Influence of Monetary Policy on Aggregate Demand

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					                Influence of Monetary Policy on Aggregate Demand
                                      Review Questions
                            ARSC 1432 Macroeconomics Co-Seminar
                                        SPRING 2009


1. The theory of liquidity preference assumes that the nominal supply of money is determined by the
    a. level of real GDP.
    b. rate of inflation.
    c. interest rate.
    d. the Federal Reserve.
ANSWER: d. the Federal Reserve.
2. According to the theory of liquidity preference, the money supply is
    a. positively related to the interest rate.
    b. negatively related to the interest rate.
    c. independent of the interest rate.
    d. negatively related to both the interest rate and the price level.
ANSWER: c. independent of the interest rate.
3. According to liquidity preference theory, the money supply curve is
        a. upward sloping.
        b. downward sloping.
        c. vertical.
        d. horizontal.
      ANSWER: c. vertical.
4. According to liquidity preference theory, the money supply curve would shift right
        a. if the money demand curve shifted right.
        b. only if the Federal Reserve chose to increase it.
        c. if the interest rate increased.
        d. if the price level fell or the interest rate decreased.
      ANSWER: b. only if the Federal Reserve chose to increase it.
5. According to liquidity preference theory, the money supply curve would shift if the Fed
        a. engaged in open-market transactions.
        b. changed the discount rate.
        c. changed the reserve requirement.
        d. did any of the above.
      ANSWER: d. did any of the above.
6. When the Fed buys government bonds, the reserves of the banking system
        a. increase, so the money supply increases.
        b. increase, so the money supply decreases.
        c. decrease, so the money supply increases.
        d. decrease, so the money supply decreases.
      ANSWER: a. increase, so the money supply increases.
7. Liquidity refers to
        a. the relation between the price and interest rate of an asset.
        b. the risk of an asset relative to its selling price.
        c. the ease with which an asset is converted into a medium of exchange.
        d. the sensitivity of investment spending to changes in the interest rate.
8. Which of the following shifts aggregate demand to the right?
        a. an increase in the price level
        b. an increase in the money supply
            c. a decrease in the price level
            d. a decrease in the money supply
           ANSWER: b. an increase in the money supply
9.    Which of the following shifts aggregate demand to the left?
            a. an increase in the price level
            b. an increase in the money supply
            c. a decrease in the price level
            d. a decrease in the money supply
           ANSWER: d. a decrease in the money supply
10.   Which of the following shifts aggregate demand right?
            a. The price level rises.
            b. The price level falls.
            c. The money supply falls.
            d. None of the above is correct.
           ANSWER: d. None of the above is correct.
11.   If the Fed conducts open-market sales, the money supply
            a. increases and aggregate demand shifts right.
            b. increases and aggregate demand shifts left.
            c. decreases and aggregate demand shifts right.
            d. decreases and aggregate demand shifts left.
           ANSWER: d. decreases and aggregate demand shifts left.
12.   If the Fed conducts open-market purchases, the money supply
            a. increases and aggregate demand shifts right.
            b. increases and aggregate demand shifts left.
            c. decreases and aggregate demand shifts right.
            d. decreases and aggregate demand shifts left.
           ANSWER: a. increases and aggregate demand shifts right.
13.   A monetary injection by the Fed
            a. increases interest rates and increases aggregate demand.
            b. increases interest rates and decreases aggregate demand.
            c. decreases interest rates and decreases aggregate demand.
            d. decreases interest rates and increases aggregate demand.
           ANSWER: d. decreases interest rates and increases aggregate demand.
14.   Open-market purchases
            a. increase the price level and real GDP.
            b. decrease the price level and real GDP.
            c. increases the price level and decreases real GDP.
            d. decreases the price level and increases real GDP.
           ANSWER: a. increase the price level and real GDP.
15.   Open-market sales
            a. increase the price level and real GDP.
            b. decrease the price level and real GDP.
            c. increases the price level and decreases real GDP.
            d. decreases the price level and increases real GDP.
           ANSWER: b. decrease the price level and real GDP.
16.   The economy is in long-run equilibrium. Suppose that automatic teller machines become cheaper and
      more convenient to use, and as a result the demand for money falls. Other things equal, we would
      expect that in the short run,
            a. the price level and real GDP would rise, but in the long run they would both be unaffected.
            b. the price level and real GDP would rise, but in the long run the price level would rise and real
               GDP would be unaffected.
            c. the price level and real GDP would fall, but in the long run they would both be unaffected.
            d. the price level and real GDP would fall, but in the long run the price level would fall and real
               GDP would be unaffected.
           ANSWER: b. the price level and real GDP would rise, but in the long run the price level would
               rise and real GDP would be unaffected.
17.   When the Fed sets a target for the interest rate, it commits itself to
            a. revealing its target to the public.
            b. adjusting the demand for money in order to make the equilibrium in the money market hit
               that target.
            c. adjusting the money supply in order to meet the interest rate target.
            d. having to make open-market sales.
           ANSWER: c. adjusting the money supply in order to meet the interest rate target.
18.   If the Fed targets the interest rate,
            a. it can then set the money supply at whatever value it wants.
            b. it must increase the money supply if the interest rate is above its target.
            c. it must decrease the money supply if the interest rate is above its target.
            d. None of the above is correct.
           ANSWER: b. it must increase the money supply if the interest rate is above its target.
19.   If the interest rate is above the Fed’s target, the Fed should
            a. buy bonds to increase the money supply.
            b. buy bonds to decrease the money supply.
            c. sell bonds to increase the money supply.
            d. sell bonds to decrease the money supply.
           ANSWER: a. buy bonds to increase the money supply.
20.   If the interest rate is below the Fed’s target, the Fed would
           a. buy bonds to increase the money supply.
            b. buy bonds to decrease the money supply.
            c. sell bonds to increase the money supply.
            d. sell bonds to decrease the money supply.
           ANSWER: d. sell bonds to decrease the money supply.
21.   If the stock market booms,
            a. aggregate demand increases, which the Fed could offset by increasing the money supply.
            b. aggregate supply increases, which the Fed could offset by increasing the money supply.
            c. aggregate demand increases, which the Fed could offset by decreasing the money supply.
            d. aggregate supply increases, which the Fed could offset by decreasing the money supply.
           ANSWER: c. aggregate demand increases, which the Fed could offset by decreasing the money
               supply.
22.   If the stock market booms
            a. household spending increases. To offset the effects of this on the price level and real GDP,
               the Fed would increase the money supply.
            b. household spending increases. To offset the effects of this on the price level and real GDP,
               the Fed would decrease the money supply.
            c. household spending decreases. To offset the effects of this on the price level and real GDP,
               the Fed would increase the money supply.
            d. household spending decreases. To offset the effects of this on the price level and real GDP,
               the Fed would decrease the money supply.
           ANSWER: b. household spending increases. To offset the effects of this on the price level and
               real GDP, the Fed would decrease the money supply.
23.   If the stock market crashes,
            a. aggregate demand increases, which the Fed could offset by increasing the money supply.
            b. aggregate demand increases, which the Fed could offset by decreasing the money supply.
       c. aggregate demand decreases, which the Fed could offset by increasing the money supply.
       d. aggregate demand decreases, which the Fed could offset by decreasing the money supply.
      ANSWER: c. aggregate demand decreases, which the Fed could offset by increasing the money
           supply.
24. When the Fed decreases the money supply we expect
       a. interest rates and stock prices to rise.
       b. interest rates and stock prices to fall.
       c. interest rates to rise and stock prices to fall.
       d. interest rates to fall and stock prices to rise.
      ANSWER: c. interest rates to rise and stock prices to fall.

        Use the following to answer questions




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25. (Figure: Monetary Policy 1) If the money market is initially at E1 and the central bank chooses
to sell bonds, then:
         a. AD2 will shift to the right, creating an inflationary gap.
         b. AD2 may shift to AD1, creating a recessionary gap.
         c. AD1 may shift to AD2, closing an existing recessionary gap.
         d. AD1 will shift to the left, increasing an existing recessionary gap.
26. (Figure: Monetary Policy 1) If the money market is initially at E1 and the central bank chooses
to buy bonds, then:
         a. AD2 will shift to the right, creating an inflationary gap.
         b. AD2 may shift to AD1, creating a recessionary gap.
         c. AD1 may shift to AD2, closing an existing recessionary gap.
         d. AD1 will shift to the left, increasing an existing recessionary gap.
27. (Figure: Monetary Policy1) If the money market is initially at E2 and the central bank chooses
to buy bonds, then:
         a. AD2 will shift to the right, creating an inflationary gap.
         b. AD2 may shift to AD1, creating a recessionary gap.
         c. AD1 may shift to AD2, closing an existing recessionary gap.
         d. AD1 will shift to the left, increasing an existing recessionary gap.
28. (Figure: Monetary Policy 1) If the money market is initially at E2 and the central bank chooses
         to sell bonds, then:
          a. AD2 will shift to the right, creating an inflationary gap.
          b. AD2 may shift to AD1, creating a recessionary gap.
          c. AD1 may shift to AD2, closing an existing recessionary gap.
          d. AD1 will shift to the left, increasing an existing recessionary gap.
29. (Figure: Monetary Policy 1) If the money market is initially at E1 and the central bank chooses
to buy bonds, then:
          a.          AD1 may shift to AD2 closing an existing recessionary gap.
          b.          AD1 will shift to the left, increasing an existing recessionary gap.
          c.          SRAS1 will shift immediately to the left, closing an existing inflationary gap.
          d.          SRAS2 will shift immediately to the right, increasing an existing inflationary gap.
30. (Figure: Monetary Policy 1) If the money market is initially at E2 and the central bank chooses
to sell bonds, then:
          a. AD2 will shift to the right, creating an inflationary gap.
          b. AD2 may shift to AD1, creating a recessionary gap.
          c. SRAS1 will shift immediately to the left, closing an existing inflationary gap.
          d. SRAS2 will shift immediately to the right, increasing an existing inflationary gap.

				
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