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, interest rates rise, and net exports decrease.

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 future price level.

Question 4

In the long run, if the economy is producing at a level of output above potential GDP, what is most likely to happen according to the AD-AS model?

Accepted Answer

SRAS will shift to the left, causing output to fall back to potential GDP and the price level to rise.

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 M2 but NOT in M1?

Accepted Answer

Savings deposits

Question 7

A bank has deposits of $$100,000 and a required reserve ratio of 10%. What is the maximum amount of new loans the bank can make if it currently holds 15$$,000 in reserves?

Accepted Answer

$5,000

Question 8

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

Accepted Answer

$$\frac{1}{0.2} = 5$$

Question 9

Which of the following best describes fiat money?

Accepted Answer

Money that has value because the government says it does, and it is not backed by a commodity.

Question 10

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

Accepted Answer

The price level increases by 10%.

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 decrease the money supply, which of the following actions should it take?

Accepted Answer

Sell government securities in the open market.

Question 13

Suppose the Federal Open Market Committee (FOMC) decides to implement expansionary monetary policy. What is the most likely immediate effect on the federal funds rate?

Accepted Answer

The federal funds rate will decrease.

Question 14

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 15

If the economy is experiencing high unemployment and low inflation, which monetary policy is most appropriate?

Accepted Answer

Expansionary monetary policy

Question 16

A central bank increases the required reserve ratio from 10% to 20%. What is the effect on the money multiplier and the money supply?

Accepted Answer

The money multiplier decreases and the money supply decreases.

Question 17

In the static AD-AS model, what is the most likely cause of demand-pull inflation?

Accepted Answer

A rightward shift of the AD curve.

Question 18

Suppose the velocity of money ($$V) is 4$$, the money supply ($$M) is$$ $$500$$ billion, and nominal GDP ($$P 	imes Y) is$$ $$2,000$$ billion. Which equation correctly represents the Quantity Theory of Money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 19

If the Federal Reserve conducts an open market purchase of government securities, what is the expected effect on the money supply and interest rates?

Accepted Answer

Money supply increases and interest rates fall.

Question 20

Which of the following scenarios best illustrates the process of money creation in a fractional reserve banking system?

Accepted Answer

A bank receives a deposit, lends out a portion, and the loaned funds are redeposited in another bank, which then lends out a portion again.

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

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