Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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To fight deflation, the Fed should
a. | buy securities, which will increase the money supply, increase aggregate demand, and
therefore increase the price level. | b. | buy securities, which would decrease the money
supply, decrease aggregate demand, and therefore decrease the price level. | c. | sell securities,
which would increase the money supply, increase aggregate demand, and therefore decrease the price
level. | d. | sell securities, which would decrease the money supply, decrease aggregate demand,
and therefore decrease the price level. |
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2.
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When the Fed successfully increases the money supply, GDP
a. | increases because the resulting increase in the interest rate leads to a decrease in
investment | b. | increases because the resulting decrease in the interest rate leads to an increase in
investment | c. | decreases because the resulting increase in the interest rate leads to a decrease in
investment | d. | decreases because the resulting increase in the interest rate leads to an increase in
investment | e. | decreases because the resulting decrease in the interest rate leads to an increase in
investment |
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3.
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If interest rates __________, investment spending tends to
__________ and aggregate demand to __________.
a. | rise; rise; rise | b. | rise; fall; rise | c. | rise; fall;
fall | d. | fall; rise; fall |
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4.
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Which of the following is an example of an expansionary monetary
policy?
a. | Government purchases of goods and services decline. | b. | The discount rate is
increased. | c. | The Fed sells U.S. government securities in the open market. | d. | The required reserve
ratio is lowered. | e. | The income tax is
lowered. |
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5.
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When interest rates rise (especially if driven up by the central bank), what is
the likely macro economic impact?
a. | Investment spending and consumer spending on durable goods decreases, creating a drop
in aggregate demand resulting in slower GDP growth or even a recession. | b. | Investment spending
and consumer spending on durable goods increases, creating a rise in aggregate demand resulting in
faster GDP growth. | c. | Investment spending and consumer spending on
durable goods decreases, creating a drop in aggregate demand resulting in faster GDP
growth. | d. | Investment spending and consumer spending on durable goods increases, creating a drop
in aggregate demand resulting in slower GDP growth or even a recession. | e. | Investment spending
and consumer spending on durable goods decreases, creating a rise in aggregate supply resulting in
slower GDP growth or even a recession. |
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6.
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The term crowding out might be appropriate when
a. | a monetary stimulus reduces government purchases | b. | a monetary stimulus
reduces consumption expenditures | c. | a monetary stimulus reduces investment
expenditures | d. | increased government purchases reduce the money supply | e. | increased government
purchases reduce investment expenditures |
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7.
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The equation of exchange is
a. | quantity supplied equals quantity demanded | b. | quantity bought
equals quantity sold | c. | M × V = P × Y | d. | C × I + G =
Y | e. | input equals output |
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8.
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According to the equation of exchange, if nominal GDP equals $6 trillion and the
money supply equals $1 trillion, the velocity of money
a. | must be 6 | b. | must be 1/6 | c. | must be 6
trillion | d. | must be 1/6 trillion | e. | cannot be determined unless we know the price
level |
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9.
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If the money supply is $300, the price level is 4, and real GDP is $1,500, what
is the nominal value of output?
a. | $1,200 | b. | $4,500 | c. | $6,000 | d. | $180,000 | e. | $500 |
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10.
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In an economy in which velocity is constant and the level of real output grows
at an average rate of 4 percent per year, a 4 percent average rate of growth in the money supply
would result in
a. | a constant price level | b. | a slowly increasing price
level | c. | a rapidly increasing price level | d. | constant real GDP | e. | constant nominal
GDP |
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11.
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International and historical evidence indicates that
a. | money supply growth and inflation are not actually closely correlated or
related. | b. | velocity of money is too variable and changes too much for money supply to be
directly correlated with price index. | c. | any increase in money supply always results in
inflation in 6 months. | d. | a and b above. |
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12.
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If something causes the velocity of money to increase, the same amount of money
will
a. | be able to support more transactions, so nominal GDP can increase | b. | be forced to support
more transactions, so nominal GDP will decrease | c. | be able to support fewer transactions, so
nominal GDP will decrease | d. | no longer have to support so many transactions,
so nominal GDP can increase | e. | mean nothing can happen to nominal
GDP |
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