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ECO-201 Principles of Macroeconomics
Lesson 10 – Monetary Policy
Questions – 25 Points
For each question, type the ONE best answer below.
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the questions in the lower pane.
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1. Planned investment spending is:
A) positively related to existing productive capacity and the interest rate.
B) negatively related to existing productive capacity and the interest rate.
C) positively related to the interest rate and expected future GDP.
D) negatively related to the interest rate and expected future GDP.
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2. The two most important factors determining planned investment spending are:
A) interest rates and expected future real GDP.
B) interest rates and current real GDP.
C) inflation and expected future real GDP.
D) inflation and current real GDP.
3. If the Federal Reserve increases interest rates to reduce inflation:
A) planned investment spending is most likely to increase.
B) planned investment spending is most likely to decrease.
C) planned investment spending is most likely to remain the same.
D) unplanned investment in inventories is likely to be negative.
4. Which of the following is true regarding the tradeoff a firm makes when it
spends money on an investment project?
A) Borrowing money will always be more expensive than using retained
earnings.
B) Using retained earnings will always be cheaper than using borrowed
money.
C) The tradeoff a firm faces when using retained earnings or borrowed funds is
the same.
D) Retained earnings has a higher opportunity cost than does using borrowed
money because retained earnings come from past profits.
5. Planned investment spending is _______ to the interest rate because ______.
A) positively related; a fall in the market interest rate decreases the supply of
loanable funds
B) negatively related; a rise in the market interest rate makes any given
investment project less profitable
C) positively related; a fall in the market interest rate decreases the opportunity
cost of investing
D) negatively related; a rise in the market interest rate decreases retained
earnings
6. According to the accelerator principle:
A) a higher growth rate of real GDP leads to higher planned investment
spending.
B) a higher growth rate of real GDP causes immigration to increase.
C) higher budget deficits lead to even larger deficits.
D) the more money people make, the faster they spend it.
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7. Inventory investment can be:
A) negative.
B) zero.
C) positive.
D) either negative, zero, or positive.
8. Actual investment spending is equal to:
A) the difference between unplanned investment spending and planned
investment spending.
B) the difference between planned investment spending and unplanned
investment spending.
C) the sum of planned investment spending and unplanned investment
spending.
D) the ratio of planned investment spending to unplanned investment
spending.
9. When planned investment is less than actual investment, then there must be:
A) unplanned inventory investment.
B) unplanned inventory disinvestments.
C) unplanned depreciation.
D) unplanned technological progress.
10. Rising inventories typically indicate _______ unplanned inventory investment
and a _________ economy.
A) positive; slowing
B) negative; slowing
C) positive; expanding
D) negative; expanding
11. Generally, the more liquid an asset is:
A) the lower its purchasing power.
B) the lower its rate of return.
C) the higher its capacity to store value over time.
D) the higher its rate of return.
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12. The short-term interest rate is the interest rate on financial assets that mature
within:
A) a month.
B) 6 months.
C) 1 year.
D) 5 years.
13. An increase in the aggregate price
A) increases the nominal demand for money.
B) decreases the nominal demand for money.
C) does not affect the nominal demand for money.
D) shifts the nominal demand for money to the left.
14. The money demand curve is _________ because a lower interest rate
___________.
A) upward-slopping; increases the opportunity cost of holding money.
B) downward-slopping; increases the opportunity cost of holding money.
C) upward-slopping; decreases the opportunity cost of holding money.
D) downward-slopping; decreases the opportunity cost of holding money
15. If Congress places a $5 tax on each ATM transaction, the real demand for
money will likely:
A) increase.
B) decrease.
C) decrease initially, and then decrease.
D) be unaffected.
16. The fact that a larger number of stores in the United States have found it
economical to accept credit cards has:
A) increased the demand for money.
B) decreased the demand for money.
C) increased the demand for credit card transactions but has had no impact on
the demand for money.
D) decreased the demand for credit card transactions but has had no impact
on the demand for money.
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17. In the accompanying table, the velocity of money must be:
Real Output
Price Level
Nominal Quantity of Money
A) 1.
B) 2.
C) 4.
D) 5.
$10 Trillion
2
$4 Trillion
18. At interest rates below equilibrium rate, people will want to:
A) shift their wealth into T-bills.
B) shift their wealth into money.
C) buy more shares of stock.
D) do none of the above.
19. When the Fed buys Treasury bills, this leads to:
A) a decrease in the money supply.
B) an increase in the money supply.
C) an increase in short-term interest rates.
D) an increase in the Fed funds rate.
20. The prime interest rate:
A) is always equal to the federal funds rate.
B) is always above the federal funds rate.
C) is always below the federal funds rate.
D) can either be above or below the federal funds rate.
21. Other things equal, an increase in the interest rate leads to a:
A) fall in investment and consumer spending.
B) rise in investment and consumer spending.
C) fall in investment spending and a rise in consumer spending.
D) fall in consumer spending and a rise in investment spending.
22. Expansionary monetary policy causes _______ in interest rates in the short run
and ______ in interest rates in the long run.
A) a decrease; no change
B) a decrease; a decrease
C) no change; a decrease
D) no change; no change
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23. According to rational expectations, monetary policy is:
A) always effective.
B) effective only if it is unexpected.
C) ineffective compared to fiscal policy.
D) effective only when fiscal policy accommodates it.
24. In the video “Monetary Policy,” a Federal Reserve economist states that
A) velocity was very stable in the early 1990s.
B) inflation is not the Fed's problem.
C) velocity was unstable in the early 1990s.
D) none of the above
25. In the video “Monetary Policy,” Federal Reserve officials have trouble
determining what is the appropriate monetary target.
A) True
B) False
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