Question 1

Summarize the effects of a decrease in the money supply on the rate of interest, investment spending, and real GDP.

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Question 2

Explain the impact of Fed open- market purchases of government bonds on the money supply.

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Question 3

Investment spending:

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Investment spending typically decreases as the interest rate increases because higher interest rates make borrowing more expensive, reducing the incentive for businesses to invest in new projects.

Question 4

Explain the transaction and speculative motives for holding money.

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Question 5

Suppose investment becomes more responsive to changes in the interest rate. What effect will this have on the effectiveness of monetary policy? Specifically, what will happen to the output given an increase in the money supply?

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Question 6

Assume the money market is initially in equilibrium. Now, suppose that the price level falls. Graphically illustrate and explain what effect this reduction in the aggregate price level will have on the money market.

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Question 7

Identify the determinants of the demand for money.

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Question 8

Explain how each of the following policy actions by the Federal Reserve would affect the quantity of money supplied:
(a) a decrease in the required reserve ratio
(b) an increase in the discount rate
(c) the Fed purchases government bonds from the public

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Question 9

Assume the money market is initially in equilibrium. Now suppose there is an increase in real GDP. Explain what effect this increase in income will have on the equilibrium interest rate. Also explain what the Fed would have to do if it wants to prevent this change in real GDP from affecting the interest rate.

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Question 10

Explain why bond prices decrease when the economy is in a boom.

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Question 11

What is the relationship between interest rates or yields on bonds and their price or market value?

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Question 12

Explain how an open market purchase can increase net exports and real GDP.

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Question 13

Graphically illustrate the relationship between interest rate changes and the level of investment.

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Question 14

Explain how an open market purchase will affect bond prices.

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Question 15

Identify the different actions that the Fed needs to undertake if it seeks to decrease the money supply.

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Question 16

Explain the impact of a decrease in the required reserve ratio on money supply.

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Question 17

Explain what effect a reduction in the U.S. interest rate would have on the exchange rate.

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Question 18

Explain why the Fed does not often choose to use the discount rate to control the money supply.

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Question 19

Explain how the financial market crisis in 2008 affected the speculative demand for money.

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Question 20

What is the difference between the discount rate and the fed funds rate?

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Quiz 14: The Federal Reserve and Monetary Policy