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 net exports decrease due to a stronger domestic currency.

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 wages due to stronger labor unions.

Question 4

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

Accepted Answer

SRAS shifts left, output falls, and price level rises.

Question 5

Which of the following is NOT a function of money?

Accepted Answer

Source of production

Question 6

Which of the following is an example of commodity money?

Accepted Answer

Gold coins used for transactions

Question 7

If the required reserve ratio is 10%, what is the simple money multiplier?

Accepted Answer

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

Question 8

Suppose a bank receives a new deposit of $1,000 and the reserve requirement is 20%. What is the maximum amount of new money that can be created in the banking system from this deposit?

Accepted Answer

$$\5$$,000$

Question 9

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

Accepted Answer

Traveler's checks

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 NOT a tool of monetary policy used by the Federal Reserve?

Accepted Answer

Changing the federal income tax rate

Question 12

If the Federal Reserve wants to implement an expansionary monetary policy, which of the following actions would it most likely take?

Accepted Answer

Buy government securities in the open market

Question 13

Suppose the Federal Open Market Committee (FOMC) decides to lower the target for the federal funds rate. What is the most direct effect of this action?

Accepted Answer

Banks are encouraged to lend more, increasing the money supply.

Question 14

If the economy is experiencing high inflation, which monetary policy action is most appropriate?

Accepted Answer

The Fed should sell government bonds.

Question 15

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 gap and the output gap.

Question 16

Suppose the economy is in a recession and the Federal Reserve increases the money supply. Using the static AD-AS model, what is the expected short-run effect?

Accepted Answer

AD shifts right, output increases, and unemployment falls.

Question 17

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 18

If the velocity of money ($$V) is 5$$, the money supply ($$M) is$$ $$\2$ trillion, and real GDP (Y$) is $$\$$8$$ trillion, what is the price level ($$P$$)? Use the equation $$MV = PY.$$

Accepted Answer

$$P = \frac{MV}{Y} = \frac{5 	imes 2}{8} = 1.25$$

Question 19

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

Accepted Answer

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

Question 20

A country experiences a rapid increase in the money supply while real output remains constant. According to the Quantity Theory of Money, what is the most likely long-run outcome?

Accepted Answer

Sustained inflation

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

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