<p>BA 206 Quiz Chapters 16 &17</p><p>1. According to the active policy position, eliminating a contractionary gap </p><p>A) can only be achieved by decreasing wages</p><p>B) requires a public policy of wage and price controls</p><p>C) should be accomplished by stimulating aggregate demand</p><p>D) will increase unemployment</p><p>E) will cause a recession</p><p>2. If real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between </p><p>A) the money supply and the price level</p><p>B) the money supply and the interest rate</p><p>C) the money supply and the foreign exchange rate</p><p>D) velocity and real GDP</p><p>E) velocity and nominal GDP</p><p>3. The opportunity cost of holding money is measured by the </p><p>A) interest rate</p><p>B) liquidity lost by holding money</p><p>C) money supply curve</p><p>D) inflation rate</p><p>E) cost of cashing in financial assets 4. The average U.S. recession (after World War II) has lasted </p><p>A) a few months</p><p>B) about half a year</p><p>C) just under a year</p><p>D) about three weeks</p><p>E) about two years</p><p>5. One often-cited rationale for a fixed-growth-rate monetary policy is that </p><p>A) it is too expensive to pay a staff to continually make adjustments in policy</p><p>B) although it's possible to determine what's happening in the economy, it's not possible to determine what to do about it</p><p>C) it is not possible to determine with any certainty what's happening in the economy, so it's easy to make a mistake with active policy</p><p>D) we know that the economy is increasing at a fixed rate year after year, so a fixed rate of growth in the money supply is justified</p><p>E) then the Federal Reserve would be superfluous and we could eliminate one large bureaucracy</p><p>6. According to those who favor a passive approach to policy, a contractionary gap will be eliminated because </p><p>A) prices and wages rise rapidly</p><p>B) prices and wages are flexible</p><p>C) the aggregate demand curve will shift to the right</p><p>D) the economy automatically slows down</p><p>E) the aggregate demand curve will shift to the left</p><p>7. The reason why self-correction works to close a contractionary gap is because </p><p>A) a labor shortage causes money wages to increase</p><p>B) a labor surplus causes money wages to increase C) a labor shortage causes money wages to fall</p><p>D) a labor surplus causes money wages to fall</p><p>E) falling money wages shift the short-run aggregate supply curve to the left</p><p>8. As a result of expansionary monetary policy, </p><p>A) both aggregate expenditure and aggregate demand increase</p><p>B) both aggregate expenditure and aggregate demand decrease</p><p>C) aggregate expenditure increases and aggregate demand decreases</p><p>D) aggregate expenditure decreases and aggregate demand increases</p><p>E) aggregate expenditure remains unchanged; aggregate demand increases</p><p>9. If the money supply is $10,000 and the nominal GDP is $40,000, then the velocity of money is: </p><p>A) 4</p><p>B) 1/4</p><p>C) 3</p><p>D) 1/3</p><p>E) 1</p><p>10. The money demand curve describes how the quantity of money demanded varies with </p><p>A) nominal GDP</p><p>B) real GDP</p><p>C) the price level</p><p>D) the interest rate</p><p>E) consumption 11. A movement upward and to the left along the money demand curve is caused by </p><p>A) an increase in the interest rate</p><p>B) a decrease in the interest rate</p><p>C) a decrease in real GDP</p><p>D) an increase in real GDP</p><p>E) an increase in the average price level</p><p>12. An increase in the money supply causes interest rates to ______, investment spending to ______and aggregate demand to ______. </p><p>A) rise; rise; rise</p><p>B) rise; fall; rise</p><p>C) rise; fall; fall</p><p>D) fall; rise; fall</p><p>E) fall; rise; rise</p><p>13.</p><p>According to those who favor a passive approach to policy, how will the economy shown in Exhibit 16-2 attain equilibrium at potential output? A) The SRAS curve will shift to the left.</p><p>B) The SRAS curve will shift to the right.</p><p>C) Either the money supply or government spending should be increased.</p><p>D) Either the money supply or government spending should be decreased.</p><p>E) Aggregate demand should be decreased.</p><p>14. People will hold ______money as the interest rate ______because they will ______other financial assets. </p><p>A) more; decreases; buy</p><p>B) more; increases; sell</p><p>C) more; decreases; sell</p><p>D) less; increases; sell</p><p>E) less; decreases; buy</p><p>15. If the quantity of money supplied exceeds the quantity of money demanded, </p><p>A) this is evidence of a failed fiscal policy</p><p>B) this indicates that the supply of money curve is horizontal</p><p>C) the interest rate will fall</p><p>D) the quantity of money demanded will increase</p><p>E) the transactions money demand curve will shift to the right</p><p>16. In total, the lags associated with discretionary policy can extend from the time a </p><p>A) problem occurs in the economy through the time it is recognized by the government</p><p>B) problem is recognized by the government through the time an agreed-on policy is approved</p><p>C) policy is approved through the time the policy is implemented</p><p>D) policy is implemented through the time its impact is felt in the economy</p><p>E) problem occurs in the economy through the time a corrective policy has an impact on the economy 17. According to the rational expectations school, people base their expectations about inflation on </p><p>A) the announcement of a change in policy</p><p>B) weighted averages of previous inflation rates, with the most distant getting the heaviest weight</p><p>C) all information available to them</p><p>D) changes in monetary policy only</p><p>E) changes in both monetary and fiscal policy</p><p>18. Problems facing active policy decisions include </p><p>A) both c and d</p><p>B) all of the following</p><p>C) timing problems related to lags and self-correction</p><p>D) that the natural unemployment rate is uncertain</p><p>E) the self-correcting forces in the economy don't work well</p><p>19. According to the natural rate hypothesis, </p><p>A) government policy makers can influence the tradeoff between inflation and unemployment in the long run but not in the short run</p><p>B) government policy makers can target both stable interest rates and a stable money supply in the long run but not in the short run</p><p>C) government policy makers can target both stable interest rates and a stable money supply in the short run but not in the long run</p><p>D) the economy tends toward the natural rate of unemployment only when the government provides the appropriate demand stimulus</p><p>E) government policy makers can influence the tradeoff between inflation and unemployment in the short run but not in the long run 20. If the short-run aggregate supply curve is positively sloped and the Fed increases the money supply, aggregate demand </p><p>A) increases, which increases real GDP and the price level</p><p>B) increases, which decreases real GDP and the price level</p><p>C) falls, which decreases real GDP and increases the price level</p><p>D) increases, which decreases real GDP and increases the price level</p><p>E) falls, which increases real GDP and the price leve</p>