Chapter 28

Empirical Evidence on the Effectiveness of Monetary Policy

D2Interpretive
1. Keynesians argue that velocity is A) equal to the inflation rate. B) equal to one. C) negative. D) unpredictable. Answer: D

D1Factual
. !he velocity of " is equal to A) "# $inus "1. B) %D& divided by " . C) %D& $ultiplied by " . D) the velocity of "1. Answer: B

D1Factual
#. 'hen co$paring the velocity of " () )* with the velocity of "1 ()1)* the evidence shows that ) has been ++++++++++++++++++ and )1 has been ++++++++++++++++++ over ti$e. A) relatively stable, relatively stable B) relatively stable, relatively unstable C) relatively unstable, relatively stable D) relatively unstable, relatively unstable Answer: B

D1Factual
-. 'hen co$paring the velocity of " () )* with the velocity of "1 ()1)* the evidence suggests that ) has been ++++++++++++++++++ and )1 has been ++++++++++++++++++ over ti$e. A) relatively predictable, relatively predictable B) relatively predictable, relatively unpredictable C) relatively unpredictable, relatively predictable D) relatively unpredictable, relatively unpredictable Answer: B

99

100.itter/0ilber/1dell Money, Banking, and Financial Markets * 2leventh 2dition

D1Interpretive
3. 4t is true that ++++++++++++++++++ changes in velocity cause ++++++++++++++++++ changes in real %D&. A) s$all, no B) large, no C) s$all, large D) large, s$all Answer: C

D2Factual
5. !he increasing attractiveness of a variety of liquid financial assets has caused the A) velocity of "1 to rise. B) de$and for "1 to rise. C) velocity of "1 to decline. D) supply of "1 to decline. Answer: A

D2Factual
6. 7ne of the reasons the velocity of "1 has risen over the long8run is A) increased econo$ic uncertainty. B) growth in the $oney supply. C) growth in personal inco$e. D) e9panding use of credit cards. Answer: D

D2Interpretive
:. As credit card usage e9pands in usage* the li;ely effect will be to A) increase the velocity of "1. B) reduce the velocity of "1. C) increase $oney de$and. D) increase the $oney supply. Answer: A

D2Factual
<. 7ne of the reasons the velocity of "1 has risen over the long8run is A) increased econo$ic uncertainty. B) growth in the $oney supply. C) new techniques of cash $anage$ent by corporate treasurers. D) an increase in the de$and for $oney. Answer: C

D2Factual
1=. 'hich of the following is not responsible for the post8'orld 'ar 44 rise in "1 velocity> A) !he relatively wide historical definition of "1 B) !he increasing attractiveness of other categories of financial assets C) Attractive yield on financial assets other than $oney D) !he lending of $oney to earn higher interest rates Answer: A

Chapter :2$pirical 2vidence on the 2ffectiveness of "onetary &olicy101

D2Interpretive
11. 4n $ost cases* higher interest rates cause the velocity of "1 to A) turn negative. B) $ove erratically. C) increase. D) decline. Answer: C

D2Interpretive
1 . ?ower interest rates cause the velocity of "1 to A) turn negative. B) $ove erratically. C) increase. D) decline. Answer: D

D2Factual
1#. 2$pirical evidence indicates that $oney de$and is deter$ined by A) interest rates and the level of %D&. B) the inflation rate and the une$ploy$ent rate. C) interest rates and the $oney supply. D) the $oney supply and the level of %D&. Answer: A

D2Factual
1-. 0tatistical studies indicate that the liquidity trap A) occurs during $ost recessions. B) occurs during inflationary periods. C) occurred only during the %reat Depression. D) has not occurred. Answer: D

D2Factual
13. !he underground econo$y refers to A) transactions in $ineral and $ining activity. B) cash pay$ents $ade in lieu of credit cards. C) cash pay$ents $ade in order to avoid docu$entation of ta9able inco$e. D) hoarding of dollar bills in high8inflation countries. Answer: C

D2Factual
15. !he inability of the @ederal .eserve to e9plain $ove$ents in "1 de$and has led to A) less e$phasis on $oney growth as a policy tool. B) the @ederal .eserveAs targeting )1 growth $ore closely. C) the @ederal .eserveAs switching to " and "# targets. D) All of the above Answer: C

102.itter/0ilber/1dell Money, Banking, and Financial Markets * 2leventh 2dition

D2Factual
16. !he interest elasticity of $oney de$and is esti$ated to be A) s$all in absolute value. B) large in absolute value. C) highly volatile. D) not statistically different fro$ Bero. Answer: A

D2Interpretive
1:. 'hen considering the velocity of $oney* the @ederal .eserve is $ost concerned about its A) stability. B) absolute siBe. C) deter$inants. D) sign. Answer: A

D2Factual
1<. &rior to the 1<6=s* the de$and for $oney ("1) was A) relatively stable. B) unpredictable. C) constant. D) un$easurable. Answer: A

D2Factual
=. 0ince the 1<6=s* the "1 de$and for $oney has been A) relatively stable. B) unpredictable. C) constant. D) un$easurable. Answer: B

D2Interpretive
1. 2$pirical studies on velocity and $oney de$and have li$ited usefulness for $onetary policy because they often ignore A) $oney supply effects. B) interest rate effects. C) inflation effects. D) lags in $onetary policy. Answer: D

D1Factual
. !he proble$ of getting an accurate reading on current econo$ic develop$ents is ;nown as the A) data proble$. B) recognition lag. C) i$pact lag. D) infor$ation proble$. Answer: B

Chapter :2$pirical 2vidence on the 2ffectiveness of "onetary &olicy103

D2Factual
#. !he i$pact lag is the ti$e between A) a change in the $oney supply and a change in interest rates. B) a change in the $oney supply and a change in %D&. C) the use of a @ederal .eserve tool and its effect on %D&. D) the use of a @ederal .eserve tool and its effect on the $oney supply. Answer: C

D2Factual
-. !he ++++++++++++++++++ lag refers to the proble$ of getting an accurate fi9 on what is happening in the econo$y. A) recognition B) realiBation C) i$pact D) Cone of the above Answer: A

D3Factual
3. All of the following e9plain the i$pact lag e9cept the ti$e between A) a change in the $oney supply and a change in interest rates. B) a change in interest rates and a change in invest$ent. C) a change in invest$ent and the change in %D&. D) a change in the econo$y and the use of a tool of $onetary policy. Answer: D

D2Factual
5. !he @ederal .eserve appears to tighten $onetary policy after a trough ++++++++++++++++++ it eases policy after a pea; in the business cycle A) sooner than B) after about the sa$e length of ti$e as C) later than D) no sooner or later than Answer: A

D1Factual
6. @ederal .eserve policy appears to be A) $ore concerned with avoiding recession rather than preventing inflation. B) $ore concerned with preventing inflation rather than avoiding recession. C) equally concerned with avoiding recession and preventing inflation. D) $otivated by whether inflation or recession is the current proble$. Answer: B

104.itter/0ilber/1dell Money, Banking, and Financial Markets * 2leventh 2dition

D2Interpretive
:. !he @ederal .eserve often begins to tighten $onetary policy after a trough in the business cycle because of A) the i$pact lag. B) the recognition lag. C) bureaucratic indecision. D) the ti$e necessary to get Congress to act. Answer: B

D2Interpretive
<. 2cono$ic $odels using co$puter si$ulations can provide an esti$ate of the A) recognition lag. B) decision lag. C) bureaucratic lag. D) i$pact lag. Answer: D

D2Interpretive
#=. A "onetarist8oriented econo$etric $odel is li;ely to e$phasiBe that $onetary policy affects econo$ic activity A) directly through changes in govern$ent spending. B) directly through changes in the $oney supply. C) indirectly through changes in velocity. D) indirectly through changes in $oney de$and. Answer: B

D2Interpretive
#1. A Keynesian econo$etric $odel is li;ely to e$phasiBe that $onetary policy affects econo$ic activity through changes in A) the $oney supply. B) reserve require$ents. C) interest rates. D) currency holding by the public. Answer: C

D2Interpretive
# . 'hen detailing the i$pact of $onetary policy* a Keynesian econo$etric $odel is li;ely to e$phasiBe the lin; between A) interest rates and invest$ent. B) the $oney supply and inflation. C) velocity and econo$ic growth. D) aggregate supply and the $oney supply. Answer: A

Chapter :2$pirical 2vidence on the 2ffectiveness of "onetary &olicy105

D2Interpretive
##. Keynesian $odels involve considerable efforts to e9plain the deter$inants of A) the $oney supply. B) aggregate supply. C) liquidity preference. D) the de$and deposit $ultiplier. Answer: C

D3Factual
#-. !he @ederal .eserve econo$etric $odel predicts that a will increase real %D& after one year by A) 1 percent. B) .3 percent. C) percent. D) 1= percent. Answer: A percent increase in the $oney supply

D2Interpretive
#3. !he consensus of $aDor econo$etric $odels is that $onetary policy has A) no effect on real %D&. B) an effect on real %D& only in the long run. C) a negative effect on real %D&. D) a substantial short8run effect on real %D&. Answer: D

D3Factual
#5. !he @ederal .eserve econo$etric $odel esti$ates that a 1 percent increase in govern$ent spending* with the $oney supply held constant* will A) increase real %D& by 1 percent per year for two years. B) increase real %D& by percent per year for two years. C) decrease real %D& by 1 percent per year for two years. D) have no effect on real %D&. Answer: A

D3Factual
#6. !he @ederal .eserve econo$etric $odel esti$ates that it ta;es ++++++++++++++++++ for crowding out to reduce the i$pact of a 1 percent increase in govern$ent spending* with the $oney supply held constant* to Bero. A) years B) # years C) - years D) crowding out never reduces the i$pact to Bero Answer: B

106.itter/0ilber/1dell Money, Banking, and Financial Markets * 2leventh 2dition

D3Factual
#:. !he @ederal .eserve econo$etric $odel esti$ates that a 1 percent increase in govern$ent spending* with the $oney supply increased to hold the interest rate constant* will A) increase real %D& by # percent in # years. B) increase real %D& by # percent in - years. C) increase real %D& by 1 percent years. D) have no effect on real %D& after # years. Answer: A

D3Factual
#<. !he @ederal .eserve econo$etric $odel esti$ates that a 1 percent increase in the $oney supply will A) increase real %D& by 1 percent after # years. B) increase real %D& by percent in # years. C) increase real %D& by # percent # years. D) have no effect on real %D& after years. Answer: A

D1Factual
-=. Crowding out is least li;ely to occur when deficit govern$ent spending is financed through A) ta9ation. B) reductions in consu$ption. C) $onetary e9pansion. D) reductions in invest$ent. Answer: C

D1Factual
-1. !he crowding out effect of e9pansionary fiscal policy when the $oney supply is not increased is confir$ed by A) neither the "onetarist nor the Keynesian econo$etric $odels. B) both the $onetarist and Keynesian econo$etric $odels. C) the "onetarist $odels only. D) the Keynesian econo$etric $odels only. Answer: B

D2Interpretive
- . 7ne of the $aDor wea;nesses of the @ederal .eserve Ban; of 0t. ?ouis econo$etric $odel was that it A) was large and cu$berso$e. B) was li$ited to analyBing an econo$y with substantial une$ploy$ent. C) did not specify the categories of private spending that were affected by $onetary policy. D) included a govern$ent spending $ultiplier that was clearly too high. Answer: C

Chapter :2$pirical 2vidence on the 2ffectiveness of "onetary &olicy107

D2Factual
-#. !he 0t. ?ouis @ederal .eserve Ban; econo$etric $odel indicates that crowding out A) is only partial. B) never occurs. C) occurs only in highly unusual circu$stances. D) is co$plete. Answer: D

D1Factual
--. !he liquidity effect indicates that e9pansionary $onetary policy causes A) interest rates to fall. B) interest rates to rise. C) bond prices to fall. D) inflation. Answer: A

D1Factual
-3. !he @ederal .eserve econo$etric $odel esti$ates that the liquidity effect an increase in the $oney supply will A) lower interest rates for 5 $onths to a year. B) lower interest rates per$anently. C) have no effect on interest rates. D) raise interest rates after 5 $onths to a year. Answer: A

D2Factual
-5. Eistorical evidence shows that the relationship between interest rates and invest$ent is A) indeter$inable. B) positive. C) negative. D) Cone of the above Answer: B

D1Applied
-6. Four businessG success is $ost li;ely to be affected by @ederal .eserve policy if it is in the A) defense industry. B) health services industry. C) restaurant industry. D) residential construction industry. Answer: D

108.itter/0ilber/1dell Money, Banking, and Financial Markets * 2leventh 2dition

D2Factual
-:. Appro9i$ately ++++++++++++++++++ of the i$pact of $onetary policy on %D& after one year ste$s fro$ the effective of changes in wealth on consu$er spending. A) 1= percent B) 3 percent C) 3= percent D) 63 percent Answer: B

D1Factual
-<. &art of the effect of higher interest rates on residential construction is through A) inflationary e9pectations. B) credit rationing. C) the e9pected value of the ho$es to the buyers. D) the inco$e effect. Answer: B

D1Factual
3=. !he wealth effect on consu$er spending is A) about the sa$e as the effect on plant and equip$ent e9penditure. B) about the sa$e as the effect on residential construction. C) less than the effect on plant and equip$ent e9penditure. D) larger than the effect on residential construction. Answer: B

D2Factual
31. !he @ederal .eserve econo$etric $odel e$phasiBes the i$pact of the wealth effect on A) consu$ption. B) govern$ent spending. C) business invest$ent. D) e9ports. Answer: A