and the face value at maturity.

10) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? 10) ______

A) 5 percent B) -5 percent C) 10 percent D) -10 percent

11) An equal increase in all bond interest rates 11) ______

A) increases the return to all bond maturities by an equal amount.

B) decreases the return to all bond maturities by an equal amount.

C) decreases long-term bond returns more than short-term bond returns.

D) has no effect on the returns to bonds.

12) If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of

7 percent, then the real interest rate on this bond is

12) ______

A) 7 percent. B) 22 percent. C) -15 percent. D) -8 percent.

13) In which of the following situations would you prefer to be the lender? 13) ______

A) The interest rate is 9 percent and the expected inflation rate is 7 percent.

B) The interest rate is 25 percent and the expected inflation rate is 50 percent.

C) The interest rate is 13 percent and the expected inflation rate is 15 percent.

D) The interest rate is 4 percent and the expected inflation rate is 1 percent.

14) The interest rate on Treasury Inflation Protected Securities is a direct measure of 14) ______

A) the nominal interest rate. B) the real interest rate.

C) the rate of deflation. D) the rate of inflation.

15) Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation

Protected Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected

rate of inflation is

15) ______

A) 3 percent. B) 5 percent. C) 8 percent. D) 11 percent.

16) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus, 16) ______

A) when interest rates rise, the expected return on money falls relative to the expected return on

bonds, causing the demand for money to rise.

B) when interest rates rise, the expected return on money falls relative to the expected return on

bonds, causing the demand for money to fall.

C) when interest rates fall, the expected return on money falls relative to the expected return on

bonds, causing the demand for money to fall.

D) when interest rates fall, the expected return on money falls relative to the expected return on

bonds, causing the demand for money to rise.

17) If there is excess demand for money, there is 17) ______

A) excess demand for bonds. B) excess supply of bonds.

C) equilibrium in the bond market. D) too much money.

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18) If there is an excess supply of money 18) ______

A) individuals buy bonds, causing interest rates to rise.

B) individuals sell bonds, causing the interest rate to rise.

C) individuals sell bonds, causing the interest rate to fall.

D) individuals buy bonds, causing interest rates to fall.

19) In the market for money, an interest rate below equilibrium results in an excess ________ money and the

interest rate will ________.

19) ______

A) demand for; fall B) supply of; fall

C) supply of; rise D) demand for; rise

20) Which of the following is NOT an entity of the Federal Reserve System? 20) ______

A) Federal Reserve Banks B) The Federal Open Market Committee

C) The Comptroller of the Currency D) The Board of Governors

21) Which of the following is an entity of the Federal Reserve System? 21) ______

A) The U.S. Treasury Secretary B) The Comptroller of the Currency

C) The FOMC D) The FDIC

22) Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks

and ________ are appointed by the Board of Governors.

22) ______

A) three; six B) four; five C) six; three D) five; four

23) The Federal Reserve Bank of ________ plays a special role in the Federal Reserve System because it

houses the open market desk.

23) ______

A) Chicago B) San Francisco C) Boston D) New York

24) Which of the following functions are not performed by any of the twelve regional Federal Reserve Banks? 24) ______

A) Conducting economic research

B) Check clearing

C) Setting interest rates payable on home mortgages

D) Issuing new currency

25) All ________ are required to be members of the Fed. 25) ______

A) banks with assets less than $100 million B) nationally chartered banks

C) state chartered banks D) banks with assets less than $500 million

26) Banks subject to reserve requirements set by the Federal Reserve System include 26) ______

A) only banks with assets less than $500 million.

B) only banks with assets less than $100 million.

C) only nationally chartered banks.

D) all banks whether or not they are members of the Federal Reserve System.

27) The Chairman of the Board of Governors is chosen from among the seven governors and serves a

________ term.

27) ______

A) one-year B) two-year C) four-year D) eight-year

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28) The Federal Open Market Committee consists of the 28) ______

A) twelve regional Fed bank presidents and the chairman of the Board of Governors.

B) seven members of the Board of Governors and five presidents of the regional Fed banks.

C) seven members of the Board of Governors and seven presidents of the regional Fed banks.

D) five senior members of the seven-member Board of Governors.

29) Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to 29) ______

A) propose legislation that would force the Fed to submit budget requests to Congress, as must other

government agencies.

B) withhold appropriations from the Board of Governors.

C) withhold appropriations from the Federal Open Market Committee.

D) instruct the General Accounting Office to audit the foreign exchange market functions of the

Federal Reserve.

30) The central bank which is generally regarded as the most independent in the world because its charter

cannot be changed by legislation is the

30) ______

A) European Central Bank. B) Bank of Japan.

C) Bank of England. D) U.S. Federal Reserve

31) The case for Federal Reserve independence does not include the idea that 31) ______

A) a Federal Reserve under the control of Congress or the president might make the so-called political

business cycle more pronounced.

B) a politically insulated Fed would be more concerned with long-run objectives and thus be a

defender of a sound dollar and a stable price level.

C) policy is always performed better by an elite group such as the Fed.

D) political pressure would impart an inflationary bias to monetary policy.

32) The political business cycle refers to the phenomenon that just before elections, politicians enact

_________ policies. After the elections, the bad effects of these policies (for example, ________ ) have

to be counteracted with ________ policies.

32) ______

A) expansionary; a higher inflation rate; contractionary

B) contractionary; higher unemployment; expansionary

C) expansionary; higher unemployment; contractionary

D) contractionary; a higher inflation rate; expansionary

33) Critics of the current system of Fed independence contend that 33) ______

A) the president has too much control over monetary policy on a day-to-day basis.

B) the current system is undemocratic.

C) the Board of Governors is held responsible for policy missteps.

D) voters have too much say about monetary policy.

34) Recent research indicates that inflation performance (low inflation) has been found to be best in

countries with

34) ______

A) political control of monetary policy.

B) a policy of always keeping interest rates low.

C) money financing of budget deficits.

D) the most independent central banks.

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35) Both ________ and ________ are Federal Reserve assets. 35) ______

A) currency in circulation; government securities

B) government securities; discount loans

C) currency in circulation; reserves

D) government securities; reserves

36) The monetary liabilities of the Federal Reserve include 36) ______

A) currency in circulation and discount loans.

B) government securities and discount loans.

C) currency in circulation and reserves.

D) government securities and reserves.

37) The sum of the Fed's monetary liabilities is called 37) ______

A) bank reserves. B) the monetary base.

C) currency in circulation. D) the money supply.

38) The interest rate the Fed charges banks borrowing from the Fed is the 38) ______

A) prime rate. B) Treasury bill rate.

C) discount rate. D) federal funds rate.

39) ________ the Federal Reserve earn income while ________ the Federal Reserve cost nothing. 39) ______

A) Currency in circulation by; assets of B) Reserves of; assets of

C) Assets of; liabilities of D) Liabilities of; assets of

40) Purchases and sales of government securities by the Federal Reserve are called 40) ______

A) swap transactions. B) federal fund transfers.

C) discount loans. D) open market operations.

41) When a bank sells a government bond to the Federal Reserve, reserves in the banking system ________

and the monetary base ________, everything else held constant.

41) ______

A) decrease; decreases B) increase; increases

C) decrease; increases D) increase; decreases

42) If a person selling bonds to the Fed cashes the Fed's check, then reserves ________ and currency in

circulation ________, everything else held constant.

42) ______

A) remain unchanged; increases B) remain unchanged; declines

C) decline; remains unchanged D) increase; remains unchanged

43) When a member of the nonbank public withdraws currency from her bank account, 43) ______

A) both the monetary base and bank reserves fall.

B) the monetary base falls, but bank reserves remain unchanged.

C) bank reserves fall, but the monetary base remains unchanged.

D) both the monetary base and bank reserves rise.

44) There are two ways in which the Fed can provide additional reserves to the banking system: it can

________ government bonds or it can ________ discount loans to commercial banks.

44) ______

A) sell; call in B) purchase; extend

C) purchase; call in D) sell; extend

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45) Suppose your payroll check is directly deposited to your checking account. Everything else held constant,

total reserves in the banking system ________ and the monetary base ________.

45) ______

A) decrease; increases B) decrease; decreases

C) remain unchanged; increases D) remain unchanged; _remains unchanged

46) An assumption in the model of the money supply process is that the desired levels of currency and excess

reserves

46) ______

A) are given as constants.

B) grow proportionally over time.

C) grow proportionally with checkable deposits.

D) grow proportionally with high-powered money.

47) If the Fed injects reserves into the banking system and they are held as excess reserves, then the money

supply

47) ______

A) increases by only one-half the initial increase in reserves.

B) increases by only the initial increase in reserves.

C) does not change.

D) increases by a multiple of the initial increase in reserves.

48) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are

$800 billion, and excess reserves total $0.8 billion, then the money supply is

48) ______

A) $8400. B) $1200. C) $8000. D) $1200.8.

49) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are

$800 billion, and excess reserves total $0.8 billion, then the currency ratio is

49) ______

A) 0.40. B) 0.50. C) 0.25. D) 0.05.

50) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are

$1000 billion, and excess reserves total $1 billion, then the monetary base is

50) ______

A) $400 billion. B) $401 billion. C) $500 billion. D) $501 billion.

51) If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits

are $900 billion, then the level of excess reserves in the banking system is

51) ______

A) $300 billion. B) $30 billion. C) $3 billion. D) 0.

52) The excess reserves ratio is _____ related to expected deposit outflows, and is _____ related to the

market interest rate.

52) ______

A) negatively; positively B) positively; positively

C) positively; negatively D) negatively; negatively

53) The amount of borrowed reserves is ________ related to the discount rate, and is ________ related to

the federal funds rate.

53) ______

A) negatively; negatively B) negatively; positively

C) positively; positively D) positively; negatively

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54) In the model of the money supply process, the Federal Reserve's role in influencing the money supply is

represented by

54) ______

A) both the required reserve ratio and the market interest rate.

B) only nonborrowed reserves.

C) the required reserve ratio, nonborrowed reserves, borrowed reserves, and the market interest

rate.

D) only borrowed reserves.

55) In the model of the money supply process, the depositor's role in influencing the money supply is

represented by

55) ______

A) only the currency ratio.

B) only the market interest rate.

C) both the currency ratio and excess reserve ratio.

D) the currency ratio, excess reserve ratio, and the market interest rate.

56) In the model of the money supply process, the bank's role in influencing the money supply process is

represented by

56) ______

A) only the excess reserve ratio.

B) only borrowed reserves.

C) only the currency ratio.

D) both the excess reserve ratio and the market interest rate.

57) In the model of the money supply process, borrowers from banks' role in influencing the money supply is

represented by

57) ______

A) only the currency ratio.

B) only market interest rates.

C) both the excess reserve ratio and the market interest rate.

D) both borrowed reserves and the market interest rate.

58) During the bank panics of the Great Depression the currency ratio 58) ______

A) increased slightly. B) decreased slightly.

C) increased sharply. D) decreased sharply.

59) Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the

holdings of currency to ________ and the currency ratio will ________.

59) ______

A) increase; decrease B) decrease; increase

C) increase; increase D) decrease; decrease

60) Factors causing an increase in currency holdings include 60) ______

A) an increase in illegal activity.

B) a decrease in bank panics.

C) an increase in the interest rates paid on checkable deposits.

D) an increase in the cost of acquiring currency.

61) The opportunity cost of holding excess reserves is 61) ______

A) the prime rate. B) the Treasury bill rate.

C) the discount rate. D) the federal funds rate.

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62) In the market for reserves, an open market purchase ________ the supply of reserves and causes the

federal funds interest rate to ________, everything else held constant.

62) ______

A) increases; rise B) decreases; fall C) decreases; rise D) increases; fall

63) In the market for reserves, a lower discount rate 63) ______

A) increases the supply of reserves.

B) lengthens the vertical section of the supply curve of reserves.

C) decreases the supply of reserves.

D) shortens the vertical section of the supply curve of reserves.

64) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the

discount rate from 5% to 4%

64) ______

A) has no effect on the federal funds rate.

B) has an indeterminate effect on the federal funds rate.

C) raises the federal funds rate

D) lowers the federal funds rate.

65) Everything else held constant, in the market for reserves, when the demand for federal funds intersects

the reserve supply curve along the horizontal section, increasing the discount rate

65) ______

A) has no effect on the federal funds rate.

B) has an indeterminate effect of the federal funds rate.

C) increases the federal funds rate.

D) lowers the federal funds rate.

66) If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected

________ in reserves.

66) ______

A) purchases; decrease B) sales; increase

C) sales; decrease D) purchases; increase

67) The Fed's lender-of-last-resort function 67) ______

A) has proven to be ineffective.

B) creates a moral hazard problem.

C) is no longer necessary due to FDIC insurance.

D) cannot prevent runs by large depositors.

68) The policy tool of changing reserve requirements is 68) ______

A) the preferred tool from the bank's perspective.

B) no longer used.

C) the most widely used.

D) still used, even with its disadvantanges.

69) In the channel-corridor system 69) ______

A) the overnight rate always equals the Lombard rate.

B) monetary control can be exercised with no required reserves.

C) reserve requirements are essential for monetary control.

D) control of the overnight interest rate is impossible.

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70) Price stability is desirable because 70) ______

A) everyone is better off when prices are stable.

B) price stability increases the profitability of the Fed.

C) it guarantees full employment.

D) inflation creates uncertainty, making it difficult to plan for the future.

71) Monetary policy is considered time-inconsistent because 71) ______

A) of the lag times associated with the implementation of monetary policy and its effect on the

economy.

B) of the lag times associated with the recognition of a potential economic problem and the

implementation of monetary policy.

C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short

run.

D) policymakers are tempted to pursue discretionary policy that is more contractionary in the short

run.

72) The goal for high employment should seek a level of unemployment at which the demand for labor

equals the supply of labor. Economists call this level of unemployment the

72) ______

A) frictional level of unemployment. B) structural level of unemployment.

C) Keynesian rate level of unemployment. D) natural rate level of unemployment.

73) Supply-side economic policies seek to 73) ______

A) increase saving and investment using tax incentives.

B) increase federal government expenditures.

C) increase consumption expenditures by increasing taxes.

D) raise interest rates through contractionary monetary policy.

74) The mandate for the monetary policy goals that has been given to the European Central Bank is an

example of a ________ mandate.

74) ______

A) secondary B) dual C) primary D) hierarchical

75) Which of the following is an advantage to money targeting? 75) ______

A) It implies smaller output fluctuations.

B) It implies lack of transparency.

C) There is an immediate signal on the achievement of the target.

D) It does not rely on a stable money-inflation relationship.

76) If the relationship between the monetary aggregate and the goal variable is weak, then 76) ______

A) inflation targeting is superior to exchange-rate targeting.

B) monetary aggregate targeting is superior to exchange-rate targeting.

C) monetary aggregate targeting will not work.

D) monetary aggregate targeting is superior to inflation targeting.

77) Which of the following is not a disadvantage to inflation targeting? 77) ______

A) Inflation targets could impose a rigid rule on policymakers.

B) There is potential for larger output fluctuations.

C) There is a delayed signal about achievement of the target.

D) There is a lack of transparency.

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78) Inflation targets can increase the central bank's flexibility in responding to declines in aggregate

spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the

target range will automatically stimulate the central bank to ________ monetary policy without fearing

that this action will trigger a rise in inflation expectations.

78) ______

A) demand: tighten B) supply; loosen

C) supply; tighten D) demand; loosen

79) The type of monetary policy regime that the Federal Reserve has been following in recent years can best

be described as

79) ______

A) monetary targeting. B) exchange-rate targeting.

C) policy with an implicit nominal anchor. D) inflation targeting.

80) Estimates suggest that, in the United States economy, it takes just over ________ for monetary policy to

affect output and just over ________ for monetary policy to affect the inflation rate.

80) ______

A) 2 years; 1 year B) 6 months; 1 year

C) 1 year; 2 years D) 1 year; 6 months

81) Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the

Fed targets

81) ______

A) an interest rate. B) the monetary base.

C) nominal GDP. D) a monetary aggregate.

82) Interest rates are difficult to measure because 82) ______

A) they fluctuate too often to be accurate.

B) real interest rates depend on the hard-to-determine expected inflation rate.

C) data on them are not available in a timely manner.

D) they cannot be controlled by the Fed.

83) Which of the following is not a requirement in selecting an intermediate target? 83) ______

A) Predictability B) Measurability C) Flexibility D) Controllability

84) According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________

the Fed's inflation target or when real GDP ________ the Fed's output target.

84) ______

A) rises above; drops below B) drops below; drops below

C) drops below; rises above D) rises above; rises above

85) Using Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2

percent, the target inflation rate is 1 percent, the actual inflation rate is 2 percent, and the central bank

places equal weight on output and inflation gaps, the nominal federal funds rate target should be

85) ______

A) 5 percent. B) 5.5 percent. C) 6 percent. D) 6.5 percent.

86) The velocity of money is 86) ______

A) the ratio of the money stock to high-powered money.

B) the average number of times that a dollar is spent in buying the total amount of final goods and

services.

C) the ratio of the money stock to interest rates.

D) the average number of times a dollar is spent in buying financial assets.

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87) If the money supply is $2 trillion and velocity is 5, then nominal GDP is 87) ______

A) $1 trillion. B) $2 trillion. C) $5 trillion. D) $10 trillion.

88) The view that velocity is constant in the short run transforms the equation of exchange into the quantity

theory of money. According to the quantity theory of money, when the money supply doubles

88) ______

A) velocity doubles. B) velocity falls by 50 percent.

C) nominal income doubles. D) nominal incomes falls by 50 percent.

89) The classical economists believed that if the quantity of money doubled, 89) ______

A) prices would remain constant. B) prices would double.

C) output would double. D) prices would fall.

90) Evidence since 1915 indicates that velocity has 90) ______

A) fluctuated too much in the short run to be viewed as a constant.

B) grown at a fairly constant rate, even in the short run.

C) trended downward since 1950 due to technological and financial innovations.

D) remained fairly constant in the short run, but tends to slowly increase.

91) The Keynesian theory of money demand emphasizes the importance of 91) ______

A) a constant velocity.

B) interest rates on the demand for money.

C) irrational behavior on the part of some economic agents.

D) expectations.

92) According to Keynes's theory of liquidity preference, velocity increases when 92) ______

A) interest rates increase. B) wealth increases.

C) income increases. D) brokerage commissions increase.

93) The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will

cause the demand for money to _____ and the demand for bonds to _____.

93) ______

A) increase; decrease B) decrease; increase

C) decrease; decrease D) increase; increase

94) The speculative demand for money may not exist because 94) ______

A) banks now pay interest on some types of checkable deposits.

B) government regulations have eliminated risk in the financial markets.

C) the transactions demand can be shown to depend on interest rates.

D) there are alternative riskless assets paying higher returns than the return on money.

95) According to Milton Friedman, the demand for money is insensitive to interest rates because 95) ______

A) transactions are not subject to scale economies as wealth increases.

B) the demand for money is insensitive to changes in the opportunity cost of holding money.

C) competition among banks keeps the opportunity cost of holding money relatively constant.

D) people base their investment decisions on expected profits, not interest rates.

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96) By analyzing aggregate demand through its component parts, we can conclude that, everything else held

constant, a decline in the price level causes

96) ______

A) a decline in the real money supply, an increase in interest rates, a decline in investment spending,

and a decline in aggregate output demand.

B) an increase in the real money supply, an increase in interest rates, a decline in investment

spending, and a decline in aggregate output demand.

C) a decline in the real money supply, a decline in interest rates, an increase in investment spending,

and an increase in aggregate output demand.

D) an increase in the real money supply, a decline in interest rates, an increase in investment

spending, and an increase in aggregate output demand.

97) The long-run aggregate supply curve is 97) ______

A) a vertical line through the natural rate level of output.

B) a horizontal line through the current level of output.

C) a vertical line through the current level of output.

D) a vertical line through the non-inflationary rate of output.

98) The short-run aggregate supply curve is upward sloping because in the short run, costs of many factors

that go into producing goods and services are ________, meaning that the price for a unit of output will

________ relative to input prices and the profit per unit will rise.

98) ______

A) flexible; fall B) fixed; rise C) flexible; rise D) fixed; fall

99) The positively sloped short-run aggregate supply curve reflects the assumption that factor prices are 99) ______

A) more flexible than output prices.

B) fixed in the long run.

C) less flexible than output prices.

D) perfectly flexible in both the short run and the long run.

100) If workers demand and receive higher real wages (a successful wage push), the cost of production

________ and the short-run aggregate supply curve shifts ________.

100) _____

A) rises; rightward B) falls; rightward C) falls; leftward D) rises; leftward

101) Suppose the economy is producing at the natural rate of output. Everything else held constant, the

development of a new, more productive technology will cause ________ in the unemployment rate and

________ in the aggregate price level in the short run.

101) _____

A) a decrease; an increase B) no change; no change

C) an increase; an increase D) a decrease; a decrease

102) Suppose the economy is producing at the natural rate of output. A decrease in consumer and business

confidence will cause ________ in real GDP and ________ in the aggregate price level in the long run,

everything else held constant.

102) _____

A) a decrease; a decrease B) an increase; an increase

C) no change; a decrease D) no change; an increase

103) Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the

Fed will cause ________ in real GDP and ________ in the aggregate price level in the short run,

everything else held constant.

103) _____

A) a decrease; a decrease B) an increase; an increase

C) no change; an increase D) no change; a decrease

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104) Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar

will cause ________ in real GDP and ________ in the aggregate price level in the long run, everything

else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

104) _____

A) no change; a decrease B) an increase; an increase

C) no change; an increase D) a decrease; a decrease

105) Suppose the economy is producing below the natural rate of output and the government is suffering

from large budget deficits. To deal with the deficit problem, suppose the government takes a policy

action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate

and ________ in the aggregate price level in the short run, everything else held constant.

105) _____

A) a decrease; an increase B) a decrease; a decrease

C) an increase; a decrease D) an increase; an increase

106) When inflation is defined to be a condition of a continually rising price level, ________ economists agree

with Milton Friedman's proposition that inflation is a monetary phenomenon.

106) _____

A) about half of practicing B) almost all

C) very few D) no

107) The combination of a successful wage push by workers and the government's commitment to high

employment leads to

107) _____

A) supply-shock inflation. B) cost-push inflation.

C) demand-pull inflation. D) supply-side inflation.

108) If workers do not believe that policymakers are serious about fighting inflation, they are most likely to

push for higher wages, which will ________ aggregate ________ and lead to unemployment or inflation

or both, everything else held constant.

108) _____

A) increase; supply B) decrease; supply

C) decrease; demand D) increase; demand

109) In the absence of an accommodating monetary policy, a push by workers to get higher wages will cause 109) _____

A) cost-push inflation. B) higher unemployment.

C) demand-pull inflation. D) a lower price level.

110) If policymakers set a target for unemployment that is too low because it is less than the natural rate of

unemployment, this can set the stage for a higher rate of money growth and

110) _____

A) demand-push inflation. B) cost-push inflation.

C) cost-pull inflation. D) demand-pull inflation.

111) Which of the following is least likely to lead to inflationary monetary policy? 111) _____

A) Declining oil prices B) Rising unemployment

C) Lower consumer confidence D) Expanding federal budget deficits

112) If the government finances its spending by issuing debt to the public, the monetary base will

___________ and the money supply will ___________.

112) _____

A) increase; decrease B) not change; not change

C) decrease; increase D) increase; increase

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113) If the government finances its spending by selling bonds to the central bank, the monetary base will

___________ and the money supply will ___________.

113) _____

A) increase; increase B) increase; decrease

C) not change; not change D) decrease; decrease

114) Analysis of episodes of hyperinflation indicate that the rapid money growth leading to the inflation is the

result of

114) _____

A) central banks' attempts to peg interest rates.

B) increases in taxes.

C) governments financing massive budget deficits by printing money.

D) central banks' attempts to peg exchange rates.

115) According to economists who believe in Ricardian Equivalence, when the government runs a deficit and

issues bonds,

115) _____

A) the public recognizes that it will be subject to higher taxes in the future in order to pay off these

bonds.

B) the Fed must sell bonds to keep the interest rate from rising.

C) the Fed must purchase bonds to keep the interest rate from rising.

D) the public works less to avoid these future taxes, causing the demand for bonds to decrease.

116) Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from 116) _____

A) an employment target that was set too high.

B) the excessive sale of government bonds to the public.

C) an expansion in the money supply to finance federal government expenditures.

D) the government's inability to sell bonds to the Fed.

117) The time that it takes for an activist policy to actually influence economic activity is called the 117) _____

A) recognition lag. B) implementation lag.

C) effectiveness lag. D) legislative lag.

118) The ________ lag is the time it takes for policymakers to change policy instruments once they have

decided on the new policy, while the ________ lag is the time it takes for the policy to actually have an

impact on the economy.

118) _____

A) legislative; effectiveness B) recognition; implementation

C) implementation; recognition D) implementation; effectiveness

119) If output adjusts ________ to the natural rate level, and if time lags between policy actions and changes

in aggregate output are relatively ________, then the case for activist policy is strengthened.

119) _____

A) quickly; short B) slowly; long C) quickly; long D) slowly; short

120) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets,

and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-

denominated assets in ________ percent.

120) _____

A) dollar; euros is 1 B) euro; dollars is 1

C) dollar; euros is 3 D) euro; dollars is 3

121) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the

coming year, the expected return on dollar deposits in terms of the foreign currency is

121) _____

A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent.

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122) In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the

foreign interest rate and the expected depreciation of the domestic currency, a situation known as the

122) _____

A) exchange rate parity condition. B) purchasing power parity condition.

C) foreign asset parity condition. D) interest parity condition.

123) A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the

domestic currency to ________, everything else held constant.

123) _____

A) decrease; appreciate B) increase; appreciate

C) increase; depreciate D) decrease; depreciate

124) Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will

cause the demand for U.S. assets to ________ and the U.S. dollar will ________.

124) _____

A) decrease; depreciate B) increase; depreciate

C) decrease; appreciate D) increase; appreciate

125) Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this

will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

125) _____

A) increase; appreciate B) decrease; depreciate

C) increase; depreciate D) decrease; appreciate

126) Suppose a report was released today that showed the Euro-Zone inflation rate is running above the

European Central Bank's inflation rate target. This leads people to expect that the European Central Bank

will enact contractionary policy in the near future. Everything else held constant, the release of this

report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar will

________.

126) _____

A) decrease; depreciate B) decrease; appreciate

C) increase; depreciate D) increase; appreciate

127) Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below par,

the central bank must intervene to purchase the ________ currency by selling ________ assets.

127) _____

A) foreign; domestic B) domestic; foreign

C) foreign; foreign D) domestic; domestic

128) When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must

intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the

money supply to ________.

128) _____

A) purchase; increase B) purchase; decline

C) sell; decline D) sell; increase

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Answer Key

1 D 33 B 65 C 97 A

2 A 34 D 66 A 98 B

3 C 35 B 67 B 99 C

4 A 36 C 68 B 100 D

5 B 37 B 69 B 101 D

6 B 38 C 70 D 102 C

7 C 39 C 71 C 103 A

8 C 40 D 72 D 104 C

9 A 41 B 73 A 105 C

10 B 42 A 74 D 106 B

11 C 43 C 75 C 107 B

12 D 44 B 76 C 108 B

13 D 45 D 77 D 109 B

14 B 46 C 78 D 110 D

15 B 47 C 79 C 111 A

16 B 48 B 80 C 112 B

17 B 49 B 81 A 113 A

18 D 50 D 82 B 114 C

19 D 51 D 83 C 115 A

20 C 52 C 84 D 116 A

21 C 53 B 85 D 117 C

22 C 54 C 86 B 118 D

23 D 55 D 87 D 119 D

24 C 56 D 88 C 120 D

25 B 57 B 89 B 121 D

26 D 58 C 90 A 122 D

27 C 59 A 91 B 123 D

28 B 60 A 92 A 124 D

29 A 61 D 93 B 125 A

30 A 62 D 94 D 126 D

31 C 63 D 95 C 127 B

32 A 64 A 96 D 128 B