Question 1

Which of the following best explains the 'wealth effect' as it relates to the aggregate demand curve?

Accepted Answer

A higher price level decreases the real value of household wealth, leading to lower consumption.

Question 2

Suppose the Federal Reserve wants to decrease the money supply. Which of the following actions would achieve this goal?

Accepted Answer

The Fed sells U.S. Treasury securities in the open market.

Question 3

If the required reserve ratio ($$RR) is 20$$%, what is the simple deposit multiplier?

Accepted Answer

$$\frac{1}{0.2} = 5$$

Question 4

Which of the following would cause a leftward shift of the short-run aggregate supply (SRAS) curve?

Accepted Answer

A sudden increase in the price of oil due to a geopolitical conflict.

Question 5

According to the quantity theory of money, if the money supply grows at 6% per year, real output grows at 2% per year, and velocity is constant, what is the inflation rate?

Accepted Answer

$$6\% - 2\% = 4\%$$

Question 6

Which of the following is NOT a function of money?

Accepted Answer

Source of economic growth

Question 7

A recession occurs when aggregate demand shifts left. In the long run, what typically happens to the price level and output?

Accepted Answer

The price level falls and output returns to potential GDP.

Question 8

Which of the following best describes fiat money?

Accepted Answer

Money authorized by a central bank that is not backed by a physical commodity.

Question 9

If the Federal Reserve lowers the discount rate, what is the most likely short-term effect on the money supply?

Accepted Answer

The money supply increases because banks are encouraged to borrow more and make more loans.

Question 10

Which of the following is a primary reason why the simple deposit multiplier overstates the actual increase in the money supply from new reserves?

Accepted Answer

The public holds some cash rather than depositing all funds in banks.

Question 11

Suppose the U.S. experiences stagflation. Which of the following best describes the likely cause and effect?

Accepted Answer

A leftward shift in short-run aggregate supply causing higher unemployment and higher inflation.

Question 12

Which of the following is included in M1, the narrow definition of the money supply?

Accepted Answer

Currency in circulation and checking account deposits

Question 13

A bank receives a new deposit of $1,000. If the required reserve ratio is 10%, what is the maximum amount this deposit can increase the money supply through the banking system?

Accepted Answer

$$10,000$$

Question 14

Which of the following best describes the role of the Federal Open Market Committee (FOMC)?

Accepted Answer

It manages the buying and selling of Treasury securities to influence the money supply.

Question 15

If the velocity of money ($$V) is 5$$, the money supply ($$M) is$$ $$2$$ trillion, and nominal GDP ($$P 	imes Y) is$$ $$10$$ trillion, what is the value of $$V$$ according to the quantity equation?

Accepted Answer

$$V = \frac{P 	imes Y}{M} = \frac{10}{2} = 5$$

Question 16

Which of the following is a likely consequence if banks lose reserves?

Accepted Answer

Banks reduce their loans, contracting the money supply.

Question 17

Which of the following is an example of a supply shock?

Accepted Answer

A hurricane that destroys oil refineries, raising production costs.

Question 18

Which of the following statements about the long-run aggregate supply (LRAS) curve is correct?

Accepted Answer

The LRAS curve is vertical because output is determined by resources, technology, and capital stock.

Question 19

Which of the following best explains why fiat money is accepted as a medium of exchange?

Accepted Answer

Households and firms have confidence that it will retain its value.

Question 20

If the growth rate of the money supply is 3%, the growth rate of real output is 5%, and velocity is constant, what will happen to the price level?

Accepted Answer

The price level will fall at a rate of 2%.

Aggregate Demand, Aggregate Supply, and Money: Study Notes for Principles of Macroeconomics

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