Question 1

The economy is in the horizontal portion of the AS curve,investment spending is interest insensitive and there is no liquidity trap.According to the Keynesian transmission mechanism,if the money supply increases the interest rate will __________,investment spending will __________,the AD curve will __________,and Real GDP will __________.

Accepted Answer

A)   fall; fall; left; fall
B)   rise; drop; left; fall
C)   fall; remain unchanged; not shift; not change
D)   rise; remain unchanged; not shift; not change
E)   none of the aboveF) A) and B)
G) A) and E)

Question 2

-Refer to Exhibit 15-1.A Keynesian would say that market forces work more quickly in taking the economy from point______________ than from point _______________.

Accepted Answer

A)   A to point D; D to point C
B)   A to point D; A to point B
C)   D to point C; B to point A
D)   C to point D; C to point BE) A) and D)
F) B) and C)

Question 3

Suppose the money market is in the liquidity trap and the Fed increases the supply of money.We expect that

Accepted Answer

A)   people will end up willingly holding more money.
B)   the excess money holdings will flow into the loanable funds market and there will be a decrease in interest rates.
C)   interest rates will increase,since the demand curve for money is upward sloping in this case.
D)   eventually,via the transmission mechanism,Real GDP will increase.E) A) and B)
F) A) and C)

Question 4

-Refer to Exhibit 15-1.Keynesians are often accused of having an "inflationary bias." This is due at least in part to their advocacy of expansionary monetary policy when they believe it is needed to take the economy from point

Accepted Answer

A)   B to point C.
B)   B to point A.
C)   D to point C.
D)   A to point B.E) C) and D)
F) A) and D)

Question 5

Which of the following statements is true?

Accepted Answer

A)   In the monetarist transmission mechanism,changes in the money market directly affect aggregate demand.
B)   In the monetarist transmission mechanism,there is no need for the money market to affect the loanable funds market or investment before aggregate demand is affected.
C)   In the monetarist transmission mechanism,if individuals are faced with an excess supply of money,they spend that money on a wide variety of goods---not just bonds or other assets,as is the case in the Keynesian transmission mechanism.
D)   a and b
E)   a,b and cF) A) and E)
G) B) and E)

Question 6

If the money market is in the liquidity trap,it is operating in the __________ segment of the __________ demand curve.

Accepted Answer

A)   vertical; investment
B)   vertical; money
C)   horizontal; investment
D)   horizontal; moneyE) A) and C)
F) All of the above

Question 7

As the interest rate __________,the quantity supplied of money __________ and the quantity demanded of money __________.

Accepted Answer

A)   falls; rises; falls
B)   rises; remains unchanged; falls
C)   falls; remains unchanged; falls
D)   rises; rises; rises
E)   none of the aboveF) A) and B)
G) A) and C)

Question 8

In the liquidity trap,the demand curve for investment is horizontal.

Accepted Answer

A) True 
 B)False

Question 9

Economist Smith favors an activist monetary policy.He says that if the economy is going to be stabilized over time,it is necessary to fine-tune the money supply to the particular economic conditions that exist.What would economist Jones,who favors rules-based monetary policy,say to economist Smith?

Accepted Answer

A)   Because of long lags,activist monetary policy is likely to be destabilizing rather than stabilizing.
B)   There have been times when activist monetary policy has worked well.
C)   There have been times when a constant-money-growth-rate rule has worked poorly.
D)   Flexibility is desirable when it comes to monetary policy.E) A) and D)
F) None of the above

Question 10

If you believe the economy is self-regulating,you are more likely to be a(an) __________ than a(an) __________.

Accepted Answer

A)   nonactivist; activist
B)   Keynesian; monetarist
C)   activist; nonactivist
D)   advocate of fiscal policy; advocate of monetary policy
E)   b and dF) A) and C)
G) D) and E)

Question 11

The demand for money rises.According to the Keynesian transmission mechanism,the interest rate __________,investment spending __________ (assuming it is interest-sensitive) ,the AD curve shifts to the __________ and if the AS curve is horizontal,Real GDP __________.

Accepted Answer

A)   rises; falls; left; rises
B)   falls; rises; right; does not change
C)   rises; falls; right; rises
D)   falls; falls; left; does not change
E)   rises; falls; left; fallsF) A) and E)
G) A) and D)

Question 12

Which of the following statements is true?

Accepted Answer

A)   Nonactivists argue that monetary and fiscal policies should be deliberately used to smooth out the business cycle.
B)   Fine-tuning consists of the usually frequent use of monetary policy to counteract even small undesirable movements in economy activity.
C)   Keynesians would be more likely to advocate contractionary monetary policy to correct an inflationary gap than expansionary monetary policy to correct a recessionary gap.
D)   b and c
E)   a,b and cF) A) and C)
G) C) and E)

Question 13

-Refer to Exhibit 15-l.A Keynesian monetary policy to eliminate a recessionary gap can be portrayed as a move between points

Accepted Answer

A)   A and B.
B)   B and C.
C)   C and D.
D)   D and A.E) A) and D)
F) B) and C)

Question 14

Suppose the money market is in the liquidity trap and the Fed increases the supply of money.Individuals would rather hold __________ than __________ because they expect that bond prices can go no __________.

Accepted Answer

A)   bonds; money; higher
B)   bonds; money; lower
C)   money; bonds; higher
D)   money; bonds; lowerE) All of the above
F) C) and D)

Question 15

Nonactivists hold that

Accepted Answer

A)   activist monetary policies are likely to be destabilizing rather than stabilizing.
B)   economic fine-tuning is quite feasible.
C)   flexibility in wages and prices is sufficient to allow the economy to return at a reasonable speed to full-employment output.
D)   a and c
E)   all of the aboveF) None of the above
G) A) and C)

Question 16

Economists who believe that the economy is self-regulating are more likely to be nonactivists than activists.

Accepted Answer

A) True 
 B)False

Question 17

-Refer to Exhibit 15-4.In the row of this table containing blank (C) ,people are holding ______________ of their wealth in bonds and ________________ of their wealth in money.

Accepted Answer

A)   too much; too little
B)   too little; too much
C)   just the right amount; too little
D)   just the right amount; too much
E)   just the right amount; just the right amountF) None of the above
G) D) and E)

Question 18

Monetary policy is

Accepted Answer

A)   the policy concerning changes in the money supply that is pursued to achieve particular macroeconomic goals.
B)   the expenditures and taxation policy that the government pursues to achieve particular macroeconomic goals.
C)   the investment policy that businesses pursue to achieve particular macroeconomic goals.
D)   the spending and saving policy that consumers pursue to achieve particular macroeconomic goals.
E)   the spending policy that the Treasury pursues to achieve particular macroeconomic goals.F) All of the above
G) B) and D)

Question 19

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 2 percent per year,then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

Accepted Answer

A)   -2 percent.
B)   0 percent.
C)   1 percent.
D)   2 percent.
E)   -1 percent.F) C) and D)
G) A) and E)

Question 20

Equilibrium in the money market exists when the quantity demanded of money equals the quantity supplied of money.

Accepted Answer

A) True 
 B)False

Exam 15: The Distribution of Income and Poverty

-Refer to Exhibit 15-4.In the row of this table containing blank (C) ,people are holding ______________ of their wealth in bonds and ________________ of their wealth in money.

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Economists who believe that the economy is self-regulating are more likely to be nonactivists than activists.

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Economist Smith favors an activist monetary policy.He says that if the economy is going to be stabilized over time,it is necessary to fine-tune the money supply to the particular economic conditions that exist.What would economist Jones,who favors rules-based monetary policy,say to economist Smith?

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Equilibrium in the money market exists when the quantity demanded of money equals the quantity supplied of money.

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-Refer to Exhibit 15-1.A Keynesian would say that market forces work more quickly in taking the economy from point______________ than from point _______________.

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Suppose the money market is in the liquidity trap and the Fed increases the supply of money.We expect that

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If you believe the economy is self-regulating,you are more likely to be a(an) __________ than a(an) __________.

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Suppose the money market is in the liquidity trap and the Fed increases the supply of money.Individuals would rather hold __________ than __________ because they expect that bond prices can go no __________.

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As the interest rate __________,the quantity supplied of money __________ and the quantity demanded of money __________.

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If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 2 percent per year,then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

Correct AnswerverifiedShow Answer

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Monetary policy is

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The demand for money rises.According to the Keynesian transmission mechanism,the interest rate __________,investment spending __________ (assuming it is interest-sensitive) ,the AD curve shifts to the __________ and if the AS curve is horizontal,Real GDP __________.

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In the liquidity trap,the demand curve for investment is horizontal.

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If the money market is in the liquidity trap,it is operating in the __________ segment of the __________ demand curve.

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-Refer to Exhibit 15-l.A Keynesian monetary policy to eliminate a recessionary gap can be portrayed as a move between points

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Which of the following statements is true?

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-Refer to Exhibit 15-1.Keynesians are often accused of having an "inflationary bias." This is due at least in part to their advocacy of expansionary monetary policy when they believe it is needed to take the economy from point

Correct AnswerverifiedShow Answer

Nonactivists hold that

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Which of the following statements is true?

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-Refer to Exhibit 15-4.In the row of this table containing blank (C) ,people are holding of their wealth in bonds and __ of their wealth in money.

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-Refer to Exhibit 15-1.A Keynesian would say that market forces work more quickly in taking the economy from point than from point _.

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If you believe the economy is self-regulating,you are more likely to be a(an) than a(an) .

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Suppose the money market is in the liquidity trap and the Fed increases the supply of money.Individuals would rather hold than because they expect that bond prices can go no __.

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As the interest rate ,the quantity supplied of money and the quantity demanded of money __.

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The demand for money rises.According to the Keynesian transmission mechanism,the interest rate ,investment spending (assuming it is interest-sensitive) ,the AD curve shifts to the and if the AS curve is horizontal,Real GDP .

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If the money market is in the liquidity trap,it is operating in the segment of the demand curve.

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