Chapter 12

167. If the Fed used open market operations to decrease the money supply, it
a. increased the federal funds rate.
b. issued more federal government debt.
*
c. sold U.S. government securities (bonds) to the general public.
d. increased the required reserve ratio.
168. Suppose the Fed buys $10 million of U.S. securities from the public. Assume a reserve requirement
of 5 percent and that all banks hold no excess reserves. The total impact of this action on the money
supply will be
*
a. an increase of $200 million.
b. a decrease of $200 million.
c. a decrease of $10 million.
d. an increase of $10 million.
169. In the United States, the control of the money supply is the responsibility of the
*
a. Federal Reserve System (the Fed).
b. president.
c. U.S. Treasury.
d. U.S. Congress.
170. Further difficulties in measuring the money supply can be expected in the future as
a. the penny is likely to be discontinued from circulation.
b. the U.S. Congress continues the process of decreasing the independence of the Fed.
c. the volume of transactions conducted with credit cards continues to escalate.
*
d. debit cards and electronic money come into widespread use.
171. Suppose a bank receives a new deposit of $500. The bank extends a new loan of $400 because it is
required to hold the other $100 on reserve. What is the legal required reserve ratio?
a. 10 percent
b. 15 percent
*
c. 20 percent
d. 25 percent
172. Fiat money is defined as
a. the money of U.S. citizens deposited at banks and other financial institutions outside the United
States.
b. money spent on Italian sports cars.
*
c. money that has little intrinsic value; it is neither backed by nor convertible to a commodity of
value.
d. vault cash plus deposits at the Fed.
173. The most frequently used tool of the Fed to control the money supply in recent years has been
a. changes in the premiums charged for FDIC deposit insurance.
*
b. open market operations.
c. changes in the discount rate.
d. changes in reserve requirements.

174. The federal funds rate is the interest rate

*
a. banks pay when they borrow money from each other.
b. the federal government pays on the national debt.
c. the Fed charges banks when banks need to borrow from the Fed.
d. the federal government charges foreign banks.
175. The three basic functions of money are
a. fiat, seignior age, and debt.
*
b. a medium of exchange, a store of value, and a unit of account.
c. a standard of pay, a coincidence of wants, and a measure of the value of time.
d. demand deposits, other checkable deposits, and time deposits.
176. If the Federal Reserve wanted to expand the supply of money to head off a recession, it could
*
a. decrease the reserve requirements.
b. lower taxes.
c. sell U.S. securities in the open market.
d. increase the discount rate.
177. The larger the reserve requirement, the
a. larger the potential deposit multiplier.
*
b. smaller the potential deposit multiplier.
c. more profitable the banks will be.
d. larger the proportion of an additional deposit that is available to the bank for the extension of
additional loans.
178. The total expansion in the money supply can be less than is predicted by the deposit expansion
multiplier if
a. banks choose to hold some excess reserves rather than lending all excess reserves.
b. some individuals prefer to hold cash instead of depositing their money in banks.
c. instead of a monopoly banking system, there are many banks.
*
d. both a and b are correct.
179. If the Fed wanted to use all three of its tools to decrease the money supply, it would
a. decrease the discount rate, decrease reserve requirements, and buy bonds.
b. decrease the discount rate, decrease reserve requirements, and sell bonds.
c. increase the discount rate, increase reserve requirements, and buy bonds.
*
d. increase the discount rate, increase reserve requirements, and sell bonds.
180. When economists say that money serves as a unit of account, they mean that money
a. allows people to avoid barter (trading goods for other goods) by using money.
b. is always issued in fixed denominations (for example $1, $5, $10, $20 bills).
*
c. allows people to value all goods and services in terms of one commodity (money), rather than
in terms of several commodities.
d. makes it easier for people to maintain value across time by letting them save it in the form of
money, rather than in the form of physical goods that might depreciate over time.
181. The value (purchasing power) of each unit of money
a. does not depend on the amount of money in circulation.
b. tends to increase as the money supply expands.
c. increases as prices rise.
*
d. is inversely related to prices (in other words, moneys value falls as prices rise and vice versa).

182. Which of the following is not a component of the M1 money supply?

a. demand deposits
b. large-denomination (more than $100) bills
c. interest-earning checking deposits
*
d. outstanding balances on credit cards
183. Which of the following compose the M2 money supply?
a. currency only
b. currency, demand deposits, other checkable deposits, and travelers checks
c. M1 plus large denomination time deposits
*
d. M1 plus savings deposits, small-denomination time deposits, and money market mutual funds
(retail)
184. The difference between the total reserves that a bank holds and the amount that is required by law is
called
*
a. excess reserves.
b. non-borrowed reserves.
c. borrowed reserves.
d. actual reserves.
185. A reserve requirement of 20 percent implies a potential money deposit multiplier of
a. 1.
*
b. 5.
c. 20.
d. 80.
186. Suppose the Fed sells $100 million of U.S. government securities (bonds) to the public. How will
this affect the money supply and the national debt?
a. The money supply will increase; the national debt will decrease.
b. The money supply will decrease; the national debt will increase.
c. The money supply will increase; the national debt will be unaffected.
*
d. The money supply will decrease; the national debt will be unaffected.
187. Suppose the U.S. Treasury issues and sells $100 million of U.S. government securities (bonds) to
the public. How will this affect the money supply and the national debt?
a. The money supply will increase; the national debt will decrease.
b. The money supply will decrease; the national debt will increase.
*
c. The money supply will be unaffected; the national debt will increase.
d. The money supply will be unaffected; the national debt will decrease.
188. Which of the following is not part of the M1 money supply?
a. paper bills (currency)
b. travelers checks
*
c. savings deposits
d. coins
189. Saying that the Fed is an independent central bank means
a. members of the Fed are not allowed to register with a political party.
*
b. the Fed is insulated from the political pressures of voters and politicians seeking reelection.
c. the Fed is a private bank that has no links to the government.
d. the Fed has control over the money supply of foreign nations.

Chapter 13
149. A decrease in the nominal (or money) interest rate would
a. encourage people to hold smaller money balances.
*
b. encourage people to hold larger money balances.
c. force the Fed to increase the money supply.
d. cause the real interest rate to rise.
150. According to monetarists, which of the following would most likely eliminate inflation?
a. a steady increase in federal expenditures at an annual rate of approximately 3 percent
b. indexing of wages, taxes, and pensions to the rate of inflation
*
c. a steady expansion in the money supply at a rate no greater than the long-run growth of real
output
d. a steady 3 percent increase in the size of the budget deficit
151. Given the strict quantity theory of money, if the quantity of money doubled, prices would
a. fall by half.
*
b. double.
c. remain constant.
d. increase somewhat but less than double.
152. The velocity of money is 6, the amount of money in circulation is $200 million, prices are 120, and
real GDP is $10 million. According to the strict quantity theory of money, if the money supply
increased to $400 million,
a. velocity of money would fall to 3.
*
b. prices would increase to 240.
c. real GDP would increase to $20 million.
d. it is unclear what would happen to GDP, prices, and the money velocity.
153. If the amount of money in circulation is $200 million and nominal GDP is $400 million, the velocity
of money is
a. 0.5.
*
b. 2.
c. 200.
d. 400.
154. If the growth rate of real GDP is 3 percent, velocity is constant, and the money supply grows at 9
percent, the rate of inflation will be approximately
a. 3 percent.
*
b. 6 percent.
c. 9 percent.
d. 12 percent.
155. When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate
demand because
*
a. real interest rates will fall, stimulating business investment and consumer purchases.
b. the dollar will appreciate on the foreign exchange market, leading to a decrease in net exports.
c. lower interest rates will tend to decrease asset prices (such as the prices of homes), which
decreases wealth and, thereby, decreases current consumption.
d. all of the above are true.

156. The most likely short-run impact of an unanticipated decrease in the money supply is a(n)
a. decrease in the real interest rate, which in turn reduces investment and real GDP.
*
b. increase in the real interest rate, which in turn reduces investment and real GDP.
c. increase in real output, which causes the interest rate to rise and, in turn, reduces investment
and real GDP.
d. decrease in real output, which causes the real interest rate to rise.
157. An unanticipated increase in the money supply will initially exert its primary impact on
*
a. output and employment rather than on prices.
b. prices; output and employment will be largely unaffected.
c. interest rates; rising interest rates will stimulate additional saving.
d. prices if the economy operates at an output level below its long-run supply constraint.
158. If decision makers fully anticipate the effects of a shift to a more expansionary monetary policy, the
policy will
a. decrease the real rate of interest.
b. increase real GDP in the short run.
*
c. increase prices (or the inflation rate) and leave real output unchanged.
d. do all of the above.
159. Which of the following is true?
a. An unanticipated shift to a more expansionary monetary policy will temporarily stimulate
output and employment.
b. Persistent growth of the money supply at a rapid rate will cause inflation.
*
c. Both a and b are true.
d. None of the above are true.
160. In the short run, an unanticipated increase in the money supply will
a. increase interest rates and shift the aggregate demand curve to the left.
b. increase interest rates and shift the aggregate demand curve to the right.
c. lower interest rates and shift the aggregate demand curve to the left.
*
d. lower interest rates and shift the aggregate demand curve to the right.
161. Suppose the economy is experiencing full employment. An unanticipated increase in the money
supply will
*
a. raise real GDP and the price level in the short run, but in the long run will cause no change in
real GDP and only a higher price level.
b. lower real GDP and the price level in the short run, but in the long run will cause no change in
real GDP and only a lower price level.
c. cause no change in real GDP in either the short run or long run but will increase the price level.
d. cause the price level to rise in the short run but will increase real GDP in the long run.
162. In the equation of exchange, V stands for
*
a. velocity, or the annual rate at which money changes hands in the purchase of final products.
b. the investment component of aggregate demand.
c. the amount of money in circulation.
d. a constant equal to 3.1416, discovered by classical economists.
163. The demand curve for money
a. would shift if the interest rate changed.
b. shifts with an increase in the reserve requirement.
*
c. shows the relationship between the quantity of money demanded and the interest rate.
d. is a relationship between the quantity of investment demanded and the interest rate.

164. If velocity was constant, real GDP was growing at 5 percent, and the money supply was allowed to
grow at 3 percent, inflation would be
a. 8 percent.
b. 2 percent.
*
c. 2 percent.
d. 4 percent.
165. Classical economists, who adhered to the quantity theory of money, believed that an increase in the
money supply would cause
a. a proportional change in velocity.
b. a proportional change in real GDP.
*
c. a proportional change in prices.
d. no effect on velocity, prices, or real GDP.
166. Inept government monetary policy is the major source of economic instability. Monetary expansion
has been the source of every major inflation. Every major recession was perpetuated by monetary
contraction. We would have less instability if we simply required the monetary authorities to
stabilize the growth rate of the money supply. This quote is indicative of the views of
a. the classical economists.
b. both Keynesians and monetarists.
*
c. the monetarists.
d. the Keynesians.
167. Under conditions of very high inflation but full employment, a new chairperson is appointed to the
Federal Reserve. To bring the rate of inflation down, he decides to cut the growth rate of the money
supply substantially.
a. If the policy is announced and is fully anticipated, it will bring the inflation down without
affecting real GDP.
b. If the policy is unanticipated, it will cause the economy to go through a short-run recession.
c. He has followed the wrong policy; the money supply growth should have been increased to
lower the inflation rate.
*
d. Both a and b are correct.

Use the figure below to answer the following questions.

Figure 8

168. In Figure 8, AD1 and SRAS1 indicate the initial

conditions in an economy, with the current level of
output, Y2, being the full-employment level, and the
current price level is P1. If the Fed unexpectedly
increases the money supply, the short-run impact of this
policy will be a movement to
a. P1 and Y2.
b. P2 and Y1.
*
c. P2 and Y3.
d. P3 and Y2.

169. Continuing with the change in question 168, in the long run in Figure 8, the impact of the
unanticipated expansionary policy will be a movement to
a. P1 and Y2.
b. P2 and Y1.
c. P2 and Y3.
*
d. P3 and Y2.
170. Return to the original initial conditions at AD1 and SRAS1, shown by output of Y2 and a price level of
P1 in Figure 8. Suppose the increase in the money supply had instead been fully anticipated. The shortrun impact of this policy will be a movement to
a. P1 and Y2.
b. P2 and Y1.
c. P2 and Y3.
*
d. P3 and Y2.
171. Continuing with the change in question 170, in the long run in Figure 8, the impact of the
anticipated expansionary policy will be a movement to
a. P1 and Y2.
b. P2 and Y1.
c. P2 and Y3.
*
d. P3 and Y2.
172. Based upon your answers to the previous questions, which of the following is a true statement?
a. Expansionary monetary policy has the same effect in the long run regardless of whether it is
originally anticipated or unanticipated.
b. Expansionary monetary policy increases real output only when it is unanticipated, and the
increase is only in the short run.
c. The primary long-run impact of expansionary monetary policy is a higher price level (or
inflation).
*
d. All of the above are true.

Chapter 14
124. The strategy of using discretionary monetary and fiscal policy to counteract economic fluctuations
is called a(n)
a. nonactivist strategy.
b. monetarist strategy.
*
c. activist strategy.
d. rational expectations strategy.
125. A typical activist policy during a recession would be to
a. increase the rate of growth of the money supply.
b. decrease tax rates.
c. increase government spending.
*
d. do all of the above.
126. A typical nonactivist policy during a recession would be to
a. increase the rate of growth of the money supply.
b. decrease tax rates.
c. increase government spending.
*
d. do none of the above.

127. The index of leading indicators is

a. an alphabetical listing of all the most popular indicators in the economy for a given month.
*
b. a composite index of indicators that provides information on the future direction of the
economy.
c. an alphabetical listing of the most important indicators of the current economic well-being of
the U.S. economy.
d. a composite index of the most important indicators of the current economic well-being of the
U.S. economy.
128. Which of the following did not contribute to the severity of the Great Depression?
a. a sharp reduction in the money supply during the early 1930s
b. a large tax increase (to balance the budget) in the early 1930s
c. substantial increases in the tariff rates on imported goods
*
d. All of the above were contributing factors to the severity of the Great Depression.
129. The Phillips curve depicts the relationship between
a. the federal debt and unemployment.
b. wage rates and aggregate demand.
c. the equilibrium level of income and the employment rate.
*
d. inflation and unemployment.
130. Which of the following is not one of the modern consensus views about economic policy?
a. The primary focus of monetary policy in the long run should be price stability.
b. Wide swings in both monetary and fiscal policy should be avoided.
*
c. Discretionary fiscal policy is an effective stabilization tool, particularly in countries like the
United States.
d. Policy is unable to permanently reduce unemployment below the natural rate or to stimulate
real GDP beyond the full-employment level in the long run.
131. Analysis of the Great Depression indicates that
a. even though monetary and fiscal policies were highly expansionary, they were unable to offset
the economic plunge.
b. even though monetary policy was expansionary, restrictive fiscal policy dominated during the
1930s.
c. a reduction in tax rates could not prevent the economic downturn from spiraling into a
depression.
*
d. the depth of the economic plunge, if not its onset, was the result of perverse monetary and
fiscal policies.
132. During the 1960s, most economists believed macropolicy
*
a. that caused inflation would permanently reduce unemployment.
b. that caused inflation would permanently increase unemployment.
c. could not be utilized to reduce unemployment.
d. did not affect inflation.
133. The modern view of the Phillips curve indicates that expansionary macroeconomic policy
a. will reduce the unemployment rate if policy makers are willing to accept the required rate of
inflation.
*
b. will reduce the unemployment rate only when people underestimate the inflationary effects of
the expansionary policy.
c. will reduce the unemployment rate only when people overestimate the inflationary effects of
the expansionary policy.
d. will reduce the unemployment rate if people accurately anticipate the inflationary effects of the
expansionary policy.

134. The interval between the recognition of a need for a policy change and when the policy change is
instituted is called the
a. recognition lag.
b. impact lag.
c. policy lag.
*
d. administrative lag.
135. Which of the following is true?
a. When the inflation rate is steadywhen it is neither rising nor fallingthe actual rate of
unemployment will equal the economys natural rate of unemployment.
b. When the inflation rate is higher than was anticipated, unemployment will exceed the natural
rate.
c. Demand stimulus policies will lead to inflation without permanently reducing the
unemployment rate.
*
d. Both a and c are true; b is false.
136. Use the table below to choose the correct answer.
Time period Actual inflation
1
4%
2
4%
3
6%
4
8%

According to the adaptive expectations hypothesis, at the beginning of period 3, decision makers
would expect inflation during period 3 to be
a. 4 percent.
b. 5 percent.
c. 6 percent.
d. 8 percent.

137. The theory according to which individuals weigh all available evidence when they formulate their
expectations about economic events (including information concerning the probable effects of
current and future economic policy) is called
a. the adaptive expectations hypothesis.
b. the permanent income theory.
*
c. the rational expectations hypothesis.
d. Laffer curve analysis.
138. The rational expectations hypothesis implies that discretionary macropolicy may be
*
a. relatively ineffective, even in the short run.
b. relatively effective in the short run but ineffective in the long run.
c. effective both in the short run and long run.
d. effective in the long run because decision makers will continually make systematic, predictable
errors.
139. Under adaptive expectations, which of the following will likely be an initial effect of an
unanticipated shift to a more restrictive macroeconomic policy?
*
a. a short-run decrease in output and a long-run decrease in inflation
b. no change in output even in the short run, only a permanent decrease in inflation
c. a short-run decrease in inflation and a long-run decrease in output
d. lower inflation and lower output in the long run

140. Under rational expectations, which of the following will likely be an initial effect of an
unanticipated shift to a more restrictive macroeconomic policy?
a. a short-run decrease in output and a long-run decrease in inflation
*
b. no change in output even in the short run, only a permanent decrease in inflation
c. a short-run decrease in inflation and a long-run decrease in output
d. lower inflation and lower output in the long run
141. When persons overestimate inflation (when actual inflation is lower than was expected), actual
unemployment will
*
a. exceed the natural rate of unemployment.
b. equal the natural rate of unemployment.
c. fall below the natural rate of unemployment.
d. decrease if the government is running a budget deficit and increase if a budget surplus is
present.
Use the Modern Expectational Phillips curve diagram in the exhibit to answer the next two questions.

142. According to the modern expectational Phillips curve, unemployment will temporarily be above the
natural rate of unemployment when
a. any inflation is present.
*
b. people expected inflation to be higher than what actually occurred.
c. people expected inflation to be lower than what actually occurred.
d. people correctly anticipated the inflation rate.
143. According to the modern expectational Phillips curve, actual unemployment will generally fall
below the natural rate of unemployment if
a. inflation falls to zero.
*
b. inflation exceeds what was anticipated by decision makers.
c. inflation is less than anticipated by decision makers.
d. people fully anticipate the inflationary side effects of expansionary macroeconomic policies.

144. According to the adaptive expectations hypothesis,

a. people will adapt to whatever income they are earning.
b. the more people save, the less total savings will be available to the economy.
*
c. the anticipated rate of inflation is based on the actual rates of inflation experienced during the
recent past.
d. the expected rate of inflation is adapted to macropolicy changes.
145. An individual who had rational expectations would be most likely to
a. ignore information about all current policies of both the government and the Fed.
b. always disagree with the expectations of someone who believed in adaptive expectations.
*
c. use all pertinent information when formulating views about the future.
d. never anticipate stable prices because monetary authorities continually expand the supply of
money rapidly.
Use the exhibit to answer the following question.

146. If the economy were currently operating at point A in the exhibit and expansionary policy were
enacted that would shift AD1 to AD2,
a. if people have adaptive expectations, the economy would move to point B in the short run.
b. if people have rational expectations, the economy would move to point C in the short run.
c. in the long run, the economy would move to point C regardless of how expectations are formed.
*
d. all of the above are true.