Question 1

Suppose the money demand curve shifts rightward.Which of the following is true about the alternative policy options available with the Fed?

Accepted Answer

When the money demand curve shifts rightward, it indicates an increase in the demand for money at the existing interest rate. To keep the interest rate from rising in response to this increased demand, the Federal Reserve (Fed) can increase the money supply, which shifts the money supply curve rightward, counteracting the increased demand and stabilizing the interest rate.

Question 2

When calculating how much changes in the money supply will change nominal GDP,we use the money multiplier instead of the spending multiplier.

Accepted Answer

The money multiplier is used to determine how changes in the monetary base affect the total money supply, not directly how they change nominal GDP. The spending (or fiscal) multiplier is more directly related to changes in GDP resulting from changes in spending.

Question 3

An expansionary monetary policy is always capable of boosting aggregate investment.

Accepted Answer

An expansionary monetary policy can increase the money supply and lower interest rates, which can make it cheaper for firms to borrow and invest. However, the effectiveness of monetary policy in boosting investment depends on a range of factors, such as the state of the economy, business confidence, and the availability of profitable investment opportunities. Therefore, while expansionary monetary policy can have a positive impact on investment, it is not always guaranteed to do so.

Question 4

The demand for money is a downward sloping line that depicts the relationship between the price level and the opportunity cost of holding money.

Accepted Answer

The demand for money is a downward sloping line that depicts the relationship between the interest rate (opportunity cost of holding money) and the quantity of money demanded, not the price level and opportunity cost.

Question 5

The Fed seeks a target rate of inflation of around _____.

Accepted Answer

The Federal Reserve seeks a target rate of inflation of around 2 percent. This is because a low and stable rate of inflation is seen as beneficial for long-term economic growth and stability.

Question 6

Most policy makers agree that in the long run,changes in the money supply influence:

Accepted Answer

Changes in the money supply have a long-run impact on the price level and inflation. This relationship is known as the quantity theory of money. As the money supply increases, prices will eventually rise due to the increase in demand for goods and services. Conversely, a decrease in the money supply will cause prices to fall. This relationship is important for policy makers to consider when implementing monetary policy.

Question 7

During the 2007-2009 financial crisis,the Federal Reserve took some unusual steps in its conduct of monetary policy.Which of the following was not one of them?

Accepted Answer

The Federal Reserve did not bail out General Motors during the 2007-2009 financial crisis. This was a responsibility that fell to the U.S. government and was managed by the Department of the Treasury through the Troubled Asset Relief Program (TARP).

Question 8

The higher the interest rate,the greater the preference for liquidity.

Accepted Answer

Higher interest rates typically decrease the preference for liquidity as individuals are incentivized to invest or save their money to earn more interest, rather than holding it in liquid form.

Question 9

For interest rates to remain stable during economic expansions,the money supply should:

Accepted Answer

If the money supply grows at the same rate as the demand for money, then interest rates can remain stable during economic expansions. If the money supply grows too fast or too slow in relation to demand, then interest rates can be impacted.

Question 10

If the Fed targets the interest rate,then:

Accepted Answer

When the Fed targets the interest rate, it adjusts the money supply to maintain that target rate. This can lead to reinforcing fluctuations in economic activity because in times of economic boom, the Fed might lower interest rates to prevent overheating, which can further boost economic activity, and in times of recession, it might reduce rates to stimulate the economy, potentially leading to more pronounced cycles.

Question 11

If the money supply in an economy is increased,the interest rate will fall,and real GDP will decrease.

Accepted Answer

Increasing the money supply in an economy can lead to lower interest rates, which generally stimulates borrowing and spending, leading to an increase in real GDP.

Question 12

A decrease in the money supply in the short run will cause an increase in planned investment spending.

Accepted Answer

A decrease in the money supply will increase interest rates, making borrowing more expensive and reducing planned investment spending.

Question 13

For a given shift of the aggregate demand curve,the steeper the short-run aggregate supply curve,the larger the change in real GDP.

Accepted Answer

The steeper the short-run aggregate supply curve, the smaller the change in real GDP for a given shift in the aggregate demand curve, as most of the adjustment occurs through changes in the price level rather than output.

Question 14

The demand for money was high in the year 2015 when the interest rate on savings deposits and time deposits was close to zero.

Accepted Answer

When interest rates on savings deposits and time deposits are close to zero, people have less incentive to save and more incentive to spend or invest their money. This leads to a higher demand for money.

Question 15

The supply of money is depicted as an upward sloping line that depends directly on the interest rate.

Accepted Answer

The supply of money is typically depicted as a vertical line, indicating that it is controlled by central banks and not directly affected by changes in the interest rate. However, changes in the interest rate can indirectly affect the supply of money through their impact on banks' willingness to lend and individuals' demand for loans.

Question 16

If the value of the spending multiplier is greater than 1,then an increase in investment will shift the aggregate demand curve to the left.

Accepted Answer

If the value of the spending multiplier is greater than 1, then an increase in investment will result in a greater increase in aggregate demand. This means that the aggregate demand curve will shift to the right, not to the left.

Question 17

Suppose that the demand and supply of money are initially in equilibrium,and that the demand for money increases.A monetary authority interested in keeping the money supply constant and the interest rate low must:

Accepted Answer

If the monetary authority wants to keep the money supply constant while also keeping interest rates low, it faces a conflict. An increase in money demand would typically lead to higher interest rates if the money supply is unchanged. To keep interest rates low, the authority would need to increase the money supply, which contradicts the goal of keeping it constant. Therefore, it cannot achieve both goals simultaneously.

Question 18

If interest rates are to remain constant,the money supply should change:

Accepted Answer

If interest rates are to remain constant, the money supply should change in the same direction as a change in money demand. This means that if there is an increase in the demand for money (people want to hold more money), then the central bank should increase the money supply to meet that demand and keep interest rates steady. On the other hand, if there is a decrease in the demand for money, the central bank can decrease the money supply to keep interest rates constant.

Question 19

The Fed purchases of long-term assets to stabilize financial markets,reduce long-term interest rates,and improve the investment environment are called:

Accepted Answer

The Fed purchase of long-term assets to stabilize financial markets, reduce long-term interest rates, and improve the investment environment is known as quantitative easing. This policy involves the purchase of government bonds and sometimes other financial assets, resulting in an increase in the money supply which attempts to stimulate economic growth.

Question 20

The money demand curve shifts to the right whenever there is a decrease in the interest rate.

Accepted Answer

The money demand curve shifts to the right whenever there is an increase in income or prices, not a decrease in the interest rate. A decrease in the interest rate would shift the money demand curve to the left as people would need less money to make investments or pay off loans.

Quiz 15: Monetary Theory and Policy