Q: If the velocity of money ($$V) is $$constant, real GDP ($$Y) is $$growing at 2% per year, and the money supply ($$M) is $$growing at 5% per year, what is the expected inflation rate according to the Quantity Theory of Money?

$$\text{Inflation rate} = 5\% - 2\% = 3\%$$

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 of the Short-Run Aggregate Supply (SRAS) curve to the left?

Accepted Answer

An increase in the price of oil, a key input.

Question 4

In the long run, an increase in the money supply will most likely lead to which of the following outcomes, according to the Quantity Theory of Money?

Accepted Answer

A proportional increase in the price level (inflation).

Question 5

Which of the following is NOT a function of money?

Accepted Answer

Source of economic growth

Question 6

If the required reserve ratio is 10%, what is the maximum possible value of the simple money multiplier?

Accepted Answer

$$m = \frac{1}{0.10} = 10$$

Question 7

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 8

A bank receives a new deposit of $1,000. If the reserve requirement is 20%, what is the maximum amount this bank can lend out from this deposit?

Accepted Answer

$$800$$

Question 9

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

Accepted Answer

Savings deposits

Question 10

Suppose the Federal Reserve wants to implement an expansionary monetary policy. Which of the following actions would it most likely take?

Accepted Answer

Lower the discount rate.

Question 11

If the Federal Reserve conducts open market purchases, what is the expected effect on the federal funds rate and the money supply?

Accepted Answer

Federal funds rate falls; money supply increases.

Question 12

According to the Taylor Rule, if the inflation rate is above the target and real GDP is above potential GDP, what should the Federal Reserve do?

Accepted Answer

Raise the federal funds target rate.

Question 13

Which of the following best describes the process of money creation in a fractional reserve banking system?

Accepted Answer

Banks lend out a portion of deposits, which are redeposited and re-lent, multiplying the money supply.

Question 14

If the velocity of money ($$V) is $$constant, real GDP ($$Y) is $$growing at 2% per year, and the money supply ($$M) is $$growing at 5% per year, what is the expected inflation rate according to the Quantity Theory of Money?

Accepted Answer

$$	ext{Inflation rate} = 5\% - 2\% = 3\%$$

Question 15

Which of the following would cause a movement along the Aggregate Demand (AD) curve rather than a shift of the curve?

Accepted Answer

A change in the price level.

Question 16

Suppose the economy is initially at long-run equilibrium. If there is a sudden negative supply shock (such as a sharp increase in oil prices), what is the most likely short-run effect?

Accepted Answer

The price level rises and real GDP falls.

Question 17

Which of the following is a goal of monetary policy?

Accepted Answer

Promoting maximum employment

Question 18

If the Federal Reserve wants to decrease the money supply, which of the following tools could it use?

Accepted Answer

Increase the discount rate

Question 19

Which of the following best describes the difference between the static and dynamic AD/AS models?

Accepted Answer

The static model assumes constant potential GDP, while the dynamic model incorporates growth in potential GDP and ongoing inflation.

Question 20

Which of the following would NOT be considered part of the Federal Reserve's monetary policy tools?

Accepted Answer

Changing the federal income tax rate

Macroeconomics: Aggregate Demand & Supply, Money, and Monetary Policy – Study Guide

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