Question 1

An indirect effect of monetary policy is that as the money supply

Accepted Answer

When the money supply increases, it puts downward pressure on interest rates as banks have more money to lend out. This leads to an increase in borrowing and spending, as consumers are incentivized to take out loans or use credit to make purchases. Therefore, the correct answer is A.

Question 2

When the Federal Reserve conducts open market purchases to increase bank reserves without trying to alter the interest rate that is already close to zero, the policy action is called

Accepted Answer

This policy action is known as quantitative easing, as it involves the Federal Reserve purchasing financial assets in order to increase bank reserves and stimulate economic activity. Qualitative easing and tightening involve altering the composition of the Federal Reserve's balance sheet to affect specific sectors of the economy, while quantitative tightening involves selling off financial assets to decrease bank reserves and slow down economic activity.

Question 3

Quantitative easing refers to a policy action in which a central bank

Accepted Answer

Quantitative easing involves a central bank buying government securities (bonds) from financial institutions in order to increase the money supply and inject liquidity into the economy. This process increases the reserve balances held by banks at the central bank.

Question 4

If the economy is operating below its full employment level, the Fed can

Accepted Answer

If the economy is operating below its full employment level (i.e. there is a recession or high unemployment), the Fed can use expansionary monetary policy to increase aggregate demand by increasing the rate of growth of the money supply. This can be done through actions such as lowering interest rates or increasing the quantity of money available in the economy. By increasing aggregate demand, the Fed can help stimulate economic growth and reduce unemployment.

Question 5

During a period of expansionary monetary policy

Accepted Answer

Expansionary monetary policy refers to actions taken by the central bank to increase the money supply and stimulate economic activity. This is usually done by lowering interest rates, making it cheaper to borrow money and encouraging spending and investment. The increased availability of money in the economy leads to an increase in demand for goods and services, which can push up prices. Therefore, during a period of expansionary monetary policy, the rate of growth of the money supply is increased, leading to an increase in the price level.

Question 6

The direct effect of an increase in the money supply is

Accepted Answer

An increase in the money supply leads to an increase in the amount of money available for spending. As a result, people tend to spend more money, which leads to an increase in economic activity. This increase in economic activity, in turn, causes the aggregate demand curve to shift to the right, creating further economic growth. Therefore, choice D is the correct answer.

Question 7

Suppose the economy currently has an inflationary gap. The Fed engages in contractionary monetary policy. The impact of contractionary monetary policy will be to

Accepted Answer

Contractionary monetary policy involves increasing interest rates and reducing the money supply in order to decrease aggregate demand. This decrease in aggregate demand will lead to a decrease in prices as producers try to clear out excess inventory, but it will also lead to a decrease in real GDP as firms sell less and eventually reduce production. Therefore, choice D is the correct answer.

Question 8

-Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new long-run equilibrium is given by point

Accepted Answer

An increase in the money supply shifts the aggregate demand curve to the right. In the long run, this leads to a higher price level but does not change the output level, which returns to its natural rate. Therefore, the new long-run equilibrium is at point C, where the price level is higher but output remains unchanged.

Question 9

The Federal Reserve conducted the policy of quantitative easing primarily when

Accepted Answer

The policy of quantitative easing is typically used when the interest rate is already close to zero and monetary policy options are limited. By purchasing large amounts of assets, such as bonds, the central bank can inject more money into the economy and lower long-term interest rates, which can stimulate borrowing and spending.

Question 10

Suppose the economy currently has some underutilized resources. The Fed engages in expansionary monetary policy. The impact of expansionary monetary policy will be to

Accepted Answer

Expansionary monetary policy increases the money supply, which leads to lower interest rates and increased borrowing and spending. This, in turn, increases aggregate demand, which leads to an increase in both prices and real GDP.

Question 11

The appropriate monetary policy in the event of a recessionary gap would be to

Accepted Answer

Engaging in an open market purchase of U.S. government securities would increase the money supply, leading to a decrease in interest rates and an increase in investment and consumption spending. This would help close the recessionary gap and promote economic growth. The other options would either have no effect or potentially worsen the recessionary gap by reducing liquidity in the economy.

Question 12

In the real world, contractionary monetary policy would be used to

Accepted Answer

Contractionary monetary policy is used to reduce the rate of inflation by decreasing the money supply, increasing interest rates, and reducing consumer spending. It is not used to combat a recession or increase long-run aggregate supply. Increasing nominal GDP is a goal of expansionary monetary policy.

Question 13

An expansionary monetary policy is one that

Accepted Answer

An expansionary monetary policy involves increasing the money supply, which lowers interest rates and makes it easier for individuals and businesses to borrow money. This increased access to credit leads to increased spending and investments, which stimulates aggregate demand. Therefore, choice C is the correct answer.

Question 14

How is the effect of expansionary monetary policy depicted in an aggregate supply-aggregate demand graph?

Accepted Answer

Expansionary monetary policy increases the money supply, which lowers interest rates and increases investment and consumer spending, leading to an increase in aggregate demand. This is shown as a rightward shift of the aggregate demand curve.

Question 15

Suppose the economy has a recessionary gap. By using an expansionary monetary policy, the Fed can

Accepted Answer

Expansionary monetary policy, such as lowering interest rates or buying government securities, aims to increase the money supply, which can stimulate economic activity by encouraging borrowing and spending. This typically leads to an increase in real GDP as demand for goods and services rises. However, the increase in demand can also lead to higher prices, thus raising the price level.

Question 16

Suppose the economy is operating below its full employment level. The Fed

Accepted Answer

The Federal Reserve can increase the money supply to stimulate aggregate demand, which increases production and moves the economy toward full employment. This occurs through both the direct effects of increasing investment and spending and the indirect effects of decreasing interest rates. As production increases, prices may rise, but the Fed can hold prices constant through its control of the money supply. Therefore, expanding the money supply can be a powerful tool for the Fed to move the economy toward full employment.

Question 17

As a result of an increase in the money supply, some banks may end up with excess reserves. What is the likely result?

Accepted Answer

When banks have excess reserves, they can use that money to make more loans, which can lead to an increase in aggregate demand. This is because the additional loans create money that didn't exist before, which flows into the economy and can increase spending.

Question 18

The long-run effect of an increase in the money supply when starting from full employment is to

Accepted Answer

In the long run, an increase in the money supply, when starting from full employment, primarily affects the price level by causing inflation, without having a lasting impact on real GDP. This is because, in the long run, the economy's output is determined by its productive capacity (factors of production) rather than the amount of money in circulation.

Question 19

During a period of contractionary monetary policy

Accepted Answer

During a period of contractionary monetary policy, the central bank decreases the rate of growth of the money supply by selling government securities, increasing the reserve requirement, or increasing the discount rate. This leads to a decrease in the supply of money and an increase in the demand for money, which drives up interest rates. As a result, borrowing and spending are reduced, which leads to a decrease in aggregate demand and a decrease in the price level.

Question 20

How would expansionary monetary policy affect the AD curve?

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates, which leads to increased borrowing and spending by consumers and businesses. This in turn leads to an increase in aggregate demand, causing the AD curve to shift to the right.

Quiz 15: Domestic and International Dimensions of Monetary Policy