ECON 472 Monetary Theory and Policy Exam
Questions and Complete Solutions
1. Which of the following is a tool of monetary policy?
A. Taxation
B. Transfer payments
C. Open market operations
D. Government spending
Correct Answer: C. Open market operations
2. The monetary base is made up of
A. Currency in circulation only.
B. Reserves and currency in circulation.
C. Currency in circulation and checking deposits.
D. Reserves and time deposits.
Correct Answer: B. Reserves and currency in circulation
3. If the Fed wants to increase the federal funds rate, it can
A. Conduct open market purchases.
B. Lower the reserve requirement.
C. Conduct open market sales.
D. Lower the discount rate.
Correct Answer: C. Conduct open market sales
4. Which of the following is a liability on the Fed’s balance sheet?
A. Securities
B. Discount loans
C. Reserves
D. Buildings
Correct Answer: C. Reserves
5. Which of the following is the most liquid asset?
A. Savings deposits
B. Money market mutual funds
,C. Currency
D. Small-denomination time deposits
Correct Answer: C. Currency
6. Which of the following would lead to a multiple deposit creation in the banking system?
A. A bank buys government bonds from the Fed.
B. A person deposits currency into a checking account.
C. The Fed sells government bonds to a bank.
D. The Fed increases the discount rate.
Correct Answer: B. A person deposits currency into a checking account
7. A decrease in the required reserve ratio will
A. Increase the money multiplier.
B. Decrease the money multiplier.
C. Not affect the money multiplier.
D. Increase the discount rate.
Correct Answer: A. Increase the money multiplier
8. The Taylor Rule is used to
A. Forecast inflation.
B. Measure the output gap.
C. Set the federal funds rate.
D. Control the money supply.
Correct Answer: C. Set the federal funds rate
9. Which of the following is not a goal of monetary policy?
A. Price stability
B. High employment
C. Economic growth
D. Increasing the federal deficit
Correct Answer: D. Increasing the federal deficit
10. In the long run, inflation is caused by
A. Wage increases.
B. Increases in productivity.
C. Money supply growing faster than output.
, D. Supply shocks.
Correct Answer: C. Money supply growing faster than output
11. The quantity theory of money assumes that
A. Velocity is constant.
B. Money supply has no effect on prices.
C. Prices are constant.
D. Output is determined by money.
Correct Answer: A. Velocity is constant
12. If actual inflation is higher than expected inflation,
A. Borrowers are worse off.
B. Lenders are worse off.
C. Real interest rates rise.
D. The nominal interest rate falls.
Correct Answer: B. Lenders are worse off
13. In the IS-LM model, an increase in government spending shifts
A. The IS curve to the left.
B. The IS curve to the right.
C. The LM curve to the right.
D. The LM curve to the left.
Correct Answer: B. The IS curve to the right
14. The LM curve represents equilibrium in
A. The goods market.
B. The money market.
C. The labor market.
D. The bond market.
Correct Answer: B. The money market
15. An increase in the interest rate will cause
A. Investment to rise.
B. Consumption to rise.
C. Output to rise.
Questions and Complete Solutions
1. Which of the following is a tool of monetary policy?
A. Taxation
B. Transfer payments
C. Open market operations
D. Government spending
Correct Answer: C. Open market operations
2. The monetary base is made up of
A. Currency in circulation only.
B. Reserves and currency in circulation.
C. Currency in circulation and checking deposits.
D. Reserves and time deposits.
Correct Answer: B. Reserves and currency in circulation
3. If the Fed wants to increase the federal funds rate, it can
A. Conduct open market purchases.
B. Lower the reserve requirement.
C. Conduct open market sales.
D. Lower the discount rate.
Correct Answer: C. Conduct open market sales
4. Which of the following is a liability on the Fed’s balance sheet?
A. Securities
B. Discount loans
C. Reserves
D. Buildings
Correct Answer: C. Reserves
5. Which of the following is the most liquid asset?
A. Savings deposits
B. Money market mutual funds
,C. Currency
D. Small-denomination time deposits
Correct Answer: C. Currency
6. Which of the following would lead to a multiple deposit creation in the banking system?
A. A bank buys government bonds from the Fed.
B. A person deposits currency into a checking account.
C. The Fed sells government bonds to a bank.
D. The Fed increases the discount rate.
Correct Answer: B. A person deposits currency into a checking account
7. A decrease in the required reserve ratio will
A. Increase the money multiplier.
B. Decrease the money multiplier.
C. Not affect the money multiplier.
D. Increase the discount rate.
Correct Answer: A. Increase the money multiplier
8. The Taylor Rule is used to
A. Forecast inflation.
B. Measure the output gap.
C. Set the federal funds rate.
D. Control the money supply.
Correct Answer: C. Set the federal funds rate
9. Which of the following is not a goal of monetary policy?
A. Price stability
B. High employment
C. Economic growth
D. Increasing the federal deficit
Correct Answer: D. Increasing the federal deficit
10. In the long run, inflation is caused by
A. Wage increases.
B. Increases in productivity.
C. Money supply growing faster than output.
, D. Supply shocks.
Correct Answer: C. Money supply growing faster than output
11. The quantity theory of money assumes that
A. Velocity is constant.
B. Money supply has no effect on prices.
C. Prices are constant.
D. Output is determined by money.
Correct Answer: A. Velocity is constant
12. If actual inflation is higher than expected inflation,
A. Borrowers are worse off.
B. Lenders are worse off.
C. Real interest rates rise.
D. The nominal interest rate falls.
Correct Answer: B. Lenders are worse off
13. In the IS-LM model, an increase in government spending shifts
A. The IS curve to the left.
B. The IS curve to the right.
C. The LM curve to the right.
D. The LM curve to the left.
Correct Answer: B. The IS curve to the right
14. The LM curve represents equilibrium in
A. The goods market.
B. The money market.
C. The labor market.
D. The bond market.
Correct Answer: B. The money market
15. An increase in the interest rate will cause
A. Investment to rise.
B. Consumption to rise.
C. Output to rise.
