Question 1

Suppose the Federal Reserve wants to increase the money supply. Which of the following actions would it most likely take?

Accepted Answer

Buy U.S. Treasury securities in the open market

Question 2

Which of the following best describes 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 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 shift to the right in the short-run aggregate supply (SRAS) curve?

Accepted Answer

A decrease in the price of an important natural resource

Question 5

According to the quantity theory of money, if the money supply grows at 8% per year, real GDP grows at 3% per year, and velocity is constant, what is the inflation rate?

Accepted Answer

5%

Question 6

Which of the following is NOT a function of money?

Accepted Answer

Source of production

Question 7

A negative supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the short run?

Accepted Answer

A leftward shift of the short-run aggregate supply curve

Question 8

Which of the following best explains why fiat money has value?

Accepted Answer

It is accepted by people because they have confidence it will be accepted by others.

Question 9

If the Federal Reserve lowers the discount rate, what is the most likely immediate effect on the banking system?

Accepted Answer

Banks will be more willing to borrow from the Fed, increasing their reserves.

Question 10

Suppose the U.S. experiences a recession due to a leftward shift in aggregate demand. According to the AD-AS model, what is the likely long-run adjustment if no policy action is taken?

Accepted Answer

SRAS will shift right, returning real GDP to potential but at a lower price level.

Question 11

Which of the following is included in M1 but NOT in M2?

Accepted Answer

There is nothing included in M1 that is not also included in M2.

Question 12

A country experiences hyperinflation. According to the quantity theory of money, which of the following is the most likely cause?

Accepted Answer

The money supply is growing much faster than real GDP.

Question 13

Which of the following would NOT shift the aggregate demand curve?

Accepted Answer

A change in the price level

Question 14

If banks decide to hold more excess reserves and make fewer loans, what is the likely effect on the money supply?

Accepted Answer

The money supply will decrease or grow more slowly than predicted by the simple deposit multiplier.

Question 15

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

Accepted Answer

It is responsible for open market operations and managing the money supply.

Question 16

Suppose the velocity of money ($$V) is 4$$, the money supply ($$M) is$$ $$2$$ trillion, and real GDP ($$Y) is$$ $$8$$ trillion. What is the price level ($$P$$)?

Accepted Answer

$$P = \frac{M 	imes V}{Y} = \frac{2 	imes 4}{8} = 1$$

Question 17

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

Accepted Answer

A major hurricane that disrupts oil production

Question 18

If the U.S. dollar appreciates relative to other currencies, what is the likely effect on U.S. net exports and aggregate demand?

Accepted Answer

Net exports will decrease, shifting aggregate demand left.

Question 19

Which of the following best describes the process of securitization?

Accepted Answer

The process of converting loans or other financial assets into securities that can be sold in financial markets.

Question 20

In the dynamic aggregate demand and aggregate supply model, what is the usual cause of inflation over time?

Accepted Answer

Aggregate demand increases faster than long-run aggregate supply.

Aggregate Demand, Aggregate Supply, and the Monetary System: Study Notes for Macroeconomics

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