Question

19. We would expect that the level of income that would equate total demand for and supply of money would be: (a) roughly at the level of the Fed’s interest rate target; (b) lower the lower the interest rates; (c) equal to the level that would equate realized investment with realized savings; (d) higher the lower the interest rate (or lower the higher the interest rate).

20. For several decades, Japan was in a “liquidity trap.” Consequently: (a) further monetary stimulus had little to no impact on GDP; (b) interest rates became stuck at very high levels; (c) fiscal stimulus that pushed the LM curve outward could not bring interest rates up: (d) there was a systemic insufficiency of liquidity in Japanese financial markets.

21. If “inflation is always and everywhere a monetary phenomenon,” the which statement is most true? (a) excessive money supply growth likely is THE cause of inflation; (b) inflation has little to do with the spread between growth rates of actual and potential GDP; (c) excessive money supply growth serves as the “fuel” that keeps the price level rising; (d) the best solution to excess inflation is to rapidly and persistently increase growth in the M-1 money supply.

22. The research conclusion that too much money supply growth for too long results eventually in higher rates of inflation suggests that: (a) there is a stable, long-term relationship between money supply growth and inflation that can be estimated precisely; (b) the relationship between money supply growth and inflation, while discoverable, is also highly variable; (c) the relationship between money supply growth and inflation is immediate and fast-acting; (d) appropriate monetary policy can bring the inflation rate to the Fed’s target level with precision over the long-term.

23. The level of the money supply is determined by the level of economic activity and adjusted at the margin via the implementation of monetary policy by the Federal Reserve. Thus, the U.S. is said to have: (a) an “elastic currency;” (b) a gold standard; (c) a rule-based monetary policy; (d) an independent central bank.

24. The Employment Act of 1946 established the original monetary policy mandate of the Fed. It called for: (a) balancing the federal budget deficit; (b) elimination of frictional unemployment by 1950; (c) setting conditions in the economy and financial system conducive to the achievement of full employment of workers and price stability; (d) maximizing employment and financial market stability.

25. With respect to the Equation of Exchange, velocity can best be thought of as: (a) the number of times an individual dollar bill is spent in an average month; (b) the number of dollars of nominal GDP per dollar of money supply; (c) how quickly new orders for business inventories can be filled; (d) the ratio of money supply to inflation.

Answer 1

The answers are as follows:-

(a) roughly at the level of the Fed’s interest rate targets

The level of income that would equate total demand for and supply of money would be generally at the interest rate set by the Fed since the Fed controls the monetary base in terms of expansion or contraction based on the need for the economy.

(a) further monetary stimulus had little to no impact on GDP

Since Japan has 0 percent or negative interest rates while it's going through a liquidity trap, further monetary stimulus will have little to no impact on the GDP.

(a) excessive money supply growth likely is THE cause of inflation

According to Milton Friedman,money supply growth is generally the primary cause of price rises which means that excessive money supply growth is likely the cause of inflation.

(a) an “elastic currency

An elastic currency is the a currency that automatically increases and decreases in volume with the demands of the economy.

(c) setting conditions in the economy and financial system conducive to the achievement of full employment of workers and price stability

This was the goal set by the policy makers of the Unemployment Act.

(a) the number of times an individual dollar bill is spent in an average month

The velocity of money is a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period. Hence (a) is the right option.