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Macreconomics: Policy and Practice (Mishkin

)
Chapter 10 Monetary Policy and Aggregate Demand
10.1 The Federal Reserve and Monetary Policy
1) There are no questions for this section.
Answer:
10.2 The Monetary Policy urve
1) The MP curve indicates the relationshi! "etween ######## and the ########.
A) ta$es% !rice level
&) the real interest rate% inflation rate
) 'onetary !olicy% () curve
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
2) The e$o-enous varia"le in the 'onetary !olicy curve is ########.
A) the !olicy !ara'eter. /
&) the real interest rate
) the autono'ous co'!onent.
*) the federal funds rate
+) the inflation rate
Answer: +
To!ic: 10.1 The MP urve
AA)&: Analytical ),ills
0) The endo-enous varia"le in the 'onetary !olicy curve is ########.
A) the !olicy !ara'eter. /
&) the real interest rate
) the autono'ous co'!onent.
*) the federal funds rate
+) the inflation rate
Answer: &
To!ic: 10.1 The MP urve
AA)&: Analytical ),ills
1
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2) 3hen the Federal Reserve ########.
A) drains liquidity. the federal funds rate falls
&) drains liquidity. real interest rates fall
) !rovides 'ore liquidity. the federal funds rate falls
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
4) The Federal Reserve ########.
A) sets the federal funds rate once a year
&) controls the interest rate in the short run
) controls the interest rate in the lon- run
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
5) The federal funds rate is ########.
A) a real interest rate
&) set !eriodically "y on-ress
) a no'inal interest rate
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.1 The MP urve
6) A central "an, can control the real interest rate !recisely. so lon- as ######## re'ains
constant.
A) the no'inal interest rate
&) 'onetary !olicy
) e$!ected inflation
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.1 The MP urve
AA)&: Analytical ),ills
2
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7) (n the very short run ########.
A) the real interest rate will "e affected "y chan-es in the no'inal rate
&) 'onetary !olicy has an i''ediate effect on inflation
) the inflation rate is deter'ined "y the federal funds rate
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
8) 3hich of the followin- is true a"out the Taylor !rinci!le9
A) it e$!lains the lin, "etween hi-her inflation and hi-her real interest rates
&) it is the foundation for an u!ward slo!in- MP curve
) it reflects the !ractice of 'onetary !olicy
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
10) (f the central "an, did not follow the Taylor !rinci!le. an increase in inflation would lead to
a decrease in ########.
A) the no'inal interest
&) the real interest rate
) a--re-ate out!ut
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
11) (f the central "an, did not follow the Taylor !rinci!le. an increase in inflation would lead to
########.
A) a decrease in the no'inal interest rate
&) an increase in inflation
) a decrease in a--re-ate e$!enditure
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
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12) (f e$!ected inflation rises. 'onetary !olicy ########.
A) is rendered ineffective
&) 'ust "e ti-htened. to !revent further increases in inflation and e$!ected inflation
) will !revent any increase in the real interest rate
*) is desi-ned to increase the no'inal interest rate "y 'ore than the increase in e$!ected
inflation
+) none of the a"ove
Answer: *
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
10) Autono'ous ti-htenin- of 'onetary !olicy involves ########.
A) raisin- interest rates and shiftin- the MP curve to the ri-ht
&) lowerin- interest rates and shiftin- the MP curve to the left
) raisin- interest rates and shiftin- the MP curve to the left
*) lowerin- interest rates and shiftin- the MP curve to the ri-ht
+) none of the a"ove
Answer:
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
12) Autono'ous easin- of 'onetary !olicy involves ########.
A) raisin- interest rates and shiftin- the MP curve to the ri-ht
&) lowerin- interest rates and shiftin- the MP curve to the left
) raisin- interest rates and shiftin- the MP curve to the left
*) lowerin- interest rates and shiftin- the MP curve to the ri-ht
+) none of the a"ove
Answer: *
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
14) A 'ove'ent alon- the MP curve ########.
A) i'!lies an auto'atic ad:ust'ent of the interest rate
&) i'!lies an autono'ous ad:ust'ent to the interest rate
) i'!lies an autono'ous ad:ust'ent of a--re-ate de'and
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
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15) A shift of the MP curve ########.
A) i'!lies an auto'atic ad:ust'ent of the interest rate
&) i'!lies a direct !olicy action of the Federal Reserve
) does not alter the relationshi! "etween inflation and the interest rate
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
16) The MP curve 'ay "e used to re!resent ########.
A) 'ove'ents of the real interest rate as a direct !olicy action of the Federal Reserve
&) 'ove'ents of the real interest rate that are inde!endent of direct Federal Reserve action
) how the real interest rate is related to the inflation rate
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
17) The MP curve 'ay "e used to re!resent how ########.
A) 'ove'ents of the inflation rate are deter'ined "y the real interest rate
&) 'onetary !olicy res!onds to chan-es in the real interest rate
) 'ove'ents of the real interest rate are related to the inflation rate
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
18) A decision to increase the !ara'eter / in the MP curve is an e$a'!le of ########.
A) autono'ous easin-
&) leftward 'ove'ent alon- the curve
) ri-htward 'ove'ent alon- the curve
*) endo-enous res!onse
+) autono'ous ti-htenin-
Answer: +
To!ic: 10.1 The MP urve
AA)&: Analytical ),ills
4
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20) &efore the financial crisis of 2006. inflation was on the rise. Accordin- to the MP curve. this
would lead to ########.
A) an increase in the real interest rate
&) an u!ward shift of the MP curve. if !olicy'a,ers o!ted for autono'ous ti-htenin-
) a decrease in a--re-ate out!ut
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
21) As the financial crisis "eca'e 'ore severe in 2007. the Federal Reserve undertoo, a;n)
######## of 'onetary !olicy. an effect of which is to ######## inflation.
A) contraction% raise
&) easin-% raise
) contraction% lower
*) easin-% lower
+) none of the a"ove
Answer: &
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
22) Throu-hout 2007. inflation and the real interest rate declined to-ether. The cause is a
co'"ination of ########.
A) 'onetary !olicy easin- and declinin- autono'ous s!endin-
&) declinin- autono'ous s!endin- and 'ove'ent alon- a fi$ed MP curve
) 'onetary !olicy ti-htenin- and inversion of the MP curve
*) increased -overn'ent s!endin- and 'ove'ent alon- a fi$ed MP curve
+) none of the a"ove
Answer: A
To!ic: 10.1 The MP urve
AA)&: Analytical ),ills
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MP Curve
20) Referrin- to the -ra!h a"ove. a 'ove'ent fro' !oint < to !oint ( 'i-ht re!resent ########.
A) the increase in the inflation rate that occurs when the real interest rate rises
&) the auto'atic res!onse of 'onetary !olicy to an increase in the inflation rate
) an autono'ous ti-htenin- of 'onetary !olicy
*) any of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.1 The MP urve
AA)&: Analytical ),ills
22) =n the -ra!h a"ove. which !air of !oints "est re!resents the i'!acts in the >. ). of the
financial crisis and !olicy res!onse fro' 2006 throu-h 20079
A) < to (
&) ? to @
) ( to <
*) ? to F
+) @ to A
Answer: +
To!ic: 10.1 The MP urve
AA)&: Analytical ),ills
24) =n the -ra!h a"ove. which !air of !oints "est re!resents a scenario in which the no'inal
interest rate and e$!ected inflation decline equally9
A) ( to <
&) @ to ?
) ( to A
*) ? to F
+) A to <
Answer: *
To!ic: 10.1 The MP urve
AA)&: Analytical ),ills
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25) )u!!ose the no'inal interest rate is five !ercent. and the inflation rate rises fro' two !ercent
to three !ercent. Mi-ht an increase in the no'inal interest rate to 4.4 !ercent "e consistent with
the Taylor Princi!le9 (f not. what consequences 'i-ht ensue9
Answer: Bes. it 'i-ht "e. The Taylor Princi!le requires that the no'inal interest rate rise "y
'ore than the increase in expected inflation. (f e$!ected inflation has not chan-ed. or has
increased "y less than half a !ercenta-e !oint. then the increase in the no'inal interest rate
i'!lies an increase in the real interest rate. (f e$!ected inflation has increased "y 'ore than
0.4C. then the real interest rate has declined. which will encoura-e 'ore s!endin- that 'i-ht
fuel further increases in inflation.
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
26) A ,ey concern of 'onetary !olicy 'a,ers is credibility. (n !articular. that !eo!le "elieve that
inflation will not deviate far fro' a rate consistent with a healthy 'acroecono'y. <ow 'i-ht
credi"ility affect the slo!e of the 'onetary !olicy curve9
Answer: redi"ility i'!lies that the 'onetary !olicy curve will "e relatively flat. 3hen inflation
e$!ectations rely 'ore on confidence in 'onetary !olicy and less on the latest fluctuations. s'all
chan-es in the real interest rate suffice to !revent chan-es in inflation fro' acquirin-
'o'entu'.
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
27) )u!!ose the econo'y is :ust recoverin- fro' a recession and all si-ns now !oint to ro"ust
-rowth. <ow 'i-ht this transition fro' recovery to e$!ansion "e reflected in the 'onetary
!olicy curve9
Answer: The 'onetary !olicy curve will have "een relatively low. as !olicy 'a,ers ,e!t interest
rates as low as !ossi"le to hasten recovery fro' the recession. =nce the recession is over. the
'onetary !olicy curve will shift u!. since low interest rates are no lon-er a!!ro!riate. and to
reduce the dan-er that s!endin- will cli'" too ra!idly and cause inflation to rise. The curve 'ay
"eco'e stee!er. as well. so that any increases in inflation are countered "y su"stantial increases
in the real interest rate.
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
28) (f the 'onetary !olicy curve is correct. then !olicy 'a,ers care only a"out inflation and not
at all a"out a--re-ate out!ut and une'!loy'ent. o''ent.
Answer: The 'onetary !olicy curve is a concise e$!ression of 'onetary !olicy. hi-hli-htin-
!olicy 'a,ersD concern with inflation sta"ility. Policy concerns other than inflation are
re!resented "y shifts of the MP curve. so that the real interest rate 'ay chan-e inde!endently of
the inflation rate. Moreover. the -oal of inflation sta"ility i'!lies the need to "e res!onsive to
'acroecono'ic conditions in -eneral. since the "ehavior of inflation is closely lin,ed to chan-es
in a--re-ate out!ut and une'!loy'ent.
To!ic: 10.1 The MP urve
AA)&: Reflective Thin,in-
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10.0 The A--re-ate *e'and urve
1) The A* urve ########.
A) de'onstrates how central "an,s res!ond to chan-es in interest rates "y chan-in- the inflation
rate
&) shows how chan-es in equili"riu' out!ut affect the inflation rate
) e$!lains lon- run fluctuations in out!ut and inflation
*) all of the a"ove
+) none of the a"ove
Answer: +
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
2) The MP urve ########.
A) de'onstrates how central "an,s res!ond to chan-es in inflation with chan-es in the interest
rate
&) shows how chan-es in interest rates affect equili"riu' out!ut
) e$!lains short run fluctuations in out!ut and inflation
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
0) The () urve ########.
A) de'onstrates how central "an,s res!ond to chan-es in inflation with chan-es in the interest
rate
&) shows how chan-es in interest rates affect equili"riu' out!ut
) e$!lains short run fluctuations in out!ut and inflation
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
2) The A* urve ########.
A) indicates the level of a--re-ate out!ut corres!ondin- to different -oodsE'ar,etEclearin-
levels of the interest rate
&) is downward slo!in-. "ecause with hi-her inflation co'es hi-her interest rates and lower
s!endin-. so equili"riu' a--re-ate out!ut declines
) e$!lains how inflation affects out!ut in the short run
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
8
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4) The A* urve ########.
A) indicates the level of a--re-ate out!ut corres!ondin- to different -oodsE'ar,etEclearin-
levels of the inflation rate
&) is downward slo!in-. "ecause with hi-her inflation co'es lower interest rates and lower
s!endin-. so equili"riu' a--re-ate out!ut declines
) e$!lains how inflation affects out!ut in the short run
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
5) Factors that shift the A* urve include ########.
A) the inflation rate
&) a--re-ate out!ut
) ta$es
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
6) (n the a--re-ate de'and curve. the endo-enous varia"le is ########.
A) out!ut
&) inflation
) the real interest rate
*) real 'oney "alances
+) none of the a"ove
Answer: A
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
7) An increase in the real interest rate occurs when ########.
A) 'onetary !olicy res!onds auto'atically to an increase in inflation
&) e$!ected inflation increases. relative to the no'inal interest rate
) an increase in autono'ous s!endin- causes an increase in equili"riu' out!ut
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
10
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8) A decrease in the real interest rate occurs when ########.
A) there is an autono'ous ti-htenin- of 'onetary !olicy
&) e$!ected inflation increases. relative to the no'inal interest rate
) a decrease in autono'ous s!endin- causes a decrease in equili"riu' out!ut
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
10) Factors that shift the A* urve include ########.
A) -overn'ent !urchases
&) autono'ous invest'ent
) ta$es
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
11) Factors that shift the A* urve include ########.
A) autono'ous net e$!orts
&) autono'ous inflation
) autono'ous interest rates
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
12) (f !eo!le "e-in to -enerally feel "etter a"out the future ########.
A) autono'ous consu'!tion should rise
&) autono'ous invest'ent should rise
) the A* curve will shift to the ri-ht
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
11
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10) (f -overn'ent cuts ta$es ########.
A) after ta$ inco'e should increase shiftin- A* to the left to a lower equili"riu' level of out!ut
&) after ta$ inco'e should increase shiftin- A* to the ri-ht to a hi-her equili"riu' level of
out!ut
) after ta$ inco'e and the equili"riu' level of out!ut re'ain unchan-ed
*) after ta$ inco'e re'ains unchan-ed "ut the equili"riu' level of out!ut would increase
+) none of the a"ove
Answer: &
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
12) An increase in autono'ous s!endin- leads to hi-her ########.
A) inflation
&) out!ut
) real interest rate
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
14) An increase in inflation leads to hi-her ########.
A) out!ut
&) s!endin-
) real interest rate
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
15) A chan-e in inflation leads to shifts of the ######## curves.
A) MP. (). F A*
&) MP F (). "ut not A*
) () F A*. "ut not MP
*) MP. "ut not () nor A*
+) none of the a"ove
Answer: +
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
12
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16) (f the Federal Reserve raises interest rates in an autono'ous ti-htenin- ######## .
A) the MP curve shifts u!. there is an u!ward 'ove'ent alon- the () curve. and the A* curve
shifts to the left to a lower level of equili"riu' out!ut
&) the MP curve shifts down. there is a downward 'ove'ent alon- the () curve and the A*
curve shifts to the ri-ht to a hi-her level of equili"riu' out!ut
) the MP curve shifts u!. there is a downward 'ove'ent alon- the () curve and the A* curve
shifts to the ri-ht to a lower level of equili"riu' out!ut
*) the MP curve shifts down. there is an u!ward 'ove'ent alon- the () curve and the A* curve
shifts to the left to a hi-her level of equili"riu' out!ut
+) none of the a"ove
Answer: A
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
17) (f the Federal Reserve raises interest rates in an autono'ous ti-htenin- ######## .
A) the MP curve shifts u!. raisin- the real interest for any -iven level of the inflation rate
&) there is an u!ward 'ove'ent alon- the () curve
) the A* curve shifts to the left
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.2 The A* urve
AA)&: Reflective Thin,in-
18) )hifts of the ######## curves result fro' autono'ous 'onetary !olicy.
A) MP. (). F A*
&) MP F (). "ut not A*
) () F A*. "ut not MP
*) MP. "ut not () nor A*
+) none of the a"ove
Answer: +
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
20) The () curve is B G 20 E 1.4r. and the a--re-ate de'and curve is B G 14.4 E 0.0H. The
'onetary !olicy curve is ########.
A) r G 2.4 E 1.7H
&) r G 20 I 0.0H
) r G 0 I 0.2H
*) B G 16.64 I 0.5H
+) none of the a"ove
Answer:
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
10
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21) The () curve is B G 20 E 1.4r. and the a--re-ate de'and curve is B G 14.4 E 0.0H. 3hen the
interest rate is 6 !ercent. the inflation rate is ######## !ercent.
A) 12.5
&) 8.4
) 0.5
*) 20
+) none of the a"ove
Answer: *
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
22) The () curve is B G 20 E 1.4r. and the a--re-ate de'and curve is B G 14.4 E 0.0H. 3hen the
inflation rate is 0 !ercent. out!ut is ########.
A) 20
&) 12.5
) 8.4
*) 0.5
+) none of the a"ove
Answer: &
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
20) The a--re-ate de'and curve is B G 14 E 0.2H when the inflation rate falls fro' 5 !ercent to 4
!ercent. Then. out!ut increases fro' 10.7 to 16. The res!onse of 'onetary !olicy to the inflation
decline has "een ########.
A) autono'ous ti-htenin-
&) auto'atic ad:ust'ent
) autono'ous easin-
*) to increase autono'ous s!endin-
+) none of the a"ove
Answer:
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
22) )u!!ose the 'onetary !olicy curve is r G 4 I 0.7H. and the current values for out!ut and
inflation are 15.7 and 2 !ercent. res!ectively. An increase in -lo"al resource !rices !ushes the
inflation rate to 2 !ercent. Policy 'a,ers esti'ate that the 'onetary !olicy in !lace. res!ondin-
to 2 !ercent inflation. will "rin- out!ut down to 10.5. a decline considered e$cessive. (nstead.
they i'!le'ent an autono'ous easin- of 'onetary !olicy to lower out!ut fro' 15.7 to 15.
Assu'in- no chan-e in the slo!e of the 'onetary !olicy curve. deter'ine the new curve.
Answer: Fro' the -iven 'onetary !olicy curve. the real interest rate was initially 5.5 !ercent.
and would rise to 7.2 !ercent in res!onse to the increase in inflation fro' 2 !ercent to 2 !ercent.
)ince this increase in the real interest rate would cause out!ut to decline fro' 15.7 to 10.5. we
,now that the () curve is B G 00 E 2r. (f out!ut is to "e 15. the real interest rate 'ust "e 6 !ercent.
The 'onetary !olicy curve with slo!e 0.7 and coordinates 2. 6 is r G 0.7 I 0.7H.
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
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24) )u!!ose the de'and curve is B G 07 E 0H. and the current values for out!ut and the real
interest rate are 28 and 6 !ercent. res!ectively. A decrease in inflation leads to a new out!ut level
of 02 and real interest rate at 5 !ercent. The 'onetary !olicy curve is ########.
Answer: The inflation rate falls fro' 0 !ercent to 2 !ercent. The corres!ondin- real interest rates
are 6 !ercent and 5 !ercent. so the MP curve is r G 2 I H.
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
25) 3hen the inflation rate falls. what ha!!ens. and why. to the MP. (). and A* curves9
Answer: A decrease in the inflation rate will. ty!ically. raise the real interest rate. -iven the
no'inal interest rate. "ecause expected inflation will have fallen. To !revent this increase in the
real interest rate. which would cause s!endin- and out!ut to decline. the central "an, lowers the
no'inal interest rate "y 'ore than the decrease in e$!ected inflation. This 'ove'ent down to
the left alon- the MP curve corres!onds to 'ove'ent down to the ri-ht alon- the () curve.
"ecause the lower real interest rate increases consu'!tion. invest'ent. and net e$!orts.
Move'ent down to the ri-ht alon- the A* curve shows the increase in out!ut that has resulted
fro' the decrease in the inflation rate.
To!ic: 10.2 The A* urve
AA)&: Analytical ),ills
10.2 The Money Mar,et and (nterest Rates
1) The liquidity !reference theory distin-uishes "etween ########.
A) no'inal and real quantities
&) 'oney and financial assets
) "uyin- -oods and earnin- interest inco'e
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
2) JReal 'oney "alancesJ refers to ########.
A) the quantity of -oods and services that 'oney can "uy
&) -old and silver
) 'oney that is actually availa"le to "e s!ent
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.0 The Money Mar,et and (nterest Rates
14
o!yri-ht 1 2012 Pearson +ducation. (nc.
0) The liquidity !reference theory ########.
A) distin-uishes "etween no'inal and real quantities
&) shows that de'and for real "alances de!ends on real inco'e
) shows that de'and for real "alances de!ends on the no'inal interest rate
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
2) ######## is a -ood 'easure of the o!!ortunity cost of holdin- 'oney.
A) The real interest rate
&) Kiquidity !reference
) Real inco'e
*) The inflation rate
+) none of the a"ove
Answer: +
To!ic: 10.0 The Money Mar,et and (nterest Rates
4) *e'and for real 'oney "alances de!ends on ########.
A) the !rice level
&) the real interest rate
) the o!!ortunity cost of holdin- 'oney
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.0 The Money Mar,et and (nterest Rates
5) Accordin- to liquidity !reference theory. as real inco'e increases. so does ########.
A) the su!!ly of real 'oney "alances
&) the de'and for real 'oney "alances
) the real interest rate
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
6) Accordin- to liquidity !reference theory. an increase in the !rice level would ########.
A) decrease the de'and for real 'oney "alances
&) increase the su!!ly of real 'oney "alances
) decrease the real interest rate
*) all of the a"ove
+) none of the a"ove
Answer: +
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
15
o!yri-ht 1 2012 Pearson +ducation. (nc.
7) Accordin- to liquidity !reference theory. an increase in the !rice level would ########.
A) increase the de'and for real 'oney "alances
&) decrease the su!!ly of real 'oney "alances
) decrease the real interest rate
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
8) The endo-enous varia"le in the liquidity !reference function is ########.
A) de'and for real 'oney "alances
&) the no'inal interest rate
) real inco'e
*) the !rice level
+) none of the a"ove
Answer: A
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Analytical ),ills
10) The liquidity !reference function shows that as ########.
A) real inco'e decreases. so does the de'and for real 'oney "alances
&) the no'inal interest rate increases. so does the de'and for real 'oney "alances
) real inco'e decreases. so does the real interest rate
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
11) As the no'inal interest rate increases ########.
A) it "eco'es 'ore costly to hold 'oney instead of "onds
&) the quantity of 'oney de'anded falls
) the o!!ortunity cost of holdin- 'oney rises
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
16
o!yri-ht 1 2012 Pearson +ducation. (nc.
12) As the no'inal interest rate increases ########.
A) it "eco'es 'ore costly to hold "onds instead of 'oney
&) the quantity of 'oney de'anded rises
) the o!!ortunity cost of holdin- 'oney rises
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
10) As inco'e rises ########.
A) the nu'"er of transactions households and fir's underta,e should increase
&) wealth also rises
) de'and for real 'oney "alances should increase
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
12) The de'and for real 'oney "alances ########.
A) is downward slo!in- with res!ect to !rices
&) is downward slo!in- with res!ect to interest rates
) is downward slo!in- with res!ect to inco'e
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
14) 3hy is the de'and for real 'oney "alances downward slo!in-9
A) "ecause the o!!ortunity cost of holdin- 'oney decreases as interest rates decrease
&) "ecause when the interest rate falls the quantity of 'oney de'anded increases
) "ecause lower interest rates encoura-e fir's and households to increase their 'oney holdin-s
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
17
o!yri-ht 1 2012 Pearson +ducation. (nc.
15) The su!!ly curve for 'oney ########.
A) is u!ward slo!in- with res!ect to interest rates
&) is fi$ed to a s!ecified interest rate
) is fi$ed re-ardless of the interest rate
*) is downward slo!in- with res!ect to interest rates
+) none of the a"ove
Answer:
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
16) (ncreased liquidity in the "an,in- syste' occurs when ########.
A) !eo!le "uy 'ore "onds
&) the de'and for real 'oney "alances declines
) "an,s "uy 'ore "onds fro' the central "an,
*) all of the a"ove
+) none of the a"ove
Answer: +
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
17) Ty!ically. central "an,s increase the su!!ly of 'oney "y ########.
A) "uyin- "onds fro' "an,s
&) !rintin- currency
) directin- the -overn'ent to issue 'ore 'oney to "an,s
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.0 The Money Mar,et and (nterest Rates
18) 3hich of the followin- is true with re-ard to the su!!ly of 'oney9
A) an o!en 'ar,et sale of -overn'ent securities will increase liquidity
&) an o!en 'ar,et !urchase of -overn'ent securities will decrease liquidity
) liquidity and the 'oney su!!ly are directly related
*) all of the a"ove
+) none of the a"ove
Answer:
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
18
o!yri-ht 1 2012 Pearson +ducation. (nc.
20) 3hich of the followin- is true with re-ard to the su!!ly of 'oney9
A) an o!en 'ar,et !urchase of -overn'ent securities will increase liquidity
&) an o!en 'ar,et sale of -overn'ent securities will decrease liquidity
) liquidity and the 'oney su!!ly are directly related
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
21) A decrease in inco'e ########.
A) lowers 'oney de'and for any -iven interest rate
&) lowers interest rates ceteris paribus
) leads to a leftward shift of the 'oney de'and curve
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
22) 3hen !eo!le are holdin- 'oney in e$cess of their de'and for real 'oney "alances
########.
A) the no'inal interest rate will fall
&) they increase their !urchases of -oods and services
) the central "an, "uys "onds to correct the i'"alance
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Analytical ),ills
20) A ri-htward shift of the 'oney su!!ly ########.
A) 'ay co'e a"out fro' an increase in the quantity of 'oney su!!lied "y the Federal Reserve
&) 'ay co'e a"out fro' a decrease in the !rice level
) leads to a decrease in interest rates ceteris paribus
*) all of the a"ove
+) none of the a"ove
Answer: *
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
20
o!yri-ht 1 2012 Pearson +ducation. (nc.
22) A leftward shift of the 'oney su!!ly ########.
A) 'ay co'e a"out fro' an increase in the quantity of 'oney su!!lied "y the Federal Reserve
&) 'ay co'e a"out fro' an increase in the !rice level
) leads to a decrease in interest rates ceteris paribus
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
24) (f the no'inal interest rate is a"ove the equili"riu' level ########.
A) the su!!ly of real 'oney "alances will fall
&) the quantity of real 'oney "alances !eo!le are holdin- is too low. and is risin-
) !eo!le are sellin- financial assets in order to increase real 'oney "alances
*) all of the a"ove
+) none of the a"ove
Answer: +
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Analytical ),ills
25) (f the no'inal interest rate is a"ove the equili"riu' level ########.
A) !urchases of "onds and other assets will cause the interest rate to fall
&) issuance of "onds and other assets will cause the su!!ly of real 'oney "alances to increase
) the o!!ortunity cost of holdin- 'oney is low. and is risin-
*) all of the a"ove
+) none of the a"ove
Answer: A
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Analytical ),ills
26) 3hen the Federal Reserve increases the 'oney su!!ly. !eo!le ########.
A) increase their !urchases of "onds and other financial assets
&) 'ay. in the short run. increase their !urchases of -oods and services
) decrease the quantity of 'oney holdin-s
*) all of the a"ove
+) none of the a"ove
Answer: &
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Analytical ),ills
21
o!yri-ht 1 2012 Pearson +ducation. (nc.
27) 3hy is the de'and for real 'oney "alances related to the nominal interest rate. rather than
the real interest rate9
Answer: &ecause e$!ected inflation is irrelevant to decidin- "etween 'oney versus interestE
"earin- assets. 3hether e$!ected inflation is hi-h or low. interestE"earin- assets -enerate inco'e
at the no'inal interest rate. and that inco'e is the o!!ortunity cost of holdin- 'oney. +$!ected
inflation i'!lies a reduction in the !urchasin- !ower of 'oney affectin- equally "oth 'oney
held and 'oney received as interest inco'e.
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
28) (f your local "an, "uys a few "illion dollars worth of -overn'ent securities. what ha!!ens to
the econo'yDs 'oney su!!ly9
Answer: (f the seller of the "onds is another !rivate "usiness. there is no effect on the 'oney
su!!ly. The 'oney that 'i-ht have su!!orted s!endin- and lendin- "y the "uyin- "an, is now
availa"le for lendin- and s!endin- "y the seller;s) of the "onds. <owever. if the seller of the
"onds is the Federal Reserve. then the 'oney su!!ly is reduced. since the decline in liquidity at
the "uyin- "an, is not offset "y an increase in liquidity elsewhere in the econo'y. ;The "an,Ds
de!osit at the Fed is reduced "y the a'ount of its "ond !urchase% the 'oney is not transferred to
a different account. "ut ceases to e$ist.)
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Reflective Thin,in-
00) )u!!ose real out!ut is 12.400. and the de'and for real 'oney "alances is
P
d
M
G
2
B
E 124i.
(f the equili"riu' interest rate is 6 !ercent. calculate the 'oney su!!ly . (f the central "an, sets
the interest rate at 7 !ercent. what is the new 'oney su!!ly9
Answer: Plu--in- the -iven out!ut and interest rate in the de'and equation. the 'oney su!!ly
;equals 'oney de'and) is 2.240. 3hen the interest rate is 7 !ercent. the 'oney su!!ly is 2.124.
To!ic: 10.0 The Money Mar,et and (nterest Rates
AA)&: Analytical ),ills
22
o!yri-ht 1 2012 Pearson +ducation. (nc.