Economics 252 Review Questions Chapter 15 Monetary Policy

(1)                 The cost of holding money is:

(a)                 nothing, if you hold it in the form of cash.

(b)                 equal to the service charge collected by the bank for managing your bank accounts.

(c)                 the return that could have been earned had the funds been lent out at interest.

(d)                 all of the above.

 

(2)                 Precautionary balances are held:

(a)                 to take advantage of future changes in bond prices.

(b)                 to make anticipated expenditures.

(c)                 to handle emergencies.

(d)                 to make speculative purchases.

 

(3)                 The transactions demand for money is most closely associated with which of the following functions of money?

(a)                 Standard of deferred payment.

(b)                 Standard of value.

(c)                 Store of value.

(d)                 Medium of exchange.

 

(4)                 Which of the following is a series of events that accurately describes the steps by which restrictive monetary policy is effective?

(a)                 Decrease in the interest rate, decrease in money supply, increase in investment.

(b)                 Decrease in money supply, increase in interest rate, decrease in investment.

(c)                 Increase in money supply, decrease in investment, decrease in interest rate.

(d)                 Increase in money supply, increase in interest rate, increase in investment.

 

(5)                 Monetary stimulus may be ineffective because:

(a)                 the investment curve is inelastic.

(b)                 expectations of an economic boom causes the investment curve to shift to the right, offsetting interest-rate effects that would stimulate the economy.

(c)                 the investment demand curve is nearly horizontal.

(d)                 all of the above.

 

(6)                 Banks and customers are most likely to be reluctant to use the full lending capacity made available by the Federal Reserve when the economy experiences:

(a)                 growth and low interest rates.

(b)                 growth and inflation rates higher than the interest rate.

(c)                 high inflation rates.

(d)                 a depression.

 

(7)                 If real output increases by 5 percent per year and velocity of money is stable, in order to keep the price level stable:

(a)                 the interest rate must increase by 5 percent per year.

(b)                 velocity must increase by 5 percent per year.

(c)                 the money supply must increase by 5 percent per year.

(d)                 the money supply must increase by more that 5 percent per year because nominal output is greater than 5 percent.

(8)                 If a lender desires to earn a return of 5 percent on a loan, and the rate of inflation is 4 percent, the lender should charge a:

(a)                 real interest rate of 9 percent.

(b)                 nominal interest rate of 9 percent.

(c)                 real interest rate of 1 percent.

(d)                 nominal interest rate of 1 percent.

 

 

Utilize Figure 1 in answering Questions (9) and (10).

Figure 1

Quantity of Money (billions $s)

 

(9)                 In Figure 1, at an interest rate of 9 percent, there is an:

(a)                 equilibrium in the money market.

(b)                 excess demand for money of $100 billion.

(c)                 excess supply of money of $100 billion.

(d)                 excess supply of money of $200 billion.

 

(10)              In Figure 1, if the money supply increased from $200 billion to $300 billion, which of the following would be likely to occur?

(a)                 Interest rates would decline.

(b)                 The quantity of money demanded would increase.

(c)                 Aggregate demand would increase.

(d)                 All of the above are likely to occur.

 

Utilize Figure 2 in answering Question (11).

Figure 2

(11)              In Figure 2, the Fed can change the equilibrium interest rate from 2 percent to 6 percent by:

 

(a)                 selling bonds in the open market.

(b)                 buying bonds in the open market.

(c)                 reducing the discount rate.

(d)                 decreasing the reserve requirement.

Utilize Figure 3 in answering Question (12).

Figure 3

 

 

(12)              In Figure 3, and increase in the money supply from MS(1) to MS(3) would cause:

(a)                 an increase in investment of $40 billion.

(b)                 an increase in investment of $20 billion.

(c)                 a decrease in investment of $20 billion.

(d)                 a decrease in investment of $40 billion.

Utilize Figure 4 in answering Question (13).

Figure 4

 

(13)              According to Figure 4, an increase in the money supply from MS(2) to MS(3) will cause:

(a)                 an increase in aggregate demand.

(b)                 a decrease in the interest rate.

(c)                 an increase in the interest rate.

(d)                 no change in the level of investment or aggregate demand

 

Utilize Figure 5 in answering Question (14).

Figure 5

 

 

(14)              In Figure 5, suppose the Federal Reserve buys bonds in the open market. The money supply will _________ and cause a shift from point _________.

 

(a)                 increase, D to point A.

(b)                 increase, D to point C.

(c)                 decrease, A to point D.

(d)                 decrease, C to point D.

 

Utilize Figure 6 in answering Questions (15) and (16).

Figure 6

 

 

(15)              In Figure 6, which of the following Fed actions is most likely to shift the aggregate demand curve from AD(1) to AD(2)?

 

(a)                 an increase in the discount rate.

(b)                 a decrease in the reserve requirement.

(c)                 the sale of bonds in the open market.

(d)                 all of the above.

 

(16)              In Figure 6, which of the following Fed actions is most likely to shift the aggregate demand curve from AD(2) to AD(1)?

 

(a)                 buying bonds in the open market.

(b)                 lowering the discount rate.

(c)                 raising the federal funds rate.

(d)                 decreasing the reserve requirement.