Economics 252 - Homework Chapter 15 - Monetary Policy

(1) Which of the following is true about velocity in the short run?

(a) It tends to rise with recessions.

(b) It is constant.

(c) It should rise if fiscal policy is successful in stimulating the economy.

(d) It must change if monetary policy affects real output.

(2) If real output increases by 5 percent per year and velocity 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 than 5 percent per year.

(3) Monetarists argue that:

(a) the velocity of money is not constant.

(b) fiscal policy is ineffective as it crowds out private sector investment.

(c) when there is a recession, people accumulate money balances which increases velocity.

(d) fiscal policy is effective as it puts idle money balances to work, increasing velocity.

(4) When monetary policy reduces interest rates:

(a) the income of retired persons increases.

(b) income is redistributed from lenders from borrowers.

(c) the construction industry is adversely affected.

(d) all of the above.

(5) Monetarists believe that increased government expenditure:

(a) has no impact on the mix of output.

(b) crowds out consumption and investment when financed by bonds.

(c) can increase real output in times of recession, when financed by bonds, by putting idle funds to work.

(d) does change real output.

(6) Keynesians believe that increased government expenditure:

(a) crowds out consumption and investment in times of recession when financed by bonds.

(b) can increase real output in times of recession, when financed by bonds, by putting idle funds to work.

(c) does not change real output.

(d) leads only to increased price levels, even during times of recession.

(7) Which of the following is a monetarist assumption that plays a key role in explaining the ineffectiveness of fiscal policy?

(a) The liquidity trap.

(b) Crowding out.

(c) The instability of the velocity of money.

(d) A vertical aggregate demand curve.

(8) Which of the following is a Keynesian assumption that plays a key role in explaining the ineffectiveness of monetary policy?

(a) The liquidity trap.

(b) Crowding out.

(c) A vertical aggregate supply curve.

(d) A vertical aggregate demand curve.

(9) Which of the following industries would likely be the most sensitive to changes in monetary policy?

(a) The construction industry.

(b) The health care industry.

(c) The personal services (hairstyling, dry cleaning) industry.

(d) The food industry.

Why? ______________________________________________________________

(10) Which of the following regions would likely be the least sensitive to changes in monetary policy?

(a) The Midwest – has high concentrations of industries producing machinery and consumer durable goods, such as automobiles and major appliances.

(b) Nevada – has high representation of entertainment and gaming industries.

(c) New York City – high concentration of financial service industries related to the stock market.

(d) The Pacific Northwest – high concentration of industries related to forestry (lumber), aircraft production, and computer equipment and software.

Why? _________________________________________________________________