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Macroeconomics: Policy and Practice, 2e, Global Edition (Mishkin)
Chapter 10 Monetary Policy and Aggregate Demand
10.1 The Federal Reserve and Monetary Policy
1) When the Federal Reserve ________.

A) drains liquidity, the federal funds rate falls
B) drains liquidity, real interest rates fall
C) provides more liquidity, the federal funds rate falls
D) all of the above
E) none of the above
Answer: C
Topic: 10.1 The Federal Reserve and Monetary Policy
AACSB: Analytical Thinking
2) The Federal Reserve ________.

A) sets the federal funds rate once a year
B) controls the interest rate in the short run
C) controls the interest rate in the long run
D) all of the above
Answer: B
3) The federal funds rate is ________.

A) a real interest rate
B) set periodically by Congress
C) a nominal interest rate
D) all of the above
Answer: C
4) A central bank can control the real interest rate precisely, so long as ________ remains
constant.
A) the nominal interest rate
B) monetary policy
C) expected inflation
D) all of the above
Answer: C
1
Copyright © 2015 Pearson Education Limited
5) In the very short run ________.
A) the real interest rate will be affected by changes in the nominal rate
B) monetary policy has an immediate effect on inflation
C) the inflation rate is determined by the federal funds rate
D) all of the above
Answer: A
6) Changes in liquidity in the banking system affect ________.

A) the nominal interest rate
B) the real interest rate
C) the federal funds rate
D) all of the above
Answer: D
10.2 The Monetary Policy Curve
1) The MP curve indicates the relationship between ________ and the ________.
A) taxes; price level
B) the real interest rate; inflation rate
C) monetary policy; IS curve
D) all of the above
Answer: B
Topic: 10.2 The Monetary Policy Curve
2) The exogenous variable in the monetary policy curve is ________.

A) the policy parameter, λ
C) the autonomous component,
D) the federal funds rate
E) the inflation rate
Answer: E
2
3) The endogenous variable in the monetary policy curve is ________.
A) the policy parameter, λ
C) the autonomous component,
D) the federal funds rate
E) the inflation rate
Answer: B
4) Which of the following is true about the Taylor principle?

A) it explains the link between higher inflation and higher real interest rates
B) it is the foundation for an upward sloping MP curve
C) it reflects the practice of monetary policy
D) all of the above
Answer: D
AACSB: Reflective Thinking
5) If the central bank did not follow the Taylor principle, an increase in inflation would lead to a
decrease in ________.
A) the nominal interest
C) aggregate output
D) all of the above
Answer: B
6) If the central bank did not follow the Taylor principle, an increase in inflation would lead to
________.
A) a decrease in the nominal interest rate
B) an increase in inflation
C) a decrease in aggregate expenditure
D) all of the above
Answer: B
3
7) If expected inflation rises, monetary policy ________.
A) is rendered ineffective
B) must be tightened, to prevent further increases in inflation and expected inflation
C) will prevent any increase in the real interest rate
D) is designed to increase the nominal interest rate by more than the increase in expected
inflation
Answer: D
8) Autonomous tightening of monetary policy involves ________.

A) raising interest rates and shifting the MP curve to the right
B) lowering interest rates and shifting the MP curve to the left
C) raising interest rates and shifting the MP curve to the left
D) lowering interest rates and shifting the MP curve to the right
Answer: C
9) Autonomous easing of monetary policy involves ________.

A) raising interest rates and shifting the MP curve to the right
B) lowering interest rates and shifting the MP curve to the left
C) raising interest rates and shifting the MP curve to the left
D) lowering interest rates and shifting the MP curve to the right
Answer: D
10) A movement along the MP curve ________.

A) implies an automatic adjustment of the interest rate
B) implies an autonomous adjustment to the interest rate
C) implies an autonomous adjustment of aggregate demand
D) all of the above
Answer: A
4
11) A shift of the MP curve ________.
A) implies an automatic adjustment of the interest rate
B) implies a direct policy action of the Federal Reserve
C) does not alter the relationship between inflation and the interest rate
D) all of the above
Answer: B
12) The MP curve may be used to represent ________.

A) movements of the real interest rate as a direct policy action of the Federal Reserve
B) movements of the real interest rate that are independent of direct Federal Reserve action
C) how the real interest rate is related to the inflation rate
D) all of the above
Answer: D
13) The MP curve may be used to represent how ________.

A) movements of the inflation rate are determined by the real interest rate
B) monetary policy responds to changes in the real interest rate
C) movements of the real interest rate are related to the inflation rate
D) all of the above
Answer: C
14) A decision to increase the parameter λ in the MP curve is an example of ________.

A) autonomous easing
B) leftward movement along the curve
C) rightward movement along the curve
D) endogenous response
E) autonomous tightening
Answer: E
5
15) Before the financial crisis of 2007, inflation was on the rise. According to the MP curve, this
would lead to ________.
A) an increase in the real interest rate
B) an upward shift of the MP curve, if policymakers opted for autonomous tightening
C) a decrease in aggregate output
D) all of the above
Answer: D
16) As the financial crisis became more severe in 2008, the Federal Reserve undertook a(n)
________ of monetary policy, an effect of which is to ________ inflation.
A) contraction; raise
B) easing; raise
C) contraction; lower
D) easing; lower
Answer: B
17) Throughout 2008, inflation and the real interest rate declined together. The cause is a
combination of ________.
A) monetary policy easing and declining autonomous spending
B) declining autonomous spending and movement along a fixed MP curve
C) monetary policy tightening and inversion of the MP curve
D) increased government spending and movement along a fixed MP curve
Answer: A
6
MP Curve
18) Referring to the graph above, a movement from point H to point I might represent ________.
A) the increase in the inflation rate that occurs when the real interest rate rises
B) the automatic response of monetary policy to an increase in the inflation rate
C) an autonomous tightening of monetary policy
D) any of the above
Answer: B
19) On the graph above, which pair of points best represents the impacts in the U. S. of the
financial crisis and policy response from 2007 through 2008?
A) H to I
B) K to G
C) I to H
D) K to F
E) G to J
Answer: E
20) On the graph above, which pair of points best represents a scenario in which the nominal
interest rate and expected inflation decline equally?
A) I to H
B) G to K
C) I to J
D) K to F
E) J to H
Answer: D
7
21) Suppose the nominal interest rate is five percent, and the inflation rate rises from two percent
to three percent. Might an increase in the nominal interest rate to 5.5 percent be consistent with
the Taylor Principle? If not, what consequences might ensue?
Answer: Yes, it might be. The Taylor Principle requires that the nominal interest rate rise by
more than the increase in expected inflation. If expected inflation has not changed, or has
increased by less than half a percentage point, then the increase in the nominal interest rate
implies an increase in the real interest rate. If expected inflation has increased by more than
0.5%, then the real interest rate has declined, which will encourage more spending that might
fuel further increases in inflation.
22) A key concern of monetary policy makers is credibility. In particular, that people believe that
inflation will not deviate far from a rate consistent with a healthy macroeconomy. How might
credibility affect the slope of the monetary policy curve?
Answer: Credibility implies that the monetary policy curve will be relatively flat. When
inflation expectations rely more on confidence in monetary policy and less on the latest
fluctuations, small changes in the real interest rate suffice to prevent changes in inflation from
acquiring momentum.
23) Suppose the economy is just recovering from a recession and all signs now point to robust
growth. How might this transition from recovery to expansion be reflected in the monetary
policy curve?
Answer: The monetary policy curve will have been relatively low, as policy makers kept interest
rates as low as possible to hasten recovery from the recession. Once the recession is over, the
monetary policy curve will shift up, since low interest rates are no longer appropriate, and to
reduce the danger that spending will climb too rapidly and cause inflation to rise. The curve may
become steeper, as well, so that any increases in inflation are countered by substantial increases
in the real interest rate.
24) If the monetary policy curve is correct, then policy makers care only about inflation and not
at all about aggregate output and unemployment. Comment.
Answer: The monetary policy curve is a concise expression of monetary policy, highlighting
policy makers' concern with inflation stability. Policy concerns other than inflation are
represented by shifts of the MP curve, so that the real interest rate may change independently of
the inflation rate. Moreover, the goal of inflation stability implies the need to be responsive to
macroeconomic conditions in general, since the behavior of inflation is closely linked to changes
in aggregate output and unemployment.
8
10.3 The Aggregate Demand Curve
1) The AD Curve ________.

A) demonstrates how central banks respond to changes in interest rates by changing the inflation
rate
B) shows how changes in equilibrium output affect the inflation rate
C) explains long run fluctuations in output and inflation
D) all of the above
Answer: E
Topic: 10.3 The Aggregate Demand Curve
2) The MP Curve ________.

A) demonstrates how central banks respond to changes in inflation with changes in the interest
rate
B) shows how changes in interest rates affect equilibrium output
C) explains short run fluctuations in output and inflation
D) all of the above
Answer: A
3) The IS Curve ________.

A) demonstrates how central banks respond to changes in inflation with changes in the interest
rate
B) shows how changes in interest rates affect equilibrium output
C) explains short run fluctuations in output and inflation
D) all of the above
Answer: B

A) indicates the level of aggregate output corresponding to different goods-market-clearing
levels of the interest rate
B) is downward sloping, because with higher inflation comes higher interest rates and lower
spending, so equilibrium aggregate output declines
C) explains how inflation affects output in the short run
D) all of the above
Answer: D
9
A) indicates the level of aggregate output corresponding to different goods-market-clearing
levels of the inflation rate
B) is downward sloping, because with higher inflation comes lower interest rates and lower
spending, so equilibrium aggregate output declines
C) explains how inflation affects output in the short run
D) all of the above
Answer: C
6) Factors that shift the AD Curve include ________.

A) the inflation rate
B) aggregate output
C) taxes
D) all of the above
Answer: C
7) In the aggregate demand curve, the endogenous variable is ________.

A) output
B) inflation
C) the real interest rate
D) real money balances
Answer: A
8) An increase in the real interest rate occurs when ________.

A) monetary policy responds automatically to an increase in inflation
B) expected inflation increases, relative to the nominal interest rate
C) an increase in autonomous spending causes an increase in equilibrium output
D) all of the above
Answer: A
10
9) A decrease in the real interest rate occurs when ________.
A) there is an autonomous tightening of monetary policy
B) expected inflation increases, relative to the nominal interest rate
C) a decrease in autonomous spending causes a decrease in equilibrium output
D) all of the above
Answer: B

A) government purchases
B) autonomous investment
C) taxes
D) all of the above
Answer: D

A) autonomous net exports
B) autonomous inflation
C) autonomous interest rates
D) all of the above
Answer: A
12) If people begin to generally feel better about the future ________.
A) autonomous consumption should rise
B) autonomous investment should rise
C) the AD curve will shift to the right
D) all of the above
Answer: D
11
13) If government cuts taxes ________.
A) after tax income should increase shifting AD to the left to a lower equilibrium level of output
B) after tax income should increase shifting AD to the right to a higher equilibrium level of
output
C) after tax income and the equilibrium level of output remain unchanged
D) after tax income remains unchanged but the equilibrium level of output would increase
Answer: B
14) An increase in autonomous spending leads to higher ________.

A) inflation
B) output
C) real interest rate
D) all of the above
Answer: B
15) An increase in inflation leads to higher ________.

A) output
B) spending
C) real interest rate
D) all of the above
Answer: C
16) A change in inflation leads to shifts of the ________ curves.

A) MP, IS, & AD
B) MP & IS, but not AD
C) IS & AD, but not MP
D) MP, but not IS nor AD
Answer: E
12
17) If the Federal Reserve raises interest rates in an autonomous tightening ________.
A) the MP curve shifts up, there is an upward movement along the IS curve, and the AD curve
shifts to the left to a lower level of equilibrium output
B) the MP curve shifts down, there is a downward movement along the IS curve and the AD
curve shifts to the right to a higher level of equilibrium output
C) the MP curve shifts up, there is a downward movement along the IS curve and the AD curve
shifts to the right to a lower level of equilibrium output
D) the MP curve shifts down, there is an upward movement along the IS curve and the AD curve
shifts to the left to a higher level of equilibrium output
Answer: A
18) If the Federal Reserve raises interest rates in an autonomous tightening ________.
A) the MP curve shifts up, raising the real interest for any given level of the inflation rate
B) there is an upward movement along the IS curve
C) the AD curve shifts to the left
D) all of the above
Answer: D
19) Shifts of the ________ curves result from autonomous monetary policy.
A) MP, IS, & AD
B) MP & IS, but not AD
C) IS & AD, but not MP
D) MP, but not IS nor AD
Answer: E
20) The IS curve is Y = 20 - 1.5r, and the aggregate demand curve is Y = 15.5 - 0.3π. The
monetary policy curve is ________.
A) r = 4.5 - 1.8π
B) r = 20 + 0.3π
C) r = 3 + 0.2π
D) Y = 17.75 + 0.6π
Answer: C
13
21) The IS curve is Y = 20 - 1.5r, and the aggregate demand curve is Y = 15.5 - 0.3π. When the
interest rate is 7 percent, the inflation rate is ________ percent.
A) 14.6
B) 9.5
C) 3.6
D) 20
Answer: D
22) The IS curve is Y = 20 - 1.5r, and the aggregate demand curve is Y = 15.5 - 0.3π. When the
inflation rate is 3 percent, output is ________.
A) 20
B) 14.6
C) 9.5
D) 3.6
Answer: B
23) The aggregate demand curve is Y = 15 - 0.2π when the inflation rate falls from 6 percent to 5
percent. Then, output increases from 13.8 to 17. The response of monetary policy to the inflation
decline has been ________.
A) autonomous tightening
B) automatic adjustment
C) autonomous easing
D) to increase autonomous spending
Answer: C
24) Suppose the monetary policy curve is r = 5 + 0.8π, and the current values for output and
inflation are 16.8 and 2 percent, respectively. An increase in global resource prices pushes the
inflation rate to 4 percent. Policy makers estimate that the monetary policy in place, responding
to 4 percent inflation, will bring output down to 13.6, a decline considered excessive. Instead,
they implement an autonomous easing of monetary policy to lower output from 16.8 to 16.
Assuming no change in the slope of the monetary policy curve, determine the new curve.
Answer: From the given monetary policy curve, the real interest rate was initially 6.6 percent,
and would rise to 8.2 percent in response to the increase in inflation from 2 percent to 4 percent.
Since this increase in the real interest rate would cause output to decline from 16.8 to 13.6, we
know that the IS curve is Y = 30 - 2r. If output is to be 16, the real interest rate must be 7
percent. The monetary policy curve with slope 0.8 and coordinates 4, 7 is r = 3.8 + 0.8π.
14
25) Suppose the demand curve is Y = 38 - 3π, and the current values for output and the real
interest rate are 29 and 7 percent, respectively. A decrease in inflation leads to a new output level
of 32 and real interest rate at 6 percent. The monetary policy curve is ________.
Answer: The inflation rate falls from 3 percent to 2 percent. The corresponding real interest
rates are 7 percent and 6 percent, so the MP curve is r = 4 + π.
26) When the inflation rate falls, what happens, and why, to the MP, IS, and AD curves?
Answer: A decrease in the inflation rate will, typically, raise the real interest rate, given the
nominal interest rate, because expected inflation will have fallen. To prevent this increase in the
real interest rate, which would cause spending and output to decline, the central bank lowers the
nominal interest rate by more than the decrease in expected inflation. This movement down to
the left along the MP curve corresponds to movement down to the right along the IS curve,
because the lower real interest rate increases consumption, investment, and net exports.
Movement down to the right along the AD curve shows the increase in output that has resulted
from the decrease in the inflation rate.
10.4 The Money Market and Interest Rates
1) The liquidity preference theory distinguishes between ________.

A) nominal and real quantities
B) money and financial assets
C) buying goods and earning interest income
D) all of the above
Answer: D
Topic: 10.4 The Money Market and Interest Rates
2) "Real money balances" refers to ________.

A) the quantity of goods and services that money can buy
B) gold and silver
C) money that is actually available to be spent
D) all of the above
Answer: A
15
3) The liquidity preference theory ________.
A) distinguishes between nominal and real quantities
B) shows that demand for real balances depends on real income
C) shows that demand for real balances depends on the nominal interest rate
D) all of the above
Answer: D
4) ________ is a good measure of the opportunity cost of holding money.

A) The real interest rate
B) Liquidity preference
C) Real income
D) The inflation rate
Answer: E
5) Demand for real money balances depends on ________.

A) the price level
C) the opportunity cost of holding money
D) all of the above
Answer: C
6) According to liquidity preference theory, as real income increases, so does ________.

A) the supply of real money balances
B) the demand for real money balances
C) the real interest rate
D) all of the above
Answer: B
16
7) According to liquidity preference theory, an increase in the price level would ________.
A) decrease the demand for real money balances
B) increase the supply of real money balances
C) decrease the real interest rate
D) all of the above
Answer: E
8) According to liquidity preference theory, an increase in the price level would ________.
A) increase the demand for real money balances
B) decrease the supply of real money balances
C) decrease the real interest rate
D) all of the above
Answer: B
9) The endogenous variable in the liquidity preference function is ________.

A) demand for real money balances
B) the nominal interest rate
C) real income
D) the price level
Answer: A
10) The liquidity preference function shows that as ________.

A) real income decreases, so does the demand for real money balances
B) the nominal interest rate increases, so does the demand for real money balances
C) real income decreases, so does the real interest rate
D) all of the above
Answer: A
17
11) As the nominal interest rate increases ________.
A) it becomes more costly to hold money instead of bonds
B) the quantity of money demanded falls
C) the opportunity cost of holding money rises
D) all of the above
Answer: D
12) As the nominal interest rate increases ________.

A) it becomes more costly to hold bonds instead of money
B) the quantity of money demanded rises
C) the opportunity cost of holding money rises
D) all of the above
Answer: C
13) As income rises ________.

A) the number of transactions households and firms undertake should increase
B) wealth also rises
C) demand for real money balances should increase
D) all of the above
Answer: D
14) The demand for real money balances ________.

A) is downward sloping with respect to prices
B) is downward sloping with respect to interest rates
C) is downward sloping with respect to income
D) all of the above
Answer: B
18
15) Why is the demand for real money balances downward sloping?
A) because the opportunity cost of holding money decreases as interest rates decrease
B) because when the interest rate falls the quantity of money demanded increases
C) because lower interest rates encourage firms and households to increase their money holdings
D) all of the above
Answer: D
16) The supply curve for money ________.

A) is upward sloping with respect to interest rates
B) is fixed to a specified interest rate
C) is fixed regardless of the interest rate
D) is downward sloping with respect to interest rates
Answer: C
17) Increased liquidity in the banking system occurs when ________.

A) people buy more bonds
B) the demand for real money balances declines
C) banks buy more bonds from the central bank
D) all of the above
Answer: E
18) Typically, central banks increase the supply of money by ________.

A) buying bonds from banks
B) printing currency
C) directing the government to issue more money to banks
D) all of the above
Answer: A
19
19) Which of the following is true with regard to the supply of money?
A) an open market sale of government securities will increase liquidity
B) an open market purchase of government securities will decrease liquidity
C) liquidity and the money supply are directly related
D) all of the above
Answer: C
20) Which of the following is true with regard to the supply of money?
A) an open market purchase of government securities will increase liquidity
B) an open market sale of government securities will decrease liquidity
C) liquidity and the money supply are directly related
D) all of the above
Answer: D
21) A decrease in income ________.

A) lowers money demand for any given interest rate
B) lowers interest rates ceteris paribus
C) leads to a leftward shift of the money demand curve
D) all of the above
Answer: D
22) When people are holding money in excess of their demand for real money balances
________.
A) the nominal interest rate will fall
B) they increase their purchases of goods and services
C) the central bank buys bonds to correct the imbalance
D) all of the above
Answer: A
20
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Section of Bunker Hill Monument
Reproduced from Solomon Willard, Plans and
Sections of the Obelisk on Bunker’s Hill
(Boston, 1843), Plate V
As described in the Baldwin Report, the circular winding
staircase is composed of granite steps, starting with a width of about
four feet and narrowing as the ascent is made. Baldwin called for
“places of repose” (landings) at intervals. Modern architects call the
part around which a circular staircase winds, the “newel.” Baldwin’s
newel is a hallow wall, 10 feet in diameter at the base, about two feet
thick.
Thus, the monument was designed by an engineer, not an
architect. Baldwin violated a common rule for the proportions of
ancient Egyptian obelisks, that the pyramidion should be as high as
the base is wide, which is one reason why the Washington
Monument is so beautiful. One regrets that architect Willard, who
picked up where Baldwin left off, did not see fit to modify the Baldwin
lines. There seems never to have been any question as to the
monument’s material: granite, the native New England stone.
Although we admire the Bunker Hill Monument for its somber
strength, it cannot be called a structure of beauty, as is the lighter-
tinted and finer-textured marble Washington Monument, with its
sharper apex.
We can also speculate on why Baldwin made the monument
wholly of granite. At today’s prices, the circular inner surface of the
shaft and the circular chimney, or newel, around which the stone
staircase winds, would be of tremendous cost. The dressing of the
stone for a square inner area would be much cheaper.
Before criticizing Baldwin on his ponderous stair design, which
could be replaced by a light, modern fire escape, we should look at
the status of the tiny American iron industry of his day. The
ironmasters were recovering from the decline of activity in the War of
1812, during which they had lost their British market. Baldwin would
know that certain early railroad promoters estimated that granite
tracks mounted with iron plates would be less expensive than the
English-rolled rails, which the Americans could not produce. With
masons in Massachusetts receiving about $0.18 an hour, granite
was considered cheaper than iron. Baldwin therefore designed his
stairway of granite, with a massive granite chimney “newel” to
support the inner ends of the treads. Long before the monument was
completed, however, a square staircase of either cast iron or
wrought iron could have been produced, economically, by American
ironmasters. It was then too late to make the change, however.
At about the time of the completion of the monument the first
mechanical elevator was exhibited, but there was no room for an
elevator at Bunker Hill—the newel was in the way. To climb a few
score steps would be an easy task to our sturdy forebears, and to
say that one has “climbed the Bunker Hill Monument” is a boast that
hundreds of thousands of tourists to Boston have been proud to
make for over 100 years. Baldwin may have been right again, as he
usually was.
Baldwin specified that the monument should be square with the
compass, a common Egyptian practice. As built, however, it is
oriented to fit the redoubt (southeast corner) of the battle fortification.
Structurally, Baldwin designed a sound foundation, 12 feet deep,
built of six courses of stone with no small rubble that might
deteriorate through the years. He specified that the starting level of
the base of the monument should be established at the best
elevation to avoid an uneconomical distribution of the excavated
earth; today we would say that he balanced cut and fill.
The modern building contractor finds the estimate that went with
the report both practical and quaint. He will find that the digging of
the pit for the foundation of the monument was figured in “squares,”
at $2.00 each; and since a square meant eight cubic yards, hand
excavation was therefore priced at $0.25 per cubic yard. This price
must have included the expense of shoring; also the pumping that
such a deep pit would require. Baldwin proposed to dig a deep well
on the site (today called a test pit), which would not only indicate the
adequacy of the soil, but would also furnish water for construction
purposes. Much water would be needed to mix the lime and sand
mortar for the monument as well as for the Roman cement, for which
5
the estimated 100 casks were figured at $7.00 each.
5
“The use of natural cement was introduced
by Mr. Parker, who first discovered the properties
of the cement-stone in the Isle of Sheppy, and
took out a patent for the sale of it in 1796, under
the name of ‘Roman Cement.’”—Edward
Dobson, Rudiments of the Art of Building
(London: John Weale, 1854).
Masonry was then estimated in “perches,” and by a little

arithmetic, the modern contractor will learn that a perch was then
equal to 25 cubic feet, or nearly a cubic yard. The 784 perches of
masonry for the foundation were priced at $10 per perch, including
“stones, hammering, mortar, laying, etc.”
The report of Baldwin contains no computations on the structural
stability of the monument. If the modern structural designer wishes to
investigate how near the safe limit the monument has been tested by
Boston’s occasional hurricane winds, he has available the major
dimensions given in the Baldwin Report, and the drawings of
Willard’s classic Plans and Sections of the Obelisk from which to
make this simple computation.
Such computation shows that the monument is so heavy that a
hurricane wind has an almost imperceptible effect on its stability.
When it is subjected to a 100-mile-per-hour wind, the resultant force
is displaced only a fraction of a foot from the center of the 50-foot-
wide foundation. The maximum load on the soil is about five tons per
square foot—a safe bearing load on “the bed of clay and gravel
which composes the soil of the Hill” as described in an old account.
The same account speaks of “great pains having been used in
loosening the earth, and in puddling and ramming the stones.”
Surely, our construction ancestors would not have purposely
disturbed the underlying soil, in an attempt to improve upon the
natural bearing strength of one of the firmest of foundations: glacial
hardpan. Like any good builder, they were undoubtedly merely
puddling with water the earth backfill around the completed
foundation.
Baldwin knew that granite would not deteriorate when exposed
to the alternately hot and cold temperatures of Boston. Half a century
later, the engineers who transported an Egyptian obelisk (one of the
Cleopatra’s Needles) to Central Park, New York, learned that the
lovely textured syenitic granite of the Nile Valley was markedly
inferior to New England granite in weather resistance, although it
had kept its surface intact for centuries in the mild climate of Egypt.
To protect Cleopatra’s Needle in New York, a paraffin coating was
found necessary.
Baldwin soon resigned from the building committee, partly
because of the press of other work, but largely in protest against a
clause which made its members, all of whom freely donated their
services, financially responsible for the estimate. Promptly after
accepting his resignation, the directors revised this clause. In
reviewing the quaint old methods, the question arises: Would
modern estimates be more accurate if the consulting architects and
engineers had to pay for overruns?
Transient Cornerstone
On 17 June 1825, the cornerstone of the monument was laid
with impressive ceremonies. As the colorful procession marched up
Bunker Hill to the stirring rendition of “Yankee Doodle” by the
drummer of Colonel William Prescott’s regiment, who, 50 years
before, had been in the battle, the rear of the procession was just
starting from distant Boston Common. The little Boston of over a
century ago was crowded with visitors who had come from places as
remote as South Carolina by stagecoach, sailing vessel, or on foot,
to hear the great speech of Daniel Webster, President of the Bunker
Hill Monument Association, and America’s first orator of the day.
Years earlier, Chaplain Joseph Thaxter had paid the last offices to
dying soldiers in the battle; now, he invoked God’s blessing on the
young American republic, as 40 veterans of the battle sat in a place
of honor.
The most important visitor, of course, was General Lafayette,
who, as a good Mason, spread the mortar on the stone when it was
laid by Most Worshipful Grand Master of the Grand Lodge of
Massachusetts, John Abbot. As the battle’s only monument up to
this date had been erected by the Masons, it was considered
appropriate that the permanent monument should have its
cornerstone laid with the Masonic ceremony. A little later, this
procedure was sharply criticized during the Antimasonic period,
6
which occurred before the monument was finished.
6
Joseph Warren, the outstanding hero of the
battle, was Grand Master of Freemasons for
North America.
Many of the spectators knew that the cornerstone records would

later have to be moved, for the plans of the monument were hardly
started. Now, the box with its old newspapers, Continental currency,
and other data is within a stone at the monument’s northeast corner,
and the original cornerstone stands in the center of the foundation.
With his usual generosity, Daniel Webster presented the
copyright of his famous speech to the Bunker Hill Monument
Association. The copyright was sold for $600, which was the second
largest single contribution up to that date.
The Leading Character

Solomon Willard, architect and superintendent of the Bunker Hill
Monument, developed the methods for the quarrying, dressing,
transporting, and erecting the huge stones of the monument that
started granite on its way to becoming a principal material for
massive structures in America for half a century, until reinforced
concrete took over. (Today, granite is used extensively as a
protective facing for concrete, for highway curbing, and for
memorials.)
It is impressive to note the universal respect for the integrity and
ability of this early American architect which all the records of the
monument stress. In the drama of the building of the Bunker Hill
Monument, he played the leading part, and his character resembled
the sturdy structure which he designed in detail and erected. During
his 18 years of service in the construction of his masterpiece, the
Bunker Hill Monument, he would accept no recompense except for
his expenses, deeming it his duty to work without pay on such a
patriotic venture. He was also a substantial contributor to the building
fund.
A self-educated man, who had learned architecture with
sufficient thoroughness to become a teacher in the subject, he had
also become proficient in the various sciences. Starting as a
carpenter, Willard had proved both his craftsmanship and artistry by
becoming an adept carver of ships’ figureheads and models,
including a model of the Capitol at Washington.
At the time the monument was begun, Willard was one of the
leading architects of Boston. Typical of an architect’s versatility, he
had played an important part in the change from the heating of
buildings by wood-burning fireplaces and Franklin stoves, to hot-air
furnaces, using either wood or coal. As an expert in furnace heat, he
was called in for advice in the design of the heating system of
America’s most important building, when the President demanded
that the national Capitol should have adequate heat.
Appointed in October, 1825, to the combined position of architect
and superintendent, Willard spent the following winter on the plans,
models, and computations required to develop the construction
details, from the over-all dimensions of the Baldwin Report. During
these preliminary steps, Willard experimented with a promising
machine for dressing the stones. The selection of the Bunker Hill
Quarry in Quincy, Mass., was made after Willard had made a careful
search for suitable stone, in which he was said to have walked 300
miles. The right to quarry, at Quincy, sufficient granite for the
monument was purchased for $325. Part of the amount to be
provided by the Commonwealth of Massachusetts was to have been
supplied by the cost of the dressing of the stone (then called
“hammering”) by the convicts of nearby Charlestown State Prison.
The convicts, however, were obviously not sufficiently independent
to work on this shrine of independence, so this procedure was not
adopted.
Up-To-Date Quarry (Circa 1825–1843)

From various old American and English records of masonry
construction, it is possible to construct an account of how the stones
for the Bunker Hill Monument must have been quarried and dressed.
The old names are used for the tools and methods, and the modern
mason will find many of these old descriptions quite familiar.
The hornblende granite of the Quincy region was (and is) of very
uniform texture and varies only in color, from gray to dark gray. In
Quincy, Willard would find that both “sheet” and “boulder” quarry
formations occurred: the joints in the ledge of the sheet areas
making the granite appear as if stratified, and hence more easily
removed; but the huge, rounded boulders in the other areas,
measuring up to 40 feet across, had no joints. Rows of holes were
drilled by hand (at least 25 years would elapse before practical
power-rock drills became available) and large blocks loosened from
the ledge or boulder, probably by wedges, possibly by light blasts of
gunpowder. At this stage the quarried block was called “quarry-
pitched.” Stone of the smaller size for the monument was split from
these blocks along lines of holes in which wedges were driven.
These were probably of the plug-and-feather type, in which an iron
wedge with an acute angle is fitted between two semicircular iron
feathers, which taper in the opposite direction to that of the wedge,
and thus fit the hole drilled in the stone, nicely. Granite has no
cleavage planes, like slate; but a routine of smart taps on the plugs,
back and forth along the line, soon splits the stone along a fairly
smooth face. Two lewises (an ancient device), attached at about the
quarter points of the top of the stone, were used to lift it. Three
members make the lewis: a flat center bar with an eye at the top, the
center bar being flanked by two wedge-shaped side pieces which
are thicker at the bottom of the hole, and these also have eyes at the
top. The wedges are inserted first, then the center bar slipped
between; thereafter any lifting pull on the three bars is bound to
expand the lewis to fill the hole and lift the stone, for the hole is
drilled wider at the bottom than at the top.
With Solomon Willard’s well-rendered isometric drawing of each
stone for a guide, the stonecutter dressed it, first selecting the best
face for the “bed” (bottom) and hammered it to a plane surface,
determined by shallow channels (chisel drafts) cut diagonally across
the stone.
From this surface, the stonecutter laid out the other faces,
including the “build” (top), by his good mason’s square or template.
The texture of the visible face was “tooled,” that is, the marks of the
chisel remained visible. Quincy granite is a quality product, taking a
high polish, but the builders of the Bunker Hill Monument desired no
polish on their monument. Today, the surface of the monument
shows faint, well-weathered lines, like those produced by the modern
bushhammer, which has a head made of several thin steel plates
bolted together, each sharpened to a cutting edge. In England during
the period, flat iron bars with rough edges were in use to saw softer
stone than granite, and at Quincy, Willard experimented with
dressing machines. The conclusion may be drawn, however, that the
stones which we now see on the monument were undoubtedly
shaped to their present dimensions by hand.
Today, 110 years after its capstone was put in place, the Bunker
Hill Monument stands as an impressive testimonial to the
conservative judgment of its designer, Loammi Baldwin, and the
painstaking fidelity of the man who supervised its construction,
Solomon Willard. An engineer familiar with its maintenance states
that there is no evidence of settlement, and that a check by
surveyor’s transit revealed no signs of misalignment. Its joints
occasionally need pointing, the last pointing being performed about
20 years ago. Various iron or steel members of the observation
chamber have had to be replaced. Its lightning rod has been in place
for many years, but there is no readily available record to check
whether the monument has ever been struck by lightning. With their
empirical methods of design and their crude, mostly hand-operated,
construction apparatus, our forebears built a sturdy structure, which,
barring an earthquake, should last for centuries.
The Granite Railway

On 7 October 1826, the first railroad in America started
operation. This was the horse-operated Granite Railway, built to
transport the stones for the Bunker Hill Monument from the quarry in
Quincy down to the Neponset River, a distance of nearly three miles.
The track and cars of the railroad had been designed and built by a
young engineer of 28, Gridley Bryant, whose Granite Railway project
started him on a long career of achievement in the invention of
equipment that played a major part in the rapid and successful
development of the American railroad system.
Ample precedent for the Granite Railway existed in England,
where, since the reign of Charles II, wooden tracks, sometimes
armored with iron plates, had been used as runways for coal cars
from the pits to the nearest waterway. Within five years of the start of
the Granite Railway, similar systems are recorded in the states of
Pennsylvania, South Carolina, New York, and Maryland. At first, the
motive power for these lines was supplied by gravity, stationary
engines, or horses, but soon tiny steam locomotives were tried.
Thus, in the year 1829, Peter Cooper built the famous Tom Thumb, a
successful locomotive which used rifle barrels for flues. In the same
year the Stourbridge Lion, “the first locomotive that ever turned a
7
driving wheel on a railroad on the Western Continent,” was brought
by sailing vessel from England and started operation in
Pennsylvania. The American steam railroad system was thus well
under way by the time the lower courses of the monument were
being raised.
7
Annual Report of the Smithsonian Institution,
1889.
Bryant later described his railroad as having stone sleepers laid

across the track, 8 feet apart. Upon these, were placed wooden rails,
6 inches thick and 12 inches high (replaced by stone within a few
years). Spiked on top of these were iron plates, 3 inches wide by ¼
inch thick. However, at road crossings, stone rails were used, with 4-
inch by ½-inch iron plates bolted on top. This “permanent”
construction was also used on the double-track, inclined plane at the
quarry. (Well-preserved vestiges of this “permanent” construction are
visible today at the rise to the Bunker Hill Quarry.) Here, an endless
chain allowed the loaded, descending cars to pull up the empty
ascending ones.
The standard gauge of American railroads is now 4 feet, 8½
inches, measured between railheads, a standard adopted after many
years of confusion before the present gauge dimension was
adopted. Although Bryant described his track gauge as 5 feet, this
dimension was measured between the “bearing points” of the wheels
on the tracks. If the bearing points are assumed to be the center of
the treads of the wheels, his gauge is found to match closely the
present standard gauge. This track gauge agrees with that adopted
by the famous English railroad engineer, George Stephenson, at
about the same time, after he had measured scores of carts used by
his farmer neighbors. Possibly, both Stephenson and Bryant knew
that their selected gauge had a very early beginning; for some
historians suggest that the English carts were originally made to fit
the ruts cut in the roads of Britain by the Roman chariots, many
centuries earlier, during the Roman occupation of Britain.
On the day when the railroad started operation, 16 tons of
granite from the Bunker Hill Quarry, and loaded on three “wagons,”
were easily pulled by one horse, once started. Bryant’s first car had
flanged wheels, 6½ feet in diameter, from the axles of which a
platform was hung to carry the granite. This platform was lowered to
receive the load and then raised by an ingenious gearing device.
Naturally, Bryant based the design of his early railroad cars upon
the construction of the horse-drawn wagons of his day. Like the
wagons, his cars had to be flexible if they were to keep on the track
when passing over the two curves of the otherwise straight Granite
Railway. In his description of another of his cars appear the road
wagon terms—bolsters, truck, and center kingpin, to allow a
swiveling motion. Rigidly bolted to cross timbers beneath the truck
were two iron axletrees, on which revolved cast-iron wheels. (Some
time would elapse in railroad progress before the wheels would be
fixed to, and revolve with, the axles in journals.)
In early American railroad development Bryant is credited with
the invention of the eight-wheel car, the turntable, switch, turnout,
and many other improvements. In 1832, he had invented and used in
the building of the United States Bank at Boston, his portable derrick,
“used in every city and village in the country wherever there was a
stone building to erect.” Others profited from Bryant’s amazing
ingenuity. Although the Supreme Court of the United States decided
in his favor in his most important invention, the eight-wheeled car, he
8
did not collect, and he died poor.
8
For more data on the Granite Railway and
Gridley Bryant, see: Charles B. Stuart, Civil and
Military Engineers of America (New York: D. Van
Nostrand Company, Inc., 1871); and The First
Railroad in America (Boston: Privately printed for
Granite Railway Company, 1926).
In the fine saga of the Bunker Hill Monument, the Granite

Railway plays a prominent part. The demand of the monument for
granite definitely inspired Bryant to conceive the idea of America’s
first railroad, and to design pioneer equipment that contributed
hugely to the subsequent progress of America’s great railroad
system. The accurate account of the building of the monument,
however, has to record the fact that the railroad was not so great a
benefit as anticipated. In the short distance of 12 miles there was too
much loading and unloading. Willard freely expressed his annoyance
at these hindrances. That he took action is indicated in the following
quotation from an apparently authentic source: “The stone used for
the foundation and for the first forty feet of the structure (the
monument) was transported from the quarry on a railroad to the
wharf in Quincy (actually located in Milton) where it was put into flat-
bottomed boats, towed by steam-power to the wharf in Charlestown,
and then raised to the Hill by teams moving upon an inclined plane.
The repeated transfer of the stones, necessary in this mode of
conveyance, being attended with delay, liability to accident, and a
defacing of the blocks, was abandoned after the fortieth foot was
laid, and the materials were transported by teams directly from the
9
quarry to the hill.” This account fails to tell how the teams got up
and down the steep hill at the quarry: the 84-foot rise at an angle of
15 degrees. Clever Bryant must have used his endless chain to drag
the empty teams up, and to brake the loaded ones down.
9
George E. Ellis, History of the Battle of
Bunker’s (Breed’s) Hill (Boston: Lockwood,
Brooks and Company, 1875).
Hoc nomen est in æternum, et hoc
memoriale in generationem et generationem.
© R. Ruzicka 1915
Bunker Hill Monument in 1915

Reproduced from a wood engraving by Rudolph
Ruzicka in the Boston Athenæum
Judah Touro
Reproduced from a portrait in the Redwood
Library, Newport, R. I.
Amos Lawrence
Reproduced from a portrait by Chester
Harding owned by the Massachusetts
Hospital Life Insurance Company
Foundation of Bunker Hill Monument
Reproduced from Willard, Plans and Sections, Plate II
Construction of Bunker Hill Monument
Reproduced from Willard, Plans and Sections, Plate IV
Construction of Bunker Hill Monument
Reproduced from Willard, Plans and Sections, Plate X
Bunker Hill Monument in 1830
Reproduced from C. H. Snow, A Geography of Boston (Boston, 1830)
Beacon for Mariners

In the noisy grogshops on the streets leading to the Boston
waterfront, in the sail lofts on what is now Commercial Street, and at
the tall desks of the counting rooms of State Street, those who got
their living from the sea eagerly discussed the progress of the
monument in Charlestown. It was to be their beacon, and when the
many frigates, packets, sloops, and schooners had safely passed
the danger spots of the lower harbor, the monument would welcome
them to the busy inner port of Boston, then much livelier than it is
today. But progress proved to be slow. Naturally the stones broken
from the Quincy ledges and boulders were not always of the
dimensions planned by Willard for the lower courses; many were of
sizes needed for the upper courses. Economical Willard dressed the

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10.1 The Federal Reserve and Monetary Policy

1) When the Federal Reserve ________.

2) The Federal Reserve ________.

3) The federal funds rate is ________.

6) Changes in liquidity in the banking system affect ________.

10.2 The Monetary Policy Curve

2) The exogenous variable in the monetary policy curve is ________.

4) Which of the following is true about the Taylor principle?

8) Autonomous tightening of monetary policy involves ________.

9) Autonomous easing of monetary policy involves ________.

10) A movement along the MP curve ________.

12) The MP curve may be used to represent ________.

13) The MP curve may be used to represent how ________.

14) A decision to increase the parameter λ in the MP curve is an example of ________.

1) The AD Curve ________.

2) The MP Curve ________.

3) The IS Curve ________.

4) The AD Curve ________.

6) Factors that shift the AD Curve include ________.

7) In the aggregate demand curve, the endogenous variable is ________.

8) An increase in the real interest rate occurs when ________.

10) Factors that shift the AD Curve include ________.

11) Factors that shift the AD Curve include ________.

14) An increase in autonomous spending leads to higher ________.

15) An increase in inflation leads to higher ________.

16) A change in inflation leads to shifts of the ________ curves.

10.4 The Money Market and Interest Rates

1) The liquidity preference theory distinguishes between ________.

2) "Real money balances" refers to ________.

4) ________ is a good measure of the opportunity cost of holding money.

5) Demand for real money balances depends on ________.

6) According to liquidity preference theory, as real income increases, so does ________.

9) The endogenous variable in the liquidity preference function is ________.

10) The liquidity preference function shows that as ________.

12) As the nominal interest rate increases ________.

13) As income rises ________.

14) The demand for real money balances ________.

16) The supply curve for money ________.

17) Increased liquidity in the banking system occurs when ________.

18) Typically, central banks increase the supply of money by ________.

21) A decrease in income ________.

Masonry was then estimated in “perches,” and by a little

Many of the spectators knew that the cornerstone records would

The Leading Character

Up-To-Date Quarry (Circa 1825–1843)

The Granite Railway

Bryant later described his railroad as having stone sleepers laid

In the fine saga of the Bunker Hill Monument, the Granite

Bunker Hill Monument in 1915

Beacon for Mariners

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