Question 1

According to the modern view of monetary policy, what is the primary way the Federal Reserve increases the money supply?

Accepted Answer

By buying government bonds in the open market

Question 2

Which of the following best describes the relationship between the demand for money and the interest rate?

Accepted Answer

The demand for money is inversely related to the interest rate

Question 3

Suppose the Federal Reserve unexpectedly increases the money supply. In the short run, what is the most likely effect on output and the price level?

Accepted Answer

Output increases and the price level rises

Question 4

If the money supply is increased from $$M_1 to$$ $$M_2$$ while the demand for money remains unchanged, what happens to the equilibrium interest rate?

Accepted Answer

It falls

Question 5

Which equation correctly expresses the relationship between the nominal interest rate ($$i$$), the real interest rate ($$r$$), and the expected inflation rate ($$\pi^e$$)?

Accepted Answer

$$i = r + \pi^e$$

Question 6

In the long run, what is the primary effect of a sustained rapid increase in the money supply?

Accepted Answer

Sustained inflation

Question 7

Which of the following best explains why the supply of money is depicted as a vertical line in the money market?

Accepted Answer

Because the supply of money is fixed by the central bank and independent of the interest rate

Question 8

If the Federal Reserve implements a restrictive monetary policy during a period of strong aggregate demand, what is the most likely outcome?

Accepted Answer

It will limit or prevent an inflationary boom

Question 9

Which of the following is a likely consequence of an unanticipated decrease in aggregate demand when the economy is at full employment?

Accepted Answer

A recession

Question 10

Why is the proper timing of monetary policy changes difficult for policymakers?

Accepted Answer

Because there are long and variable time lags between policy changes and their impact on the economy

Question 11

Suppose the velocity of money ($$V) $$falls while the money supply ($$M) is $$held constant. According to the equation $$MV = PQ$$, what happens to nominal GDP ($$PQ$$)?

Accepted Answer

Nominal GDP falls

Question 12

Which of the following demographic changes would most likely lead to lower real interest rates in high-income countries?

Accepted Answer

An increase in the proportion of the population aged 50 to 75

Question 13

If the Federal Reserve buys bonds in the open market, which of the following is the most direct effect?

Accepted Answer

Bank reserves increase

Question 14

Which of the following best describes the long-run effect of an unanticipated expansionary monetary policy when the economy is already at full employment?

Accepted Answer

A temporary increase in output followed by higher prices

Question 15

If the real interest rate is 4% and the expected inflation rate is 5%, what is the nominal interest rate?

Accepted Answer

$$9\%$$

Question 16

Which of the following statements is most consistent with Milton Friedman's view on monetary policy?

Accepted Answer

Major inflations are produced by monetary expansion

Question 17

During the period 2008–2020, real interest rates in the United States were persistently low. Which of the following is NOT a likely explanation for this phenomenon?

Accepted Answer

A decrease in the money supply by the Federal Reserve

Question 18

Which of the following is a likely effect of a decrease in the velocity of money, holding the money supply constant?

Accepted Answer

It blunts the impact of expansionary monetary policy

Question 19

If policymakers frequently shift monetary policy in response to short-term economic changes, what is the most likely result?

Accepted Answer

Greater economic instability

Modern Macroeconomics and Monetary Policy: Study Notes

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