Question 1

Which of the following best explains why the Aggregate Demand (AD) curve is downward sloping?

Accepted Answer

Because as the price level rises, the real value of household wealth falls, interest rates rise, and net exports decrease.

Question 2

Suppose the government increases its spending on infrastructure. Which of the following best describes the effect on the Aggregate Demand (AD) curve?

Accepted Answer

The AD curve will shift to the right.

Question 3

Which of the following would cause a shift in the Short-Run Aggregate Supply (SRAS) curve but NOT the Long-Run Aggregate Supply (LRAS) curve?

Accepted Answer

A temporary increase in the price of oil.

Question 4

In the static AD-AS model, if the economy is initially at long-run equilibrium and there is a sudden increase in consumer confidence, what is the most likely short-run outcome?

Accepted Answer

The AD curve shifts right, output rises above potential, and the price level increases.

Question 5

Which of the following is NOT a function of money?

Accepted Answer

Source of government revenue

Question 6

Which of the following is included in the M1 measure of the money supply?

Accepted Answer

Currency in circulation

Question 7

A bank receives a new deposit of $1,000. If the required reserve ratio is 10%, what is the maximum possible increase in the money supply from this deposit, assuming no currency drain?

Accepted Answer

$9,000

Question 8

Which of the following best describes the difference between commodity money and fiat money?

Accepted Answer

Commodity money has intrinsic value, while fiat money is valuable only by government decree.

Question 9

If the Federal Reserve wants to decrease the money supply, which of the following actions should it take?

Accepted Answer

Sell government securities in the open market.

Question 10

According to the Quantity Theory of Money, if the velocity of money ($$V) $$and real output ($$Y) $$are constant, what happens to the price level ($$P) if $$the money supply ($$M) $$doubles?

Accepted Answer

The price level doubles.

Question 11

Which of the following is a primary goal of monetary policy?

Accepted Answer

Achieving price stability

Question 12

Suppose the Federal Open Market Committee (FOMC) decides to implement expansionary monetary policy. What is the most likely immediate effect on the federal funds rate?

Accepted Answer

The federal funds rate will decrease.

Question 13

If the money demand curve shifts to the right, what is the most likely effect on the equilibrium interest rate, holding the money supply constant?

Accepted Answer

The equilibrium interest rate will increase.

Question 14

Which of the following best describes the Taylor Rule for setting the federal funds target rate?

Accepted Answer

It sets the target rate based on the inflation rate, output gap, and equilibrium real interest rate.

Question 15

Suppose the economy is experiencing high inflation due to persistent increases in aggregate demand. Which monetary policy action is most appropriate?

Accepted Answer

The Fed should sell government securities.

Question 16

If the required reserve ratio is 20%, what is the value of the simple money multiplier?

Accepted Answer

$$5$$

Question 17

Which of the following would NOT cause a shift in the Aggregate Demand (AD) curve?

Accepted Answer

A change in the price level

Question 18

In the dynamic AD-AS model, which of the following is a likely cause of inflation?

Accepted Answer

Aggregate demand increases faster than aggregate supply.

Question 19

A country has the following data: $$M = 500$$, $$V = 4$$, $$P = 2. $$According to the Quantity Theory of Money, what is the value of real output $$Y$$?

Accepted Answer

$$Y = 2,000$$

Question 20

If banks hold excess reserves instead of lending out all excess reserves, what happens to the actual money multiplier compared to the simple money multiplier formula $$\frac{1}{RR}$$?

Accepted Answer

The actual money multiplier will be smaller.

Aggregate Demand, Money, and Monetary Policy: Study Guide for ECON 2013 Exam 3

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