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Exam 15: Monetary Policy

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Question 1

Multiple Choice

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According to economist Arnold Kling's perspective on the economy,economic activity is best viewed by focusing on

A) aggregate demand.
B) the actions of the Federal Reserve.
C) changes in spending.
D) specialization and trade.

E) A) and B)
F) A) and C)

Correct Answer

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D

Question 2

Multiple Choice

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If a country's rules-based monetary policy sets the annual money supply growth rate equal to the average annual growth rate of Real GDP,and velocity is a constant,then the price level

A) is also constant.
B) rises in years when Real GDP rises.
C) rises in years when Real GDP growth is less than average.
D) rises in years when Real GDP growth is greater than average.

E) None of the above
F) All of the above

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Question 3

True/False

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As the interest rate falls,the quantity supplied of money falls and the quantity demanded of money rises.

Buddy bought a bond last year for $10,000.His bond pays $1,000 a year.This year a bond that sells for $10,000 pays $900 a year.If Buddy were to sell his (old) bond,its price would be approximately

Which of the following statements is false?

The economy is in the horizontal portion of the AS curve,there is no liquidity trap and investment is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply drops the interest rate will __________,investment spending will __________,the AD curve will shift to the __________,and the price level will __________.

One argument in favor of activist monetary policy is that the economy does not always equilibrate quickly enough at Natural Real GDP.

According to the Keynesian transmission mechanism,if the Fed conducts an open market sale of government securities,it may cause which of the following in the investment goods market?

The object of inflation targeting is for a country's central bank to try to keep the inflation rate near

Compared to the Keynesian transmission mechanism,the monetarist transmission mechanism is

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 1 percent per year,then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

Which of the following statements is likely to be made by an economist who does not believe in activist monetary policy? (1) The more closely monetary policy can he designed to meet the particulars of a given economic environment,the better.(2) Because of long and uncertain time lags,activist monetary policy may be destabilizing rather than stabilizing.(3) There is sufficient flexibility in wages and prices in modern economies to allow the economy to equilibrate in reasonable speed at the natural level of Real GDP, (4) The "same-for-all-seasons" monetary policy is the way to proceed.(5) There is evidence that monetary policy in the mid-1970s caused a recession.

Last year,Bentley bought a bond for $1,000 that promises to pay $115 a year.This year,a person who buys a bond for $1,000 receives $125 a year.If Bentley were to sell his (old) bond,its price would be approximately

Activists believe that

Which best describes the Keynesian transmission mechanism when the money supply increases?

As the interest rate __________,the opportunity cost of holding money __________ and individuals choose to hold __________ money.

Suppose that the bond market and the money market both start out in equilibrium,then the Federal Reserve decreases the money supply.The result will be a ______________ in the money market and a _________________ in the bond market,which will push bond prices _________________ and interest rates will ___________________ until a new equilibrium is reached.

Assume the Keynesian transmission mechanism is operational and the economy is currently operating in the horizontal portion of the AS curve.If the money supply decreases and the demand for money curve is downward sloping and investment is interest-____________,then Real GDP will ___________________.

The rules-based monetary policy reads: The annual growth rate in the money supply will be equal to the average annual growth rate in Real GDP minus the growth rate in velocity.If the average growth rate in Real GDP this year is 3 percent and the growth rate in velocity is 2 percent,then the money supply will increase by ______________ percent this year.

Which of the following statements is likely to be made by an economist who believes in activist monetary policy? (1) The more closely monetary policy can be designed to meet the particulars of a given economic environment,the better.(2) Because of long and uncertain time lags,activist monetary policy may be destabilizing rather than stabilizing.(3) There is sufficient flexibility in wages and prices in modern economies to allow the economy to equilibrate in reasonable speed at the natural level of Real GDP.(4) The "same-for-all-seasons" monetary policy is the way to proceed.(5) There is evidence that monetary policy in the mid-1970s caused a recession.