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Q:
Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess demand of goods which will cause aggregate output to ________.
A) right; fall
B) right; rise
C) left; fall
D) left; rise
Q:
Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess supply of goods which will cause aggregate output to ________.
A) right; fall
B) right; rise
C) left; fall
D) left; rise
Q:
Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________.
A) supply; fall
B) supply; rise
C) demand; fall
D) demand; rise
Q:
Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________.
A) supply; fall
B) supply; rise
C) demand; fall
D) demand; rise
Q:
The ________ describes points for which the goods market is in equilibrium.
A) LM curve
B) IS curve
C) consumption function
D) investment schedule
Q:
The ________ traces out the points for which total quantity of goods produced equals total quantity of goods demanded.
A) LM curve
B) IS curve
C) consumption function
D) investment schedule
Q:
Points on the IS curve satisfy ________ market equilibrium.
A) money
B) goods
C) stock
D) bond
Q:
The negative relation between investment spending and the interest rate is what gives the ________ curve its ________ slope.
A) IS; upward
B) IS; downward
C) LM; downward
D) LM; upward
Q:
A decrease in interest rates
A) increases the value of the dollar, net exports, and equilibrium output.
B) increases the value of the dollar, reducing net exports and equilibrium output.
C) reduces the value of the dollar, net exports, and equilibrium output.
D) reduces the value of the dollar, increasing net exports and equilibrium output.
Q:
An increase in interest rates
A) increases the value of the dollar, net exports, and equilibrium output.
B) increases the value of the dollar, reducing net exports and equilibrium output.
C) reduces the value of the dollar, net exports, and equilibrium output.
D) reduces the value of the dollar, increasing net exports and equilibrium output.
Q:
When interest rates fall in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________.
A) falls; less; fall
B) falls; less; rise
C) falls; more; fall
D) rises; less; fall
Q:
When interest rates rise in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________.
A) falls; less; fall
B) falls; more; rise
C) rises; more; fall
D) rises; less; fall
Q:
When the interest rate is ________, ________ investments in physical capital will earn more than the cost of borrowed funds, so planned investment spending is ________.
A) high; few; high
B) high; few; low
C) low; few; high
D) low; many; low
E) high; many; high
Q:
When the interest rate rises,
A) planned investment falls.
B) planned investment rises.
C) planned investment will be unaffected.
D) equilibrium income increases.
Q:
If the interest rate falls, other things being equal, investment spending will
A) fall.
B) rise.
C) either rise, fall, or remain unchanged.
D) not be affected.
Q:
Keynes believed that unstable investment caused the Great Depression. Using the simple Keynesian model, explain how a fall in investment affects equilibrium output.
Q:
In the late 1990s, M2 velocity ________, suggesting a ________ normal relationship between M2 and macroeconomic variables.
A) stabilized; less
B) stabilized; more
C) slowed; less
D) slowed; more
Q:
In the early 1990s, M2 growth underwent a dramatic ________, which some researchers believe ________ be explained by traditional money demand functions.
A) surge; cannot
B) surge; can
C) slowdown; cannot
D) slowdown; can
Q:
Researchers at the Federal Reserve found that M2 money demand functions performed ________ in the 1980s, with M2 velocity moving ________ with the opportunity cost of holding M2.
A) poorly; erratically
B) poorly; closely
C) well; erratically
D) well; closely
Q:
Conventional money demand functions tended to ________ money demand in the middle and late 1970s, and ________ velocity beginning in 1982.
A) overpredict; overpredict
B) overpredict; underpredict
C) underpredict; overpredict
D) underpredict; underpredict
Q:
Starting in 1974, the conventional M1 money demand function began to severely ________ the demand for money. Stephen Goldfeld labeled this phenomenon "the case of the missing ________."
A) underpredict; velocity
B) overpredict; velocity
C) underpredict; money
D) overpredict; money
Q:
Starting in 1974, the conventional M1 money demand function began to
A) severely underpredict the demand for money.
B) severely overpredict the demand for money.
C) predict more precisely the demand for money.
D) do none of the above.
Q:
In one of the earliest studies on the link between interest rates and money demand using United States data, James Tobin concluded that the demand for money is
A) sensitive to interest rates.
B) not sensitive to interest rates.
C) not sensitive to changes in income.
D) not sensitive to changes in bond values.
Q:
What factors determine the demand for money in the Baumol-Tobin analysis of transactions demand for money? How does a change in each factor affect the quantity of money demanded?
Q:
The speculative demand for money may not exist because
A) banks now pay interest on some types of checkable deposits.
B) there are alternative riskless assets paying higher returns than the return on money.
C) the transactions demand can be shown to depend on interest rates.
D) government regulations have eliminated risk in the financial markets.
Q:
Because Treasury bills pay a higher return than money and have no risk
A) the transactions demand for money may be zero.
B) the precautionary demand for money may be zero.
C) the speculative demand for money may be zero.
D) all three of the above motives for holding money will be zero.
Q:
Tobin's model of the speculative demand for money shows that people can reduce their ________ by ________ their asset holdings.
A) wealth; diversifying
B) risk; specializing
C) return; diversifying
D) risk; diversifying
Q:
Tobin's model of the speculative demand for money shows that people hold money as a ________ as a way of reducing ________.
A) medium of exchange; transaction costs
B) medium of exchange; risk
C) store of wealth; transaction costs
D) store of wealth; risk
Q:
Tobin's model of the speculative demand for money shows that people hold money as a store of wealth as a way of
A) reducing risk.
B) reducing income.
C) avoiding taxes.
D) reducing transactions cost.
Q:
Tobin's model of the speculative demand for money improves on Keynes's analysis by showing that
A) the speculative demand for money is interest insensitive.
B) the transactions demand for money is interest insensitive.
C) people will hold a diversified portfolio.
D) people will hold money or bonds but not both.
Q:
In the Baumol-Tobin analysis of transactions demand, scale economies imply that an increase in real income increases the quantity of money demanded ________, while an increase in the price level increases the quantity of money demanded ________.
A) proportionately; less than proportionately
B) more than proportionately; proportionately
C) less than proportionately; proportionately
D) proportionately; more than proportionately
Q:
In the Baumol-Tobin analysis of the demand for money, either an increase in ________ or an increase in ________ increases money demand.
A) income; interest rates
B) brokerage fees; interest rates
C) interest rates; the price level
D) brokerage fees; income
Q:
In the Baumol-Tobin analysis of transactions demand for money, either an increase in ________ or a decrease in ________ increases money demand.
A) income; interest rate
B) interest rates; brokerage fees
C) brokerage fees; income
D) interest rate; income
Q:
The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Q:
The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q:
The Baumol-Tobin analysis suggests that
A) velocity is relatively constant.
B) the transactions component of the demand for money is negatively related to the level of interest rates.
C) the speculative motive is nonexistent.
D) velocity is unrelated to the transactions motive.
Q:
If there are economies of scale in the transactions demand for money, as income increases, money demand
A) increases proportionately.
B) increases less than proportionately.
C) increases more than proportionately.
D) does not change.
Q:
The absence of money illusion means that
A) as real income doubles, the demand for money doubles.
B) as interest rates double, the demand for money doubles.
C) as the money supply doubles, the demand for money doubles.
D) as the price level doubles, the demand for money doubles.
Q:
Describe what the liquidity trap is. Explain how it can be problematic for monetary policymakers.
Q:
The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable, then steady growth of the money supply
A) is going to promote price stability at the expense of low unemployment.
B) is going to promote low unemployment at the expense of price stability.
C) is an ineffective way to conduct monetary policy.
D) can still be used to conduct monetary policy if the goal is price stability.
Q:
Evidence suggests that a liquidity trap is possible when
A) real interest rates are at zero.
B) real interest rates are at or just above zero.
C) nominal interest rates are at zero.
D) nominal interest rates are at or just above zero.
Q:
In the liquidity trap, the money demand curve
A) is horizontal.
B) is vertical.
C) is negatively sloped.
D) is positively sloped.
Q:
In the liquidity trap, monetary policy
A) has a large impact on interest rates.
B) has a small impact on interest rates.
C) has no impact on interest rates.
D) has a proportionate impact on interest rates.
Q:
In a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates.
A) no; no
B) no; a large
C) no; a small
D) a large; a large
Q:
In the liquidity trap a small change in interest rates produces ________ change in the quantity of money demanded.
A) a small
B) no
C) a proportionate
D) a very large
Q:
The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates, and there is ________ evidence that a liquidity trap exists.
A) sensitive; substantial
B) sensitive; little
C) insensitive; substantial
D) insensitive; little
Q:
The theory of portfolio choice indicates that factors affecting the demand for money include
A) income.
B) nominal interest rate.
C) riskiness of money.
D) all the above.
Q:
The theory of portfolio choice indicates that factors affecting the demand for money include
A) income.
B) nominal interest rate.
C) liquidity of other assets.
D) all the above.
Q:
The theory of portfolio choice indicates that higher interest rates make money ________ desirable, and the demand for real money balances ________.
A) less; falls
B) more; falls
C) less; rises
D) more; rises
Q:
As interest rates rise, the expected absolute return of money ________, money's expected return relative to bonds ________.
A) does not change; decrease
B) rises; decrease
C) does not change; increase
D) falls; decrease
Q:
The portfolio theories of money demand state that when income (and therefore, wealth) is higher, the demand for the money asset will ________ and the demand for real money balances will be ________.
A) rise; higher
B) rise; lower
C) fall; higher
D) fall; lower
Q:
The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate.
A) positively; negatively
B) positively; positively
C) negatively; negatively
D) negatively; positively
Q:
Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant?
Q:
The Keynesian demand for real balances can be expressed as
A) Md = f(i,Y).
B) Md/P = f(i).
C) Md/P = f(Y).
D) Md/P = f(i,Y).
Q:
Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________.
A) negatively; interest rates
B) positively; interest rates
C) negatively; income
D) negatively; wealth
Q:
Keynes's model of the demand for money suggests that velocity is ________ related to ________.
A) positively; interest rates
B) negatively; interest rates
C) positively; bond values
D) positively; stock prices
Q:
Keynes's liquidity preference theory indicates that the demand for money is
A) constant.
B) positively related to interest rates.
C) negatively related to interest rates.
D) negatively related to bond values.
Q:
Keynes's model of the demand for money suggests that velocity is
A) constant.
B) positively related to interest rates.
C) negatively related to interest rates.
D) positively related to bond values.
Q:
Keynes's theory of the demand for money is consistent with ________ movements in ________.
A) countercyclical; velocity
B) procyclical; velocity
C) countercyclical; expectations
D) procyclical; expectations
Q:
Keynes's theory of the demand for money is consistent with
A) countercyclical movements in velocity.
B) a constant velocity.
C) procyclical movements in velocity.
D) a relatively stable velocity.
Q:
Keynes's liquidity preference theory indicates that the demand for money
A) is purely a function of income, and interest rates have no effect on the demand for money.
B) is purely a function of interest rates, and income has no effect on the demand for money.
C) is a function of both income and interest rates.
D) is a function of both government spending and income.
Q:
Because interest rates have substantial fluctuations, the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well.
A) classical
B) Cambridge
C) liquidity preference
D) Pigouvian
Q:
Keynes's theory of the demand for money implies that velocity is
A) not constant but fluctuates with movements in interest rates.
B) not constant but fluctuates with movements in the price level.
C) not constant but fluctuates with movements in the time of year.
D) a constant.
Q:
According to Keynes's theory of liquidity preference, velocity increases when
A) income increases.
B) wealth increases.
C) brokerage commissions increase.
D) interest rates increase.
Q:
Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________, so the quantity of money demanded would ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Q:
Keynes argued that when interest rates were low relative to some normal value, people would expect bond prices to ________ so the quantity of money demanded would ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q:
If people expect nominal interest rates to be lower in the future, the expected return to bonds ________, and the demand for money ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Q:
If people expect nominal interest rates to be higher in the future, the expected return to bonds ________, and the demand for money ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
Q:
The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that
A) interest rates are about to fall.
B) bond prices are about to rise.
C) expected inflation is about to fall.
D) bond prices are about to fall.
Q:
Because Keynes assumed that the expected return on money was zero, he argued that people would
A) never hold money.
B) never hold money as a store of wealth.
C) hold money as a store of wealth when the expected return on bonds was negative.
D) hold money as a store of wealth only when forced to by government policy.
Q:
Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates?
A) The transactions motive.
B) The precautionary motive.
C) The speculative motive.
D) The altruistic motive.
Q:
The speculative motive for holding money is closely tied to what function of money?
A) Store of wealth
B) Unit of account
C) Medium of exchange
D) Standard of deferred payment
Q:
Keynes hypothesized that the speculative component of money demand was primarily determined by the level of
A) interest rates.
B) velocity.
C) income.
D) stock market prices.
Q:
The demand for money as a cushion against unexpected contingencies is called the
A) transactions motive.
B) precautionary motive.
C) insurance motive.
D) speculative motive.
Q:
Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.
A) incomes; wealth
B) incomes; age
C) transactions; income
D) transactions; age
Q:
Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate?
Q:
Explain and show graphically the effect of an increase in the expected inflation rate on the equilibrium exchange rate, everything else held constant.
Q:
Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.
Q:
Explain the Taylor rule, including the formula for setting the federal funds rate target, and the components of the formula. If the Fed were to use this rule, how many goals would it use to set monetary policy?
Q:
Explain and demonstrate graphically how targeting the federal funds rate can result in fluctuations in nonborrowed reserves.