Monetary Policy of Economics MCQ
Expansionary monetary policy refers to the ________ to increase real gdp.
Government's increasing spending and lowering taxes
Federal reserve's decreasing the money supply and increasing interest rates
Federal reserve's increasing the money supply and decreasing interest rates
Government's decreasing spending and raising taxes
Answer
Correct Answer:
Government's increasing spending and lowering taxes
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If the fed buys government securities from commercial banks in the open market _____.
Commercial banks give the securities to the Fed, and the Fed increases the banks' reserves
Manipulating the size of excess reserves held by commercial banks
Discount rate, reserve ratio, open-market operations, and term auction facility
Supply of money declines when the public purchases securities from commercial banks
Answer
Correct Answer:
Commercial banks give the securities to the Fed, and the Fed increases the banks' reserves
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The money demand curve relates ______ to the ________.
The aggregate quantity of money demanded; nominal interest rate
The aggregate quantity of money demanded; aggregate demand
Aggregate demand; nominal interest rate
The aggregate quantity of money demanded; price level
Answer
Correct Answer:
The aggregate quantity of money demanded; nominal interest rate
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The m2 money multiplier is ___________ the m1 multiplier.
Substantially larger than
Substantially smaller than
Not much different than
Twice as large as
Answer
Correct Answer:
Substantially larger than
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Reserves in the banking system ______. banks ______ loans.
Increase; increases
Increase; decreases
Decrease; increases
Decrease; decreases
Answer
Correct Answer:
Increase; increases
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It is the __________________ that gives fiat money it value.
Shiny appearance
Multiple thread colors
Acceptance in transactions
None of the above
Answer
Correct Answer:
Acceptance in transactions
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Excess reserves are a bank's _____ reserves minus its _____ reserves.
Desired; desired
Actual; desired
Actual; actual
Desired; actual
Answer
Correct Answer:
Actual; desired
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Except for one point, the short run average cost must always be ________ the long run average cost.
Less than
Greater than
The same as
None of these
Answer
Correct Answer:
Greater than
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Examples of physical capital are ______. examples of financial capital are ______.
The stocks that can be purchased on the stock market and the bonds that can be purchased on the bond market; money in the bank inventories of raw materials and semifinished goods;
The tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services
The funds that firms use to buy physical capital;
The stocks that can be purchased on the stock market and the bonds that can be purchased on the bond market
The tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services; the funds that firms use to buy physical capital
Answer
Correct Answer:
The tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services; the funds that firms use to buy physical capital
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Depository institutions provide four benefits, which are ______.
Creating liquidity, lowering the cost of borrowing, paying interest on investment funds, and introducing new technology into banking
Minimizing interest rates on purchases of large ticket items, centralizing all household monetary needs in one location, introducing new technology into banking, and paying interest on investment funds
Creating liquidity, lowering the cost of borrowing, lowering the cost of monitoring borrowers, and pooling risk
Pooling risk, keeping inflation low and steady, lowering the cost of borrowing, and lowering the cost of monitoring borrowers
Answer
Correct Answer:
Creating liquidity, lowering the cost of borrowing, lowering the cost of monitoring borrowers, and pooling risk
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According to the laffer curve, _____.
Increasing marginal tax rates may reduce tax revenues
Decreasing marginal tax rates may reduce tax revenues
Increasing marginal tax rates may increase tax revenues
Decreasing marginal tax rates may increse tax revenues
Answer
Correct Answer:
Increasing marginal tax rates may reduce tax revenues
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A depository institution takes deposits from ______ and earns most of its income by _______.
Households; providing Internet banking services
Households and firms; providing Internet banking services and charging service fees
Households and firms; making loans and buying securities that earn a higher interest rate than that paid to depositors
firms; charging service fees
Answer
Correct Answer:
Households and firms; making loans and buying securities that earn a higher interest rate than that paid to depositors
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If the fed wants to raise the federal funds rate, it will ______ bonds, which ________ bond prices.
Sell; lowers
Sell bonds
Raise interest rates.
Phillips Curve
Answer
Correct Answer:
Sell; lowers
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Money is __________ when a bank makes a loan to a customer.
Created
Not affected
Destroyed
None of the above
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Covered interest arbitrage moves the market ________ equilibrium because ________.
Away from; purchasing a currency on the spot market and selling in the forward market increases the di§erential between the two
Toward; investors are now more willing to invest in risky securities
Away from; demand for the stronger currency forces up interest rates on the weaker security
Toward; purchasing a currency on the spot market and selling in the forward market narrows the di§erential between the two
Answer
Correct Answer:
Toward; purchasing a currency on the spot market and selling in the forward market narrows the di§erential between the two
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The discount rate is kept ________ the federal funds rate because the fed prefers that
Below; banks borrow reserves from each other
Below; banks borrow reserves from the Fed
Above; banks borrow reserves from each other
Above; banks borrow reserves from the Fed
Answer
Correct Answer:
Above; banks borrow reserves from each other
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In general, banks make profits by selling ________ liabilities and buying ________ assets.
Long-term; shorter-term
Short-term; longer-term
Illiquid; liquid
Risky; risk-free
Answer
Correct Answer:
Short-term; longer-term
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The federal reserve generally uses ___________________ to implement monetary policy.
Open market operations
Contractionary monetary policy
Out of the loanable funds ma
Policy related to money supplyrket
Answer
Correct Answer:
Open market operations
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Bank deposits ______ and the quantity of money ______.
When the People's Bank of China makes an open market purchase, bank deposits increase because loans increase.
Money includes bank deposits, so the quantity of money increases.
Excess reserves have decreased so the bank calls in loans and makes fewer loans.
When the bank calls in loans and makes fewer loans, bank deposits decrease and the quantity of money decreases.
All of the Above
Answer
Correct Answer:
All of the Above
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As interest rates rise, _____.
Fall
The sum of all private investors.
Increase.
Long-lived fixed-rate debt instruments will decline more than short-lived fixed rate debt instruments
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A currency drain ______ bank deposits and _______ bank reserves.
Increases; decreases
Decreases; increases
Decreases; decreases
Increases; increases
Answer
Correct Answer:
Increases; decreases
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The two main responsibilities of the federal reserve system are to ______ and to ______.
Providing information and risk-sharing services
Currency, checking deposits, and travelers' checks
Reduce the cost of gathering information about borrowers
Conduct monetary policy; oversee financial markets
Answer
Correct Answer:
Conduct monetary policy; oversee financial markets
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Reserves consist of the currency in the _____ plus the balance on its _____ account at _____.
Interest rate; interbank
Bank's vaults;reserve;a federal reserve bank
Both
None of these
Answer
Correct Answer:
Bank's vaults;reserve;a federal reserve bank
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To _____ the money supply, the federal reserve could _____.
Decrease; lower the federal funds rate
Increase; conduct open-market sales
Increase; lower the discount rate
Decrease; lower the reserve requirements - wrong
Answer
Correct Answer:
Increase; lower the discount rate
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The rate of interest banks charge on short-term loans to their best customers is the _____.
Prime rate
Federal funds rate
Discount rate
None of the above
Answer
Correct Answer:
Prime rate
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The purpose of expansionary monetary policy is to increase _____.
Real GDP
The GDP-gap
The inflation rate
Interest rates
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The federal funds rate is the _____ rate on _____ loans.
Interest, interbank
Interbank, interest
Interst, interst
Interbank, interbank
Answer
Correct Answer:
Interest, interbank
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The demand curve for federal funds is _____.
Downward-sloping
Upward-sloping
Straight-sloping
Answer
Correct Answer:
Downward-sloping
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An open market purchase ______ the monetary base. an open market sale ______ the monetary base.
Increases; decreases
Descreases; increases
Increases; increases
Descreases; decreases
Answer
Correct Answer:
Increases; decreases
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An increase in the money supply, all else held constant, usually _____.
Increases the interest rate and increases aggregate demand.
Increases the interest rate and decreases aggregate demand.
Decreases the interest rate and increases aggregate demand.
Decreases the interest rate and decreases aggregate demand
Answer
Correct Answer:
Decreases the interest rate and increases aggregate demand.
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A sale of treasury bills by the federal reserve _____ interest rates and _____ the money supply.
Raises; reduces
Reduces; raises
Raises; raises
Reduces; reduces
Answer
Correct Answer:
Raises; reduces
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Both ________ and ________ are federal reserve assets
Currency in circulation; reserves
Currency in circulation; government securities
Government securities; discount loans
Government securities; reserves
Answer
Correct Answer:
Government securities; discount loans
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Monetarists think that the fed should use _________ as a target when conducting monetary policy.
The federal funds rate
The money supply
The inflation rate
The Treasury bill rate
The unemployment rate
Answer
Correct Answer:
The money supply
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Rising prices erode the value of money as a ________ and as a ________.
Medium of exchange; store of value
Unit of barter; unit of account
Store of value; unit of barter
Store of value; unit of liquidity
Answer
Correct Answer:
Medium of exchange; store of value
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If the economy is in a recessionary gap, actual output will be _____ potential output.
Below
Above
None of above
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An increase in the time to the promised future payment ________ the present value of the payment.
Decreases
Increases
Has no effect on
Is irrelevant to
Answer
Correct Answer:
Decreases
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A higher real interest rate ______ saving and ______ consumption spending.
Increases; decreases
Decreases;increases
Increases;increases
Decreases;decreases
Answer
Correct Answer:
Increases; decreases
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A higher real interest rate ______ investment spending and ______ consumption spending.
Increases; decreases
Decreases;increases
Increases;increases
Decreases;decreases
Answer
Correct Answer:
Decreases;decreases
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Normally the discount rate is _____ the federal funds rate.
Above
Below
Equal to
None of these
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In a recession the money supply can be increased by the fed _____________ securities.
Keynesians
Decreases
Increased
All the above
Answer
Correct Answer:
Increased
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Based on the exchange rate table below, one u.s. dollar is able to buy _____ mexican pesos.
Japan YEN 101.96
China YUAN 6.2471
Mexico PESO 12.8575
Canada DOLLAR 1.0853
Answer
Correct Answer:
Mexico PESO 12.8575
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A higher required reserve ratio _________ the value of the simple deposit multiplier.
The money supply will increase
Payments agreed to today but made in the future are in terms of money
Decreases
The buyers of these securities pay for them with checks and bank reserves fall
Answer
Correct Answer:
Decreases
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What do many people believe was an important cause of the financial crisis of 2008-2009?
Banks giving out too many loans that couldn’t be paid back
Banks maintaining excess reserves instead of loaning them out
Banks receiving insufficient money for the Fed
Banks using reserves for investments
Answer
Correct Answer:
Banks maintaining excess reserves instead of loaning them out
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The short-run aggregate supply curve is _____ when the economy is near maximum capacity.
Upward sloping
Downward sloping
Steep
Flat
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Why does the Fed engage in quantitative easing?
To increase short-term interest rates
To decrease short-term interest rates
To increase long-term interest rates
To decrease long-term interest rates
Answer
Correct Answer:
To decrease long-term interest rates
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In order to know how much to stimulate the economy, policy makers must know how much ______ should increase.
RGDP
NGDP
NNP
NI
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It is difficult for the Fed to know when an increase in the aggregate demand curve will happen because ______.
RGDP tends to fluctuate
Equilibrium points are unstable
Of unexpected shifts in price levels
Of the time lag before monetary policy has an impact
Answer
Correct Answer:
Of the time lag before monetary policy has an impact
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In the equation of exchange, which of the following letters represents real output?
M
P
Q
V
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The quantity theory of money and prices claims that changes in the ______ lead to equal proportional changes in the ______.
Real GDP; money supply
Money supply; price level
Real GDP; price level
Real GDP; nominal GDP
Answer
Correct Answer:
Money supply; price level
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During inflation, the Fed will engage in a contractionary money policy by ______ the money supply and ______ the interest rate.
Decreasing; increasing
Increasing; decreasing
Decreasing; decreasing
Increasing; increasing
Answer
Correct Answer:
Decreasing; increasing
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The Fed decides to pursue an expansionary monetary policy on the open market. What effect will this have?
U.S. exports and imports will both increase.
U.S. exports and imports will both decrease.
U.S. exports will increase and U.S. imports will decrease.
U.S. exports will decrease and U.S. imports will increase.
Answer
Correct Answer:
U.S. exports will increase and U.S. imports will decrease.
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When does the Fed use a contractionary monetary policy?
Before an economic recession
During an economic recession
Before an inflation period
During an inflation period
Answer
Correct Answer:
During an inflation period
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Which of the following strategies do bond sellers use if many people are trying to get rid of bonds?
They vary interest rates.
They keep interest rates stable.
They decrease interest rates.
They increase interest rates.
Answer
Correct Answer:
They increase interest rates.
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With all other things being equal, the money supply curve is drawn as ______.
Vertical
Horizontal
Upward sloping
Downward sloping
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In the long run, if the money supply rises by 20 percent, the price level rises by ______.
5%
10%
20%
30%
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Money market equilibrium occurs at which of the following?
The real interest rate where the quantity of money demanded equals the quantity of money supplied
The nominal rate where the quantity of money demanded equals the quantity of money supplied
The real interest rate where the quantity of money demanded is less than the quantity of money supplied
The nominal interest rate where the quantity of money demanded is more than the quantity of money supplied
Answer
Correct Answer:
The nominal rate where the quantity of money demanded equals the quantity of money supplied
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A decrease in the demand for money will shift the money demand curve ______.
To the right
To the left
Upward
Downward
Answer
Correct Answer:
To the left
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A measure of how frequently money is turned over is called
Velocity of money
Frequency of money
Acceleration of money
All of these
Answer
Correct Answer:
Velocity of money
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Quantity theory of money and prices states the hypothesis that changes in the money supply lead to ____proportional changes in the price level
Less
Greater
Zero
Equal
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In which market the money demand and money supply determine the equilibrium interest rate?
Clothes market
Money market
Interest market
All of these
Answer
Correct Answer:
Money market
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