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 price of oil, a key input for many industries.

Question 4

In the static AD-AS model, what is the likely short-run effect of a negative supply shock, such as a sudden increase in oil prices?

Accepted Answer

The SRAS curve shifts left, leading to higher prices and lower output.

Question 5

Which of the following is NOT a function of money?

Accepted Answer

Means 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

$$\frac{1}{0.10}$$

Question 8

Suppose a bank receives a new deposit of $1,000 and the required reserve ratio 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 M2 but NOT in M1?

Accepted Answer

Savings deposits

Question 10

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

Accepted Answer

It conducts open market operations to influence the money supply.

Question 11

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 will double.

Question 12

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

Accepted Answer

Open market operations

Question 13

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

Accepted Answer

Buy government securities in the open market

Question 14

Suppose the economy is experiencing high inflation. According to the Taylor Rule, what should the Federal Reserve do to the federal funds target rate?

Accepted Answer

Raise the target rate to reduce inflationary pressures

Question 15

In the federal funds market, what is the immediate effect of the Federal Reserve increasing the supply of reserves?

Accepted Answer

The federal funds rate falls.

Question 16

Which of the following scenarios best illustrates the use of contractionary monetary policy?

Accepted Answer

The Fed sells government bonds to reduce inflation.

Question 17

If the money supply increases by 10% and the velocity of money and real GDP remain constant, what is the predicted percentage change in the price level according to the Quantity Theory of Money?

Accepted Answer

10%

Question 18

Suppose the economy is in long-run equilibrium. If there is a sudden increase in consumer confidence, what is the likely short-run effect on output and the price level?

Accepted Answer

Output and the price level both increase.

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 without a corresponding increase in real output. According to the Quantity Theory of Money, what is the most likely outcome?

Accepted Answer

Inflation

Aggregate Demand, Money, and Monetary Policy: Study Guide for Exam 3 (ECON 2013)

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