Question 1

A restrictive monetary policy reduces investment spending and shifts the economy's aggregate demand curve to the right.

Accepted Answer

A restrictive monetary policy involves decreasing the money supply and raising interest rates to slow down inflation. This will typically reduce investment spending and shift the economy's aggregate demand curve to the left, not the right.

Question 2

Which of the following varies directly with the interest rate?

Accepted Answer

The answer of Which of the following varies directly with...

Question 3

A liquidity trap occurs when the Federal Reserve reduces reserves in the system, choking off aggregate demand.

Accepted Answer

A liquidity trap occurs when interest rates are already at or near zero and further monetary policy actions by the central bank have little or no impact on stimulating economic growth or inflation. It is not caused by the Federal Reserve reducing reserves in the system.

Question 4

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

Accepted Answer

The quantity of money demanded for transactions purposes can be calculated using the formula for the velocity of money: V = (P*Y)/M, where V is the velocity of money, P is the price level, Y is the real GDP, and M is the quantity of money. In this case, we are given that the nominal GDP (P*Y) is $800 billion and the velocity of money (V) is 4, meaning each dollar is spent four times. Rearranging the formula to solve for M gives us M = (P*Y)/V = $800 billion / 4 = $200 billion.

Question 5

According to the Taylor rule, if real GDP falls by 1 percent below potential GDP, the Fed should lower the federal funds rate by one-half a percentage point.

Accepted Answer

The Taylor rule suggests adjusting the federal funds rate based on deviations of actual GDP from potential GDP and inflation from the target rate. A 1% GDP shortfall typically calls for a 0.5% rate cut.

Question 6

The interest rate will fall when the

Accepted Answer

When the quantity of money supplied exceeds the quantity of money demanded, it creates a surplus of money in the market, which puts downward pressure on interest rates as lenders compete to loan out their excess funds. Conversely, if there's a shortage of cash relative to demand, competition among borrowers pushes up interest rates.

Question 7

(Consider This) "Repo" stands for "Repossession purchase" and describes when the Fed buys mortgage-backed securities from banks.

Accepted Answer

"Repo" stands for "Repurchase agreement," a short-term borrowing for dealers in government securities, not specifically related to mortgage-backed securities.

Question 8

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to

Accepted Answer

If money is spent four times a year, it means the velocity of money is 4. Therefore, the quantity of money people wish to hold for transactions purposes is 1/4 of nominal GDP, or 25 percent of nominal GDP.

Question 9

Assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes.This situation means that the

Accepted Answer

If the stock of money is fixed by the Federal Reserve, then the supply of money curve is vertical because it is not affected by changes in the interest rate. The demand for money curve, on the other hand, will be downward sloping as usual, indicating that people will hold less money as the interest rate increases.

Question 10

An increase in nominal GDP will

Accepted Answer

An increase in nominal GDP means that more transactions are taking place. This will increase the transactions demand for money, as more money is needed to facilitate these transactions. Additionally, as the economy grows and incomes rise, people generally want to hold more money for precautionary reasons, leading to an increase in the total demand for money.

Question 11

An increase in the money supply is likely to reduce

Accepted Answer

An increase in the money supply leads to an excess supply of money in the economy, which causes interest rates to fall. When interest rates fall, borrowers are encouraged to take out loans and spend more, which increases aggregate demand and leads to higher prices. Therefore, an increase in the money supply is likely to reduce interest rates.

Question 12

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that

Accepted Answer

The velocity of money is calculated by dividing nominal GDP by the money demanded for transactions. Here, $4,000 billion / $800 billion = 5, indicating each dollar is spent five times a year.

Question 13

A consumer holds money to meet spending needs.This would be an example of the

Accepted Answer

The consumer holding money to meet spending needs represents the transactions demand for money, which is the motive for holding money to facilitate transactions. Option A represents the unit of account function of money, option B represents the medium of exchange function, and option D represents the asset demand for money, which is the motive for holding money as a store of value.

Question 14

The transactions demand for money will shift to the

Accepted Answer

According to the Quantity Theory of Money, an increase in nominal GDP will increase the demand for money, while a decrease in nominal GDP will decrease the demand for money. Therefore, the transactions demand for money will shift to the left when nominal GDP decreases (choice B). The interest rate affects the opportunity cost of holding money, but it does not directly impact the transactions demand for money.

Question 15

A decrease in the interest rate will cause a(n)

Accepted Answer

A decrease in interest rates will reduce the opportunity cost of holding money, making it more attractive as an asset, therefore increasing the amount of money held as an asset.

Question 16

A wealthy executive is holding money, waiting for a good time to invest in the stock market.This action would be an example of the

Accepted Answer

The executive is holding money as an asset, waiting for a favorable investment opportunity, which is an example of the asset demand for money.

Question 17

There is an asset demand for money primarily because of which function of money?

Accepted Answer

The asset demand for money is primarily because money serves as a store of value. This function allows individuals to save and defer consumption until a later time, treating money as an asset.

Question 18

The transactions demand for money is least likely to be a function of the

Accepted Answer

The answer of The transactions demand for money is least...

Question 19

A restrictive monetary policy may be frustrated if the investment-demand curve shifts to the left.

Accepted Answer

The answer of A restrictive monetary policy may be frustrated...

Question 20

The Federal Reserve adheres strictly to the Taylor rule when formulating monetary policy.

Accepted Answer

While the Taylor rule is a popular guideline for setting monetary policy, the Federal Reserve does not strictly adhere to it. The Fed considers a variety of economic data and indicators when formulating its policies.

Quiz 36: Interest Rates and Monetary Policy