Test bank
1.
Chapter six
The demand for money curve slopes downwards for all but one of the following
reasons?
a.
A lower rate of interest (r) reduces the opportunity cost of holding money as an
asset.
b. As interest rates rise people are more likely to hold wealth in a less liquid form.
c. A lower rate of interest reduces the opportunity cost of holding money for
transactions.
d. At a lower rate of interest there is a greater supply of money.
2. The supply of money schedule is vertical because:
a. As r increases the demand for money increases.
b. As r increases the Reserve Bank allows the money supply to increase.
c. As r increases banks find it more profitable to operate at a lower ratio of reserves
to deposits.
d. It is assumed to be determined by monetary policy
3. Which of the following would cause the demand for money to fall, ceteris paribus?
a. National output falls.
b. Uncertainty about the future leads households to hold larger precautionary
balances.
c. Interest rates fall.
d. The price level rises.
4. If the money market is initially in equilibrium, then an increase in the demand for
money:
a.
b.
c.
d.
Will be accompanied by rising bond prices.
Will be accompanied by falling bond prices.
Will cause a corresponding contraction in the money supply.
Means that the equilibrium rate of interest has fallen.
5.
On a given Md curve, at a high rate of interest people wish to hold less narrow money
because:
a.
b.
c.
d.
The opportunity cost of holding money is high.
They wish to conduct fewer transactions.
The government reduces the money supply when the rate of interest is high.
Their incomes fall.
6. If the authorities keep the money base constant as the economy moves into a
recession, then:
a.
b.
c.
d.
The money supply will rise.
Interest rates will rise.
Interest rates will fall.
The velocity of circulation will increase.
7. Which of the following is not consistent with the equation of exchange?
a.
b.
c.
d.
A rise in the price level could be offset by a fall in output.
A rise in output could be balanced by a rise in the velocity of circulation.
A rise in the price level could be balanced by a fall in the stock of money.
A rise in the stock of money could be offset by a fall in the velocity of circulation
8. Which of the following is consistent with a rising yield curve
a.
b.
c.
d.
There is an expectation that future interest rates will rise.
There is an expectation that future inflation will rise
There is an expectation that inflation will continue to be low and stable
All of the above
9. Which of the following are not used as an indicators of inflationary pressure
a.
b.
c.
d.
Surveys of expectations of future inflation.
The size of the gap between potential and actual output
The rate of asset price inflation
The size of the Current Account Deficit
10. Why is it difficult for the Reserve Bank to control the exchange rate by direct
intervention
a.
b.
c.
d.
.
Because tight monetary policy is ineffective in raising the exchange rate
Because sales of foreign reserves only increase the overseas debt
Because international pressures on the exchange rate may be too great
All of the above