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Suppose the equation for the money demand curve is MD = 65,000 – 15,000i, where i is the nominal interest rate. If inflation is 0.06 (6%) and the central bank wants to set the real rate of interest at 0.04 (4%) it must set a money supply equal to: |
| | A) | 63,500 |
| | B) | 64,400 |
| | C) | 64,100 |
| | D) | 64,970 |
| | E) | 50,000 |
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| 2.
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To close an expansionary gap, the ECB must ____ real interest rates by ______ the money supply. |
| | A) | Increase; increasing |
| | B) | Increase; decreasing |
| | C) | Decrease; not changing |
| | D) | Decrease; increasing |
| | E) | Decrease; decreasing |
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| 3.
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In an economy where aggregate demand is given by AD = 6,000 + .8Y - 20,000r, the central bank is currently setting the interest rate (r) at 0.05 (5percent). If potential output equals 26,000, the central bank must ____ the interest rate to _____percent to restore full employment. |
| | A) | Lower; 0.03 |
| | B) | Lower; 0.04 |
| | C) | Raise; 0.06 |
| | D) | Raise; 0.07 |
| | E) | Raise; 0.08 |
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| 4.
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Suppose a central bank sets the real interest rate, r, according to the policy reaction function r = 2 + 0.5(p – p*), were p = the inflation rate and p* = the central bank's target for inflation. At what level would the central bank set the nominal rate of interest if the actual rate of inflation p = 6% and the target rate = 2%. |
| | A) | 10% |
| | B) | 8% |
| | C) | 6% |
| | D) | 4% |
| | E) | 2% |
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| 5.
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The following table shows Alex's estimated annual benefits of holding different amounts of money.
 <![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::Table 1::/sites/dl/free/0077108310/329323/ch27table1.JPG','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif">Table 1 (16.0K)</a>]]>Table 1
How much money will Alex hold if the nominal interest rate is 8 percent? (Assume she wants her money holdings to be in multiples of €100.) |
| | A) | 300 |
| | B) | 400 |
| | C) | 500 |
| | D) | 600 |
| | E) | 700 |
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| 6.
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Which of the following would be expected to increase the demand for
money?
A) |
| | A) | Greater availability of ATM machines |
| | B) | The economy enters a recession. |
| | C) | An increase in the Consumer Price Index |
| | D) | The introduction of faster and safer Internet on-line banking facilities |
| | E) | Financial investors become less concerned about the
riskiness of shares |
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| 7.
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In the absence of central bank intervention, an increase in income will _____ money demand and _____ the nominal interest rate. |
| | A) | Increase; increase |
| | B) | Increase; decrease |
| | C) | Not change; not change |
| | D) | Decrease; decrease |
| | E) | Decrease; increase |
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| 8.
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If the central bank increases the money supply, bond prices will _____ and the nominal interest rate will _____. |
| | A) | Increase; increase |
| | B) | Increase; decrease |
| | C) | Do not change; does not change |
| | D) | Decrease; decrease |
| | E) | Decrease; increase |
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| 9.
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Retail sales rise significantly during the Christmas season. If the central bank takes no action we would expect to see a _____ in nominal interest rates and a _____ in the money supply: |
| | A) | Rise; rise |
| | B) | Rise; fall |
| | C) | Rise: no change |
| | D) | Fall; fall |
| | E) | No change; rise |
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| 10.
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The central bank can affect planned aggregate expenditure and short-run equilibrium output by changing: |
| | A) | Planned government spending. |
| | B) | Tax revenue. |
| | C) | Transfer payments. |
| | D) | Real interest rates. |
| | E) | The unemployment rate. |
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