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 the expected price of inputs, such as oil.

Question 4

In the long run, an increase in the money supply will most likely lead to which of the following, 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 government revenue

Question 6

If the required reserve ratio is 10%, and a bank receives a new deposit of $1,000, what is the maximum possible increase in the money supply, assuming no excess reserves and no currency drain? Use the money multiplier formula.

Accepted Answer

$9,000

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

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 9

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

Accepted Answer

Savings deposits

Question 10

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 6% per year, what is the expected inflation rate according to the Quantity Theory of Money? Use the equation $$M 	imes V = P 	imes Y.$$

Accepted Answer

4%

Question 11

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

Accepted Answer

Achieving price stability

Question 12

The Federal Open Market Committee (FOMC) is responsible for which of the following?

Accepted Answer

Conducting open market operations to influence the money supply

Question 13

If the Federal Reserve purchases $$500$$ million in government securities from the public, and the reserve requirement is $$20\%$$, what is the maximum possible increase in the money supply? Use the money multiplier formula $$	ext{Money Multiplier} = \frac{1}{	ext{Reserve Ratio}}.$$

Accepted Answer

$$2.5$$ billion

Question 14

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 15

Suppose the economy is initially at long-run equilibrium. If there is a sudden increase in oil prices, what is the most likely short-run effect on output and the price level?

Accepted Answer

Output falls and the price level rises.

Question 16

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, the equilibrium real federal funds rate, and the output gap.

Question 17

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

Accepted Answer

Sell government securities in the open market.

Question 18

Which of the following is a characteristic of the long-run macroeconomic equilibrium?

Accepted Answer

The economy is operating at potential GDP.

Question 19

In the static AD/AS model, which of the following would most likely cause demand-pull inflation?

Accepted Answer

A rightward shift of the AD curve.

Question 20

A bank has $$\200$$,000$$ in deposits and a required reserve ratio of 10$$\%$. What is the minimum amount of reserves the bank must hold?

Accepted Answer

$$\20$$,000$

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

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