Chapter 15: Monetary Policy

The speculative, transactions, and precautionary demands for money added together give the Market demand curve for money. Monetarist demand-for-money curve. Keynesian liquidity trap. Market supply curve for money.

The transactions demand for money is most closely associated with which of the following functions of money? Standard of deferred payment. Store of value. Standard of value. Medium of exchange.

During periods of hyperinflation, money does not hold its value; therefore, people hold as little as possible for as short a time as possible. This description implies that the Transactions demand for money has increased. Precautionary demand for money has increased. Speculative demand for money has decreased. Portfolio demand for money has decreased.

Carolina holds $2,000 in her savings account in case of a medical emergency. This represents the Medical savings account. Transaction demand for money. Precautionary demand for money. Income demand for money.

The speculative demand for money is related to money functioning as a Store of value. Standard of value. Medium of exchange. Unit of account.

Ceteris paribus, the quantities of money people are willing and able to hold Decrease as interest rates fall. Increase as interest rates fall. Increase as the money supply decreases. Decrease when the speculative demand increases

The market demand curve for money is Vertical because it is a fixed amount regardless of changes in the interest rate. Horizontal because it is determined by the individual. Upward-sloping to the right because people wish to hold more money at higher interest rates and less money at lower interest rates. Downward-sloping to the right because people wish to hold less money at higher interest rates and more money at lower interest rates.

The normal market demand curve for money is A horizontal curve at very high interest rates, where the quantity demanded changes but the interest rate is constant. An upward-sloping demand curve, where more money is held when interest rates are higher. A vertical demand curve, where the same amount of money is held regardless of the interest rate. A downward-sloping demand curve, where more money is held at lower interest rates.

Which of the following is true about the equilibrium rate of interest? It is constant because of structural forces. At this rate, money demand exceeds money supply. At this rate, money supply exceeds money demand. The Fed can change it by changing the money supply.

The Fed can change the equilibrium rate of interest by changing Government spending. Taxes. Reserve requirements or the discount rate, or through open market operations. Tariffs.

Ceteris paribus, if the Fed sells bonds through open market operations, the money Supply curve should shift rightward. Supply curve should shift leftward. Demand curve should shift rightward. Demand curve should shift leftward.

What should happen to the equilibrium interest rate and the corresponding rate of investment if the Fed decreases the discount rate? The equilibrium interest rate and the equilibrium rate of investment should both increase. The equilibrium interest rate should increase, and the equilibrium rate of investment should decrease. The equilibrium interest rate should decrease, and the equilibrium rate of investment should increase. The equilibrium interest rate and the equilibrium rate of investment should both decrease.

An increase in the money supply will Reduce interest rates and increase aggregate demand. Reduce interest rates and decrease aggregate demand. Raise interest rates and increase aggregate demand. Raise interest rates and decrease aggregate demand.

If the Fed's objective is to stimulate the economy, which of the following gives the correct sequence of events? The money supply increases, interest rates decrease, investment increases, and AD increases. The money supply increases, interest rates decrease, investment increases, and AS decreases. The money supply decreases, interest rates increase, investment decreases, and AD decreases. The money supply decreases, interest rates increase, investment increases, and AD increases.

A monetary stimulus is designed to shift the AS curve to the right. AS curve to the left. AD curve to the right. AD curve to the left.

According to Bernanke's policy guide, a 1/4 point decrease in long-term interest rates results in a $10 billion stimulus for the economy. $50 billion stimulus for the economy. $10 billion decrease for the economy. $50 billion decrease for the economy.

Which shift should occur if the Fed raises the discount rate? The investment demand curve should shift rightward. The aggregate supply curve should shift rightward. The aggregate demand curve should shift leftward. The aggregate demand curve should shift rightward.

A decrease in aggregate demand could be caused by A decrease in the value of the domestic currency. A booming economy. Contractionary monetary policy. Expansionary monetary policy.

If the Federal Reserve raises the discount rate, we would expect the AS curve to increase. Investment curve to increase. AD curve to increase. AD curve to decrease.

Which of the following is likely to cause monetary restraint to be effective? High expectations overwhelm high interest rates. Businesses have the ability to borrow funds from foreign banks. People behave rationally and borrow less when interest rates rise. None of the choices are correct.

Monetary stimulus will fail if Banks are reluctant to lend money. The investment demand curve is fairly flat. The money demand curve is fairly steep. Consumers begin to spend more.

Which of the following is true about monetary policy in the liquidity trap? Monetary policy will be unable to reduce interest rates further to stimulate investment. The opportunity cost of holding money is relatively high at interest rates implied by the liquidity trap. An expansion of the money supply will have the large effect of raising interest rates when the economy is in the liquidity trap. The demand for money is interest-inelastic in the liquidity trap.

The effectiveness of monetary policy is increased In the liquidity trap. When investment demand becomes more responsive to changes in the interest rate. If the velocity of money is constant. If the money demand curve is elastic.

Monetary policy will be ineffective if The demand for money is very sensitive to changes in the interest rate, but the investment demand is not. The demand for money and investment demand are both very sensitive to changes n the interest rate. Interest rates are sensitive to the quantity of money supplied, and investment spending is sensitive to changes in the interest rate. Investors have favorable expectations for future sales.

Monetary stimulus may be ineffective if The investment demand curve is inelastic. Expectations of a boom cause the investment demand curve to shift to the right, offsetting interest rate effects that would stimulate the economy. The investment demand curve is horizontal. People usually respond to lower interest rates by consuming more goods and services.

Global money can impact monetary policy Because businesses refuse to borrow and spend when they see that foreign rates are lower than U.S. rates. Because lower foreign interest rates reduce consumer confidence in the domestic economy. Because businesses may be able to borrow from foreign banks at cheaper rates. Very little because businesses are not allowed to borrow from foreign sources.

Keynes believed that monetary stimulus would be ineffective during a recession because of all of the following except The liquidity trap. Low expectations. The reluctance of banks to lend. The willingness of consumers to increase consumption when interest rates fall.

Which of the following increases the effectiveness of monetary policy from a monetarist perspective? The liquidity trap. The constant velocity of money. Changing expectations. Unresponsive investment demands.

Using the equation of exchange and assuming full employment and a constant velocity of money, a decrease in the required reserve ratio would result in a Lower velocity. Lower quantity of real output. Higher price level. Lower price level.

According to the extreme monetarist position, using the equation of exchange, an increase in the quantity of money in circulation will Increase real GDP. Decrease the velocity of money. Have no effect on the price level. Increase the price level.

Monetarists argue that The velocity of money is constant. Fiscal policy puts idle money balances to work, which reduces V. When there is a recession, people accumulate money balances, which increases V. The velocity of money increases as much as total spending falls so that MV remains constant.

If a lender desires to earn a return of 4 percent on a loan and the anticipated rate of inflation is 1 percent, the lender should charge a Real interest rate of 6 percent. Nominal interest rate of 4 percent. Real interest rate of 5 percent. Nominal interest rate of 5 percent.

If the anticipated inflation rate is 5 percent and the nominal interest rate is 9 percent, the real interest rate will be 4 percent. Negative 14 percent. 14 percent. 5 percent.

If the nominal interest rate is a constant 15 percent and anticipated inflation falls from 10 percent to 7 percent, the real interest rate would change from 15 to 10 percent. 5 to 8 percent. 7 to 9 percent. 8 to 5 percent.

According to Keynesians, fiscal policy affects Real interest rates only. Aggregate spending, prices, and nominal interest rates only. Aggregate spending, real output, and real interest rates, with possible effects on prices and nominal interest rates. The velocity of money only.

Which of the following is a monetarist assumption that plays a key role in explaining the ineffectiveness of fiscal policy? The liquidity trap. The instability in the velocity of money. Crowding out. A vertical aggregate demand curve.

According to extreme monetarists, monetary policy affects The velocity of money and level of employment. Real output, investment, and the money supply. Aggregate demand, prices, and nominal interest rates only. Aggregate demand, real output, and real interest rates, with possible effects on prices and nominal interest rates.

Assume the aggregate supply curve is horizontal and the economy is experiencing a recession. Which of the following is most likely to occur if the Fed pursues expansionary monetary policy? The equilibrium price level and output will both increase. The equilibrium price level and output will both decrease. The equilibrium price level will increase but output will stay the same. The equilibrium output will increase but the price level will stay the same until full employment is reached.