1.

The monetary base is equal to

A. currency in circulation plus checking deposits.

B. bank reserves plus checking deposits.
C. currency in circulation plus bank reserves.
D. currency in circulation minus bank reserves.

2. An example of a defensive open–market operation is

A. an expansionary purchase of bonds by the Fed.

B. a contractionary sale of bonds by the Fed.
C. a sale of bonds that offsets an increase of the money multiplier.
D. a discount loan to a bank

3. If the Fed desires to increase the money supply it would

A. sell bonds to the public.

B. lower the discount rate.
C. discontinue auction loans.
D. increase reserve requirements.

4. When banks increase their holdings of excess reserves

A. the required reserve ratio increases.

B. the reserve–deposit ratio increases.
C. the required reserve ratio decreases.
D. the reserve–deposit ratio decreases.

5. A factor causing an increase in the reserve–deposit ratio is

A. growth in the number and use of ATMs.

B. the use of sweep programs.
C. the elimination of required reserves on savings deposits.
D. the reduction of required reserves on checking deposits.
6. If the target value for the money supply is above the current value, a central bank
would

A. increase money demand.

B. increase the money supply.
C. reduce money demand.
D. reduce the money supply.

7. A policy of money targeting works best when

A. money demand is stable.

B. money demand is unstable.
C. transactions technologies are changing.
D. aggregate spending is volatile.

8. Under a policy of interest–rate targeting, an increase in aggregate spending

A. increases the target interest rate.

B. increases the money supply.
C. reduces the target interest rate.
D. reduces the money supply.

9. To increase the federal funds rate the Fed would

A. reduce the discount rate.

B. make a open–market purchase of bonds.
C. reduce required reserves.
D. sell bonds in the open market.
10. Opponents of monetary targeting argue that the monetarist experiment of 1979–
1982 failed because

A. M1 growth did not stay within target ranges.

B. interest–rate instability caused recessions.
C. the Fed announced it was targeting money in order to allow interest rates to
increase.
D. money demand was stable during this period.

11. The current Federal Reserve policy is to target

A. growth of the M1 money supply.

B. the prime rate of interest.
C. growth of the monetary base.
D. the federal funds rate of interest.

12. The Fed reduces the monetary base when it

A. buys a bond for $1000.

B. sells a bond for $1000.
C. lends a bank $1000.
D. increases the required reserve ratio.

13. Federal Reserve policy is set by

A. the Secretary of Treasury.

B. the Board of Governors of the Federal Reserve System.
C. the Federal Open Market Committee.
D. the President of the United States.
14. The interest rate the Fed charges to banks that request a loan from the Fed is

A. the prime rate.

B. the federal funds rate.
C. the market rate of interest.
D. the discount rate.

15. If people hold $4000 in checking deposits and $1000 in currency, the currency–
deposit ratio is

A. 4.
B. 3.
C. 1.
D. 0.25.

16. The reserve–deposit ratio equals

A. required reserves divided by checking deposits.

B. bank reserves divided by checking deposits.
C. excess reserves divided by checking deposits.
D. currency divided by checking deposits.

17. If the currency–deposit ratio is 0.20 and the reserve–deposit ratio is 0.20, the money
multiplier is

A. 4.
B. 3.
C. 2.
D. 1.
18. An open–market sale of bonds

A. reduces the monetary base and the money supply.

B. increases the monetary base and the money supply.
C. reduces the money multiplier and the money supply.
D. increases the money multiplier and the money supply.

19. A reduction in the reserve–deposit ratio

A. reduces the monetary base and the money supply.

B. increases the monetary base and the money supply.
C. reduces the money multiplier and the money supply.
D. increases the money multiplier and the money supply.

20. A factor that contributed to the Great Depression was

A. the increase of the monetary base that reduced the money supply.
B. the reduction of the monetary base that reduced the money supply.
C. the reduction of reserve requirements that reduced the money supply.
D. the increase of the currency–deposit ratio that reduced the money supply.
 1. When actual output equals potential output

A. the rate of unemployment exceeds the natural rate of unemployment.

B. the rate of unemployment equals the natural rate of unemployment.
C. the rate of unemployment is less than the natural rate of unemployment.
D. the rate of unemployment cannot be determined.

2. The NAIRU is another name for

A. the output gap.

B. the natural rate of unemployment.
C. expected inflation.
D. the Phillips curve.

3. An example of a beneficial supply shock is

A. an increase in oil prices.

B. an increase in wages in negotiated labor contracts.
C. a reduction of the health insurance costs paid by employers.
D. a depreciation of the domestic currency, increasing the costs of importers.

4. An reduction of the real interest rate in the AE/PC model

A. reduces output and inflation.

B. increases output and inflation.
C. increases output and reduces inflation.
D. reduces output and increases inflation.

5. If the central bank follows an accommodative monetary policy when an adverse

supply shock occurs

A. output and inflation increase.

B. output increases and inflation remains constant.
C. inflation increases and output remains constant.
D. output and inflation remain constant.
6. When the central bank follows a nonaccommodative policy after an adverse supply
shock

A. the central bank increases the real interest rate to keep inflation constant,
reducing output.
B. the central bank holds the real interest rate constant to keep inflation and output
constant.
C. the central bank increases the real interest rate to increase output and reduce
inflation.
D. the central bank reduces the real interest rate to keep output constant, increasing
inflation.

7. Disinflation requires

A. permanently increasing interest rates and permanently reducing output to

permanently reduce inflation.
B. permanently increasing interest rates and temporarily reducing output to
permanently reduce inflation.
C. temporarily increasing interest rates and temporarily reducing output to
permanently reduce inflation.
D. temporarily increasing interest rates and temporarily reducing output to
temporarily reduce inflation.

8. The long–run result of a nonaccommodative policy in response to an adverse

supply shock

A. keeps the interest rate, output and inflation constant.

B. temporarily increases both the interest rate and output to keep inflation
constant.
C. permanently increases interest rates and permanently reduces output to keep
inflation constant.
D. temporarily increases the interest rate and temporarily reduces output to hold
inflation constant.
 9. The inflation of the 1970s was largely due to

A. increased government spending for the military.

B. new technology that caused an investment boom.
C. increased consumer confidence.
D. supply shocks and accommodative monetary policy.

10. Long–run money neutrality means that in the long run, monetary policy can change
only the

A. real interest rate.

B. level of real output.
C. the rate of unemployment.
D. the rate of inflation.

11. The neutral real interest rate is determined by

A. past rates on inflation.

B. potential output and the AE curve.
C. the expected rate of inflation.
D. monetary policy, potential output, and the AE curve.

12. A factor that could change the natural rate of unemployment is

A. an economic boom.
B. Federal Reserve monetary policy when policy is neutral.
C. productivity growth.
D. a recession.
13. The neutral rate of interest falls if

A. investment increases.
B. saving increases.
C. net capital inflows fall.
D. net exports increase.

14. According to Okun’s law, when unemployment increases by 1%

A. output increases by 1%.

B. output increases by 2%.
C. output falls by 1%.
D. output falls by 2%.

15. The National Bureau of Economic Research defines a recession as a period when

A. output falls by a substantial amount.

B. output is below its trend rate of growth.
C. output equals its trend rate of growth.
D. output is above its trend rate of growth.

16. The component of aggregate expenditure that is not affected by a change in the real
interest rate is

A. consumption.
B. investment.
C. government purchases.
D. net exports.

17. The expenditure shock that shifts the AE curve to the left is

A. a tax increase.
B. increased government purchases.
C. a boom in foreign countries.
D. an increase in consumer confidence.
18. An example of countercyclical monetary policy would be

A. an increase of the real interest rate when consumer confidence falls.

B. an increase of the real interest rate when taxes are increased.
C. a decrease of the real interest rate when other countries experience recessions.
D. a decrease of the real interest rate when new technologies spur new investment.

19. Adaptive expectations of inflation are based upon

A. the actions of the central bank.

B. forecasts of future inflation.
C. news about changes that may affect inflation.
D. past inflation.

20. Inflation will fall when

A. output rises above potential output.

B. actual output and potential output are equal.
C. unemployment falls.
D. unemployment increases.