Question 1

An excess demand for money will result in all the following, except:

Accepted Answer

An excess demand for money will lead to a fall in investment spending rather than a rise, as individuals and firms are holding onto their money rather than investing it. Therefore, option B is the exception. Options A, C, D, and E are all correct as they describe the effects of an excess demand for money.

Question 2

An increase in the money supply will:

Accepted Answer

An increase in the money supply leads to lower interest rates, which makes borrowing cheaper and increases investment spending. This increase in investment spending leads to an increase in aggregate demand.

Question 3

Scenario 13.1
Assume the following conditions hold.
a.At all banks, excess reserves are zero.
b.The deposit expansion multiplier is 3.
c.The investment spending function is as illustrated in the figure below.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent.
 
-Refer to Scenario 13.1. What is the change in required reserves following the open market operation by the Fed?

Accepted Answer

The Fed's purchase of $1 billion in Treasury securities increases the monetary base by $1 billion. The required reserve ratio is 10%, so the change in required reserves is $1 billion * 10% = $0.1 billion. However, the Fed also sells $0.33 billion in Treasury securities to offset the increase in the monetary base, so the net change in required reserves is $0.1 billion - $0.33 billion = -$0.23 billion.

Question 4

An increase in the money supply will lead to an increase in equilibrium real GDP only if:

Accepted Answer

An increase in the money supply will only lead to an increase in equilibrium real GDP if the aggregate supply curve is not vertical. This is because if the aggregate supply curve is vertical, any increase in aggregate demand will only result in higher prices, not higher output. However, if the aggregate supply curve is not vertical, then an increase in aggregate demand (caused by an increase in the money supply) can lead to an increase in equilibrium real GDP.

Question 5

A change in the interest rate does not affect the quantity of money supplied. This means that:

Accepted Answer

The quantity of money supplied is determined by the actions of the central bank and is not affected by changes in the interest rate. Therefore, the money supply curve is vertical.

Question 6

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP.
Figure 13.3
 
-Refer to Figure 13.3. Other things equal, if real GDP is equal to $900 billion, then:

Accepted Answer

The answer of In the figure given below panel A...

Question 7

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP.
Figure 13.3
 
-Refer to Figure 13.3. Other things equal, if the interest rate is greater than 6 percent, then:

Accepted Answer

Panel B shows that at an interest rate greater than 6%, investment demand decreases. This causes a leftward shift in the aggregate demand curve in panel C, leading to a lower equilibrium level of real GDP. Therefore, choice C is correct. A, B, D, and E are not correct because they do not correspond to the given information.

Question 8

What is the current market price of a bond that pays $200 per year indefinitely and has a current yield of 16 percent?

Accepted Answer

The answer of What is the current market price of...

Question 9

Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720. If the supply of bonds increases and the price of the bond falls to $600, the interest rate will ____ to ____.

Accepted Answer

The answer of Suppose the interest rate on a bond...

Question 10

Suppose that a sharp downturn in the price of a country's prime manufacturing product results in a terrible recession and a massive decline in the general income level of the citizens. Other things constant, what would be the recession's most probable effect on money demand in the country?

Accepted Answer

The recession will cause a decline in income and economic activity, which will lead to a decrease in transactions demand for money. As a result, at any given interest rate level, individuals and firms will demand less money to conduct their daily economic transactions. This will cause a leftward shift in the money demand curve, leading to a lower quantity of money demanded. The other choices are less likely to happen.

Question 11

Suppose a bond sells for $2,000 and pays $200 per year in interest. What will happen to the current interest rate if the price of the bond changes to $1,800?

Accepted Answer

The answer of Suppose a bond sells for $2,000 and...

Question 12

If interest rates decrease:

Accepted Answer

Lower interest rates typically decrease the opportunity cost of holding money relative to other assets, leading individuals and firms to demand more money. Therefore, the quantity of money demanded will increase.

Question 13

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP.
Figure 13.3
 
-Refer to Figure 13.3. Starting from the equilibrium illustrated in the graphs, if the Federal Reserve purchases government bonds in the open market, then:

Accepted Answer

If the Federal Reserve purchases government bonds in the open market, it increases the money supply, which reduces interest rates (as there is more money available to be loaned out), leading to an increase in investment spending and an increase in equilibrium real GDP. Bond prices may initially rise due to the increased demand for bonds, but over time, the increased money supply will lead to lower bond prices. Money demand may initially increase due to the increased money supply, but it is unlikely to decline overall.

Question 14

Scenario 13.1
Assume the following conditions hold.
a.At all banks, excess reserves are zero.
b.The deposit expansion multiplier is 3.
c.The investment spending function is as illustrated in the figure below.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent.
 
-Refer to Scenario 13.1. What is the change in excess reserves following the open market operation by the Fed?

Accepted Answer

The change in excess reserves is +$0.67 billion, which is the result of the open market operation by the Fed, typically involving the purchase of securities that increase reserves in the banking system.

Question 15

An increase in nominal income will result in:

Accepted Answer

The answer of An increase in nominal income will result...

Question 16

A leftward shift in the money demand function would result from:

Accepted Answer

The answer of A leftward shift in the money demand...

Question 17

If a bond pays a fixed return of $500 a year and the current interest rate has risen from 5 percent to 10 percent, then the bond price must have:

Accepted Answer

The answer of If a bond pays a fixed return...

Question 18

Assume the economy is in equilibrium as illustrated by Figure 13.3. Based on the equation of exchange, what is the velocity of money?

Accepted Answer

The velocity of money is calculated as the ratio of nominal GDP to the money supply. In this case, nominal GDP is $100 and the money supply is $20, so the velocity of money is 10.

Question 19

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP.
Figure 13.3
 
-Refer to Figure 13.3. When this economy is in equilibrium:

Accepted Answer

The answer of In the figure given below panel A...

Question 20

If a bond pays 11.5 percent interest a year and a bank deposit pays 3.5 percent, the opportunity cost of holding the deposit is:

Accepted Answer

The opportunity cost is the return you could have earned by investing in an alternative option. In this case, the alternative option is the bond that pays 11.5 percent interest. Therefore, the opportunity cost of holding the bank deposit is the difference between the two, which is 11.5 percent - 3.5 percent = 8 percent. So, the best choice is C.

Quiz 13: Monetary Policy