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Monetary Neutrality is a theory in macroeconomics that states when the central bank conducts monetary policy, the central bank does not affect the real economy (e.g., the number jobs, the size and growth of output, the amount of investment). Instead, any change in the money supply would be offset by a proportional change in prices and wages. Monetary neutrality underlies the quantity theory of money. Suppose that throughout the fourth quarter of 2015, the Federal Reserve enacted a bond buying program. If monetary neutrality holds, then which of the answer choices is correct?

A. During the fourth quarter of 2015, the Fed conducted a contractionary monetary policy. From the third quarter to the fourth quarter, U.S. money supply decreased, and U.S. nominal GDP decreased.

B. During the fourth quarter of 2015, the Fed conducted a contractionary monetary policy. From the third quarter to the fourth quarter, U.S. money supply decreased, and U.S. nominal GDP was unchanged since it is not affected by changes in monetary policy.

C. During the fourth quarter of 2015, the Fed conducted an expansionary monetary policy. From the third quarter to the fourth quarter, U.S. money supply increased, and U.S. nominal GDP increased.

D. During the fourth quarter of 2015, the Fed conducted an expansionary monetary policy. From the third quarter to the fourth quarter, U.S. money supply increased, and U.S. nominal GDP was unchanged since it is not affected by changes in monetary policy.

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Anne Gillian Duero
Anne Gillian DueroLv10
28 Sep 2019
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Related questions

In an effort to move the economy out of a recession, the federal government would engage in expansionary economic policies. Respond to the following points in your paper on the actions the government would take to address expansionary fiscal and monetary policies:

Expansionary Fiscal Policy:

Explain the actions the federal government would take while engaging in expansionary fiscal policy in terms of the following:

The necessary change in taxes and government spending,

The effect on aggregate demand, GDP, and employment.

Expansionary Monetary Policy:

The three tools the Federal Reserve Bank (The Fed) uses when conducting monetary policy are the required reserve ratio, the discount rate, and open market operations.

Explain the actions of the Fed in regard to the three tools.

When the required reserve ratio is increased or decreased

When the discount rate is increased or decreased

Buying or selling government securities when conducting expansionary monetary policy

Explain how these actions would affect the money supply, interest rates, spending, aggregate demand, GDP, and employment.

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending. 

 

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

 

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

 

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

 

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

 

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

 

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

 

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease 

 

1.The classical theory of inflation

A. Is also known as the quantity theory of money.

B.was developed by some of the earliest economic thinkers.

C.is used by most modern economists to explain the long-run determinants of the inflation rate.

D.All of the above are correct.

2.To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

A.quantity theory of money.

B.price-index theory of money.

C.theory of hyperinflation.

D.disequilibrium theory of money and inflation.

3.When the price level rises, the number of dollars needed to buy a representative basket of goods

A.increases, and so the value of money rises.

B.increases, and so the value of money falls.

C.decreases, and so the value of money rises.

D.decreases, and so the value of money falls

4.The supply of money is determined by

A.the price level.

B.the Treasury and Congressional Budget Office.

C.the Federal Reserve System.

D.the demand for money.

6.Economic variables whose values are measured in monetary units are called

A.dichotomous variables.

B.nominal variables.

C.classical variables.

D.real variables.

7.Economic variables whose values are measured in goods are called

A.dichotomous variables.

B.nominal variables.

C.classical variables.

D.real variables.

7.The classical dichotomy refers to the idea that the supply of money

A. is irrelevant for understanding the determinants of nominal and real variables.

B.determines nominal variables, but not real variables.

C.determines real variables, but not nominal variables.

D.is a determinant of both real and nominal variables.

8.According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

A.the price level

B.nominal wages

C.nominal GDP

D.All of the above are correct.

9.Monetary neutrality implies that an increase in the quantity of money will

A.increase employment.

B.increase the price level.

C.increase the incentive to save.

D.not increase any of the above.

10.The velocity of money is

A.the rate at which the Fed puts money into the economy.

B.the same thing as the long-term growth rate of the money supply.

C.the money supply divided by nominal GDP.

D.the average number of times per year a dollar is spent.

11.If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?

A.2.25

B.3.00

C.6.50

D.None of the above is correct.

12.According to the assumptions of the quantity theory of money, if the money supply increases by 5 per cent, then

A.nominal and real GDP would rise by 5 per cent.

B.nominal GDP would rise by 5 per cent; real GDP would be unchanged.

C.nominal GDP would be unchanged; real GDP would rise by 5 per cent.

D.neither nominal GDP nor real GDP would change.

13.The inflation tax refers to

A.the revenue a government creates by printing money.

B.higher inflation which requires more frequent price changes.

C.the idea that other things the same, an increase in the tax rate raises the inflation rate.

D.taxes being indexed for inflation.

14.The inflation tax falls most heavily on

A.those who hold a lot of currency and accounts for a large share of U.S. government revenue.

B.those who hold a lot of currency but accounts for a small share of U.S. government revenue.

C.those who hold little currency and accounts for a large share of U.S. government revenue.

D.those who hold little currency but accounts for a small share of U.S. government revenue.

15.The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the

A.Friedman Effect.

B.Hume Effect.

C.Fisher Effect.

D.None of the above is correct.

16.The nominal interest rate is 3 per cent and the inflation rate is 2 per cent. What is the real interest rate?

A.6 per cent

B.5 per cent

C.1.5 per cent

D.1 per cent

17.Which of the following helps to explain why the inflation fallacy is a fallacy?

A.Increases in the price level can be created by increases in money demand.

B.Nominal incomes tend to rise at the same time that the price level is rising.

C.As the price level rises, the value of a dollar falls.

D.Inflation only changes nominal variables.

18.The shoe-leather cost of inflation refers to

A.the re distributional effects of unexpected inflation.

B.the time spent searching for low prices when inflation rises.

C.the waste of resources used to maintain lower money holdings.

D.the increased cost to the government of printing more money.

19.Which of the following is an example of menu costs?

A.deciding on new prices

B.printing new price-lists

C.advertising new prices

D.All of the above are examples of menu costs.

20.Which of the following are U.S. taxpayers allowed to adjust for inflation for income taxes?

A.both interest in income and capital gains.

B.interest income but not capital gains.

C.capital gains but net interest income.

D.neither interest income nor capital gains.

21.You put money into an account and earn a real interest rate of 4 per cent. Inflation is 2 per cent, and your marginal tax rate is 20 per cent. What is your after-tax real rate of interest?

A.1.2 per cent

B.2.8 per cent

C.4.8 per cent

D.None of the above is correct.

22.Which of the following is correct? Inflation

A.impedes financial markets in their role of allocating resources.

B.reduces the purchasing power of the average consumer.

C.generally increases after-tax real interest rates.

D.is most costly when anticipated.

23.Wealth is redistributed from creditors to debtors when inflation is

A.high, whether it is expected or not.

B.low, whether it is expected or not.

C.unexpectedly high.

D.unexpectedly low.

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