Q: If the nominal interest rate is 5% and the price of a one-year $$1,000 bond is 950$$, what is the yield on the bond?

$$\frac{1,000 - 950}{950} \times 100 = 5.26\%$$

Question 1

Which of the following best describes the primary effect of an expansionary monetary policy on the aggregate demand curve?

Accepted Answer

It shifts the aggregate demand curve to the right.

Question 2

Suppose the Federal Reserve increases the money supply. According to the money market model, what happens to the nominal interest rate and why?

Accepted Answer

The nominal interest rate falls because the supply of money increases.

Question 3

If the government increases its spending while holding taxes and the money supply constant, what is the likely short-run effect on private investment, according to the crowding-out effect?

Accepted Answer

Private investment decreases due to higher interest rates.

Question 4

Which equation represents the equilibrium condition for aggregate expenditure and output?

Accepted Answer

$$C + I + G = Y$$

Question 5

A decrease in the money supply will most likely have which of the following effects in the short run?

Accepted Answer

Increase the interest rate and decrease aggregate output.

Question 6

Which of the following factors does NOT directly shift the money demand curve?

Accepted Answer

The nominal interest rate

Question 7

If the price of a bond falls from $$950 to 900$$, what happens to its yield (interest rate), assuming a face value of $1,000?

Accepted Answer

The yield increases.

Question 8

Which of the following best explains why the aggregate demand curve is downward sloping?

Accepted Answer

Because as the price level rises, the demand for money increases, raising interest rates and reducing aggregate output.

Question 9

Which of the following policy combinations would most likely result in a rightward shift of the aggregate demand curve?

Accepted Answer

Increase in government spending and increase in money supply

Question 10

Suppose the Federal Reserve wants to fight inflation. Which of the following actions is it most likely to take?

Accepted Answer

Raise the federal funds rate target

Question 11

If the nominal interest rate is 5% and the price of a one-year $$1,000 bond is 950$$, what is the yield on the bond?

Accepted Answer

$$\frac{1,000 - 950}{950} 	imes 100 = 5.26\%$$

Question 12

Which of the following is an example of an automatic stabilizer in fiscal policy?

Accepted Answer

An increase in unemployment benefits during a recession

Question 13

What is the likely effect on the money demand curve if real GDP increases, ceteris paribus?

Accepted Answer

The money demand curve shifts upward.

Question 14

Which of the following best describes the crowding-out effect?

Accepted Answer

An increase in government spending causes reductions in private investment spending.

Question 15

If the Federal Reserve conducts an open market purchase of government securities, what is the expected effect on the reserves in the banking system and the federal funds rate?

Accepted Answer

Reserves increase and the federal funds rate falls.

Question 16

Which of the following scenarios best illustrates the international substitution effect as a reason for the downward slope of the aggregate demand curve?

Accepted Answer

A higher domestic price level increases demand for foreign goods, reducing net exports.

Question 17

Which of the following is true about the relationship between bond prices and interest rates?

Accepted Answer

Bond prices and interest rates move in opposite directions.

Question 18

If the Federal Reserve wants to stimulate the economy during a recession, which of the following actions is it most likely to take?

Accepted Answer

Buy government bonds from the public.

Question 19

Which of the following best describes the effect of financial innovation on the demand for money?

Accepted Answer

Financial innovation can either increase or decrease the demand for money, depending on the type of innovation.

chapter 11 Midterm 2

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