Question 1

For the U.S. economy, money holdings are a
A)large part of household wealth, and so the interest-rate effect is large.
B)large part of household wealth, and so the wealth effect is large.
C)small part of household wealth, and so the interest-rate effect is small.
D)small part of household wealth, and so the wealth effect is small.

Accepted Answer

Money holdings are typically a small part of household wealth and do not have a large impact on the economy through the interest-rate effect or wealth effect. Therefore, choice D is the best answer.

Question 2

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₃. Which of the following events would cause the equilibrium interest rate to decrease? A)The Federal Reserve increases the money supply. B)Money demand decreases. C)The price level decreases. D)All of the above are correct.

Accepted Answer

All of the events listed (A, B, and C) would lead to a decrease in the equilibrium interest rate. An increase in the money supply (A) shifts the money supply curve to the right, decreasing interest rates. A decrease in money demand (B) shifts the money demand curve to the left, also decreasing interest rates. A decrease in the price level (C) reduces money demand, leading to lower interest rates.

Question 3

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD₁. If the current interest rate is r₂, then A)the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. B)people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. C)bond issuers and banks will respond by raising the interest rates they offer. D)in response, the money-demand curve will shift upward from its current position to establish equilibrium in the money market.

Accepted Answer

When the interest rate is r2 and the money-demand curve is MD1, the quantity of money demanded is less than the quantity supplied, leading to an excess supply of money.

Question 4

When the interest rate is below the equilibrium level,
A)the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to hold.
B)people respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C)bond issuers and banks respond by lowering the interest rates they offer.
D)All of the above are correct.

Accepted Answer

The answer of When the interest rate is below the...

Question 5

The exchange-rate effect is based, in part, on the idea that
A)a decrease in the price level reduces the interest rate.
B)an increase in the price level causes investors to move some of their funds overseas.
C)an increase in the price level causes domestic goods to become less expensive relative to foreign goods.
D)a decrease in the price level reduces spending on net exports.

Accepted Answer

The answer of The exchange-rate effect is based, in part,...

Question 6

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then A)in response, the money-demand curve will shift downward from its current position to establish equilibrium in the money market. B)people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. C)bond issuers and banks will respond by lowering the interest rates they offer. D)there is a surplus of money.

Accepted Answer

According to the graph, if the current interest rate is r₂ and the money-demand curve is MD₂, then there is an excess demand for money. People will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts, which will shift the money-supply curve to the right, thereby lowering the interest rate until equilibrium is reached where the money supply equals the money demand.

Question 7

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is
A)Keynesian in nature, and that his view is more valid for the long run than for the short run.
B)classical in nature, and that his view is more valid for the long run than for the short run.
C)Keynesian in nature, and that his view is more valid for the short run than for the long run.
D)classical in nature, and that his view is more valid for the short run than for the long run.

Accepted Answer

The theory of liquidity preference is a Keynesian theory and is more applicable to the short run rather than the long run. In the short run, interest rates are primarily determined by the demand for and supply of money, which is largely influenced by people's desire to hold cash. The theory of liquidity preference explains how changes in the demand for money affect the interest rate in the short run. However, in the long run, other factors such as productivity and inflation come into play and have a more significant impact on interest rates. Therefore, Marcus's opinion is more valid for the short run than for the long run and is consistent with a Keynesian perspective.

Question 8

The Fed can influence the money supply by
A)changing how much it lends to banks.
B)changing the interest rate it pays banks on the reserves they are holding.
C)using open-market operations.
D)All of the above are correct.

Accepted Answer

The Fed can influence the money supply by changing how much it lends to banks, changing the interest rate it pays banks on the reserves they are holding, and using open-market operations. These tools allow the Fed to increase or decrease the amount of money in circulation in order to stabilize the economy and achieve its macroeconomic goals.

Question 9

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Let Y₁ represent the corresponding quantity of goods and services demanded, and let P₁ represent the corresponding price level. Starting from this situation, if the Federal Reserve increases the money supply and if the price level remains at P₁, then A)there will be an increase in the equilibrium quantity of goods and services demanded. B)there will be a decrease in the equilibrium quantity of goods and services demanded. C)there will be an increase in the equilibrium interest rate. D)fewer firms will choose to borrow to build new factories and buy new equipment.

Accepted Answer

An increase in the money supply shifts the MD curve to the right, resulting in a new equilibrium point with a lower interest rate (rS2U2B11S1U1B0). At the new equilibrium point, the quantity of goods and services demanded (YS2U2B11S1U1B0) exceeds the quantity demanded at the original equilibrium point (YS1U1B11S1U1B0), indicating an increase in demand for goods and services.

Question 10

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that
A)shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate.
B)the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate.
C)changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.
D)the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.

Accepted Answer

The statement suggests that both decreasing the money supply and raising the interest rate are two different ways to achieve the same objective of contracting aggregate demand. Therefore, monetary policy can be described in terms of either the money supply or the interest rate.

Question 11

Charisse is of the opinion that the interest rate depends on the economy's saving propensities and investment opportunities. Most economists would say that Charisse's opinion is
A)Keynesian in nature, and that her view is more valid for the long run than for the short run.
B)classical in nature, and that her view is more valid for the long run than for the short run.
C)Keynesian in nature, and that her view is more valid for the short run than for the long run.
D)classical in nature, and that her view is more valid for the short run than for the long run.

Accepted Answer

Charisse's opinion is more in line with classical economics, which emphasizes the role of saving and investment in determining interest rates. This view is more applicable to the long run, where the economy has had time to adjust to changes in saving and investment behavior. In the short run, other factors such as monetary policy and market expectations may have a more significant impact on interest rates.

Question 12

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂? A)a decrease in the price level B)a decrease in the cost of borrowing C)an increase in the price level D)an increase in the cost of borrowing

Accepted Answer

An increase in the price level would increase the demand for money, as individuals and businesses need more money to finance higher-priced goods and services. This would result in a rightward shift of the money-demand curve from MD₁ to MD₂. A decrease in the price level (choice A) would decrease the demand for money, shifting the curve to the left. A decrease in the cost of borrowing (choice B) would also increase the demand for money, but this would be represented by a movement along the existing money-demand curve, not a shift. Similarly, an increase in the cost of borrowing (choice D) would decrease the demand for money, but this would also be a movement along the curve rather than a shift.

Question 13

In response to the sharp decline in stock prices in October 1987, the Federal Reserve
A)increased the money supply and increased interest rates.
B)increased the money supply and decreased interest rates.
C)decreased the money supply and increased interest rates.
D)decreased the money supply and decreased interest rates.

Accepted Answer

The answer of In response to the sharp decline in...

Question 14

In response to the sharp decline in stock prices in October 1987, the Federal Reserve
A)increased interest rates, and the economy avoided a recession.
B)increased interest rates, but the economy was unable to avoid a recession.
C)decreased interest rates, and the economy avoided a recession.
D)decreased interest rates, but the economy was unable to avoid a recession.

Accepted Answer

In response to the sharp decline in stock prices in October 1987, the Federal Reserve decreased interest rates. This helped to stabilize the economy and prevent a recession.

Question 15

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase? A)The Federal Reserve increases the money supply. B)Money demand increases. C)The price level decreases. D)All of the above are correct.

Accepted Answer

An increase in money demand would cause the money demand curve to shift to the right, resulting in a new equilibrium point at a higher interest rate. Option A is incorrect because an increase in money supply would shift the MS curve to the right, resulting in a new equilibrium point at a lower interest rate. Option C is also incorrect because a decrease in price level would shift the MD curve to the left, resulting in a new equilibrium point at a lower interest rate.

Question 16

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁? A)a decrease in the price level B)a decrease in the number of firms building new factories and buying new equipment C)an increase in the price level D)an increase in the number of firms building new factories and buying new equipment

Accepted Answer

A decrease in the price level would increase the real money supply, leading to a lower equilibrium interest rate.

Question 17

When the interest rate is above the equilibrium level,
A)the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied.
B)people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts.
C)bond issuers and banks respond by lowering the interest rates they offer.
D)All of the above are correct.

Accepted Answer

The answer of When the interest rate is above the...

Question 18

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that
A)rightward shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate.
B)the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.
C)changes in monetary policy aimed at expanding aggregate demand can be described either as increasing the money supply or as increasing the interest rate.
D)our analysis of monetary policy is not fundamentally altered if the Federal Reserve decides to target an interest rate.

Accepted Answer

This statement means that the description of monetary policy does not change fundamentally whether it is described in terms of the money supply or the interest rate. Therefore, if the Federal Reserve decides to target an interest rate, the analysis of monetary policy still remains the same. Option A is incorrect because rightward shifts of the money-supply curve can still occur even when the Federal Reserve is targeting an interest rate. Option B is incorrect because the activities of bond traders can still affect the interest rate even when the Federal Reserve is targeting it. Option C is also not entirely accurate because changes in monetary policy can be described in different ways depending on the situation, and it is not always expanding aggregate demand.

Question 19

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the
A)open-market rate.
B)discount rate.
C)preference rate.
D)None of the above are correct.

Accepted Answer

The answer of The interest rate that the Federal Reserve...

Question 20

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₃. Let Y₃ represent the corresponding quantity of goods and services demanded, and let P₃ represent the corresponding price level. Starting from this situation, if the Federal Reserve decreases the money supply and if the price level remains at P₃, then A)there will be an increase in the equilibrium quantity of goods and services demanded. B)there will be a decrease in the equilibrium interest rate. C)the aggregate-demand curve will shift to the right. D)fewer firms will choose to borrow to build new factories and buy new equipment.

Accepted Answer

A decrease in the money supply typically leads to higher interest rates, making borrowing more expensive. As a result, fewer firms will choose to borrow to build new factories and buy new equipment.

Quiz 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand

For the U.S. economy, money holdings are a

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease?

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then

When the interest rate is below the equilibrium level,

The exchange-rate effect is based, in part, on the idea that

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is

The Fed can influence the money supply by

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Charisse is of the opinion that the interest rate depends on the economy's saving propensities and investment opportunities. Most economists would say that Charisse's opinion is

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

When the interest rate is above the equilibrium level,

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₃. Which of the following events would cause the equilibrium interest rate to decrease?

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD₁. If the current interest rate is r₂, then

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase?

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?