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Final Exam Practice Test

Which of the following is an advantage to money targeting?

There is an immediate signal on the achievement of the target

If the relationship between the monetary aggregate and the goal variable is weak, then

monetary aggregate targeting will not work

Which of the following is NOT an element of inflation targeting?

An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy

The first country to adopt inflation targeting was

New Zealand

The decision by inflation targeters to choose inflation targets _________ zero reflects the concern of monetary policymakers that particularly __________ inflation can have substantial negative effects on real economic activity.

Above; low

The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as

policy with an implicit nominal anchor

The monetary policy strategy that provides the least accountability is

the implicit nominal anchor

Which of the following is a potential operating instrument for the central bank?

The monetary base

If the desired intermediate target is a monetary aggregate, then the preferred policy instrument will be a(n) __________ variable like the _________.

reserve aggregate; monetary base

The immediate (two-day) exchange of one currency for another is a

spot transaction

When te value of the British pound changes from $1.50 to $1.25, then the pound has _________ and the U.S. dollar has __________.

depreciated; appreciated

Everything else held constant, when a country's currency depreciates, its goods abroad become _________ expensive while foreign goods in that country become _________ expensive.

less; more

The _________ states that exchange rates between any two currencies will adjust to relect changes in the price levels of the two countries.

theory of purchasing power parity

The theory of PPP (purchasing power parity) suggests that if one country's price falls relative to another's, its currency should

appreciate in the long run

According to PPP (purchasing power parity), the real exchange rate between two countries will always equal _________.


As the relative expected return on dollar assets increases, foreigners will want to hold more _________ assets and less _________ assets, everything else held constant.

U.S. dollar; foreign currency

Suppose that the Federal Reserve enacts expansionary fiscal policy. Everything else held constant, this will cause the demand for U.S. assets to _________ and the U.S. dollar to _________.

increase; appreciate

The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given time period is known as


Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of

the demand for money

If the money supply is $500 and nominal income is $3,000, the velocity of money is


The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles

nominal income doubles

Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of


Keynes's theory of the demand for money implies that velocity is

not constant but fluctuates with movements in interest rates

If the government finances its spending by issuing debt to the public, the monetary base will _________ and the money supply will _________.

not change; not change

Of the three motives for holding money suggested by Keynes, which did he belive to be the most sensitive to interest rates?

The speculative motive

In the simple Keynesian model, equilibrium aggregate output is determined by

aggregate demand

Because inflation was not a serious problem during the Great Depression, Keynes's analysis assumed

that the price level was fixed

The marginal propensity to consume (mpc) can be defined as the fraction of

a change in income that is spent

Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If disposable income equals $1000, then total consumption equals


In the Keynesian framework, as long as output is above the equilibrium level, unplanned inventory investment will remain _________ and firms will continue to _________ production.

positive; lower

If the marginal propensity to consume is .9, the value of the consumption multiplier is


Points on the IS curve satisfy _________ market equilibrium.


Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess _________ of goods which will cause aggregate output to _________.

supply; fall

When the AD and AS curves are combined in the same diagram, the intersection of the two curves determines the equilibrium level of _________ as well as the _________.

aggregate output; inflation rate

A tax cut _________ disposable income, _________ consumption expenditure, and shifts the IS curve to the _________, everything else held constant.

increases; increases; right

The upward slope of the MP curve indicates that

the central bank raises real interest rates when inflation rises

An autonomous easing of monetary policy

shifts the monetary policy curve downward

In the long-run AD-AS model and with everything else held constant, the long-run effect of a tax cut is to _________ real output and _________ the interest rate.

not change; increase

When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate, which indicated that

the monetary policy curve shifted downward

Everything else held constant, a decrease in autonomous planned investment spending will cause the IS curve to shift to the _________ and aggregate demand will _________.

left; decrease

The long-run rate of unemployment to which an economy always gravitates is the

natural rate of unemployment

Everything else held constant, a decrease in the cost of production _________ aggregate _________.

increases; supply

Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause _________ in real GDP in the long run and _________ in the aggregate price level in the long run, everything else held constant.

no change; an increase

According to aggregate demand and supply analysis, the negative demand shock of 2000-2004 had the effect of

decreasing aggregate output, raising unemployment, and lowering inflation

Everything else held constant, a decrease in government spending will cause the IS curve to shift to the _________ and aggregate demand will _________.

left; decrease

The economist who proposed that, "Inflation is always and everywhere a monetary phenomenon" was

Milton Friedman

Evidence strongly supposts the view that countries with high inflation also have

the highest rates of money growth

Demand-pull inflation can result when

a persisten budget deficit is financed by selling bonds to the central bank

When the economy is in a recession, the following policies may be used to regain long run equilibrium.

Monetary policy and Fiscal policy

When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then

inflation will be unchanged

If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then

potential output falls, the long-run aggregate supply curve shifts leftward, and the short-run aggregate supply curve shifts upward

If workers do not belive that policymakers are serious about fighting inflation, they are most likely to push for higher wages, which will _________ aggregate _________ and lead to unemployment or inflation or both, everything else held constant.

decrease; supply

Lucas argues that when policies change, expectations will change thereby

changing the relationships in econometric models

Arguments for adopting a monetary policy rule include

discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run

Suppose that there is a negative aggregate demand shock and the central bank takes expansionary monetary policy. But if the central bank is not credible, then

inflation will rise

The U.S. government can play an important role in establishing the credibility of anti-inflation policy by

demonstrating fiscal responsibility

Economic theory suggests that _________ interest rates are _________ important than _________ interest rates in explaining investment behavior.

real; more; nominal

The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the

traditional interest-rate channel

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