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, leading to lower consumption, and higher price levels make exports less competitive.

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 expected price of inputs, such as oil.

Question 4

In the long run, an increase in aggregate demand will most likely result in:

Accepted Answer

A higher price level and unchanged real GDP.

Question 5

Which of the following is NOT a function of money?

Accepted Answer

Source of production

Question 6

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

Accepted Answer

Savings deposits

Question 7

A bank has deposits of $1,000,000 and is required to keep 10% as reserves. What is the maximum amount of money the banking system can create, assuming no excess reserves and no currency drain?

Accepted Answer

$9,000,000

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

Accepted Answer

$$5$$

Question 10

According to the Quantity Theory of Money, if the money supply increases by 10% and velocity and real GDP are constant, what happens to the price level?

Accepted Answer

It increases by 10%.

Question 11

Which of the following is a tool of monetary policy used by the Federal Reserve?

Accepted Answer

Open market operations

Question 12

If the Federal Reserve wants to decrease the money supply, which action should it take?

Accepted Answer

Sell government securities in the open market

Question 13

Suppose the economy is experiencing high unemployment and low inflation. Which monetary policy is most appropriate?

Accepted Answer

Expansionary monetary policy

Question 14

The Taylor Rule for setting the federal funds target rate can be expressed as:

$$	ext{Federal Funds Target Rate} = 	ext{Current Inflation Rate} + 	ext{Equilibrium Real Fed Funds Rate} + \frac{1}{2}(	ext{Inflation Gap}) + \frac{1}{2}(	ext{Output Gap})

If $$the current inflation rate is 2%, the equilibrium real federal funds rate is 2%, the inflation gap is 1%, and the output gap is -2%, what is the target rate?

Accepted Answer

$$3.5\%$$

Question 15

Which of the following would cause a movement along the money demand curve, rather than a shift of the curve?

Accepted Answer

A change in the interest rate

Question 16

If the Federal Reserve lowers the target for the federal funds rate, what is the likely short-run effect on aggregate demand?

Accepted Answer

Aggregate demand will increase.

Question 17

In the static AD-AS model, what is the most likely result of an adverse supply shock (such as a sudden increase in oil prices) in the short run?

Accepted Answer

Higher price level and lower real GDP

Question 18

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

Accepted Answer

It determines the target for the federal funds rate and directs open market operations.

Question 19

If the velocity of money ($$V) is 4$$, the money supply ($$M) is$$ $$2$$ trillion, and nominal GDP ($$P 	imes Y) is$$ $$8$$ trillion, which equation correctly represents the Quantity Theory of Money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 20

Suppose the economy is at long-run equilibrium. If the Federal Reserve unexpectedly increases the money supply, what is the most likely short-run effect?

Accepted Answer

The price level will rise and real GDP will increase.

Macroeconomics Exam 3 Study Guide: Aggregate Demand & Supply, Money, and Monetary Policy

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