Question 1

The short-run effect of an increase in the money supply is to

Accepted Answer

An increase in the money supply will result in an increase in aggregate demand, which will increase both real GDP and the price level in the short run. This is because the increase in money supply stimulates consumer and investment spending, leading to an increase in demand for goods and services, causing firms to increase their output, which in turn leads to higher prices due to increased demand.

Question 2

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

Accepted Answer

The correct choice is D because when the economy is operating below its full employment level, the Fed can use expansionary monetary policy to increase the money supply and stimulate aggregate demand. This can lead to an increase in production and employment levels, thus moving the economy towards full employment. The direct effect of an increase in the money supply is a reduction in interest rates, which stimulates investment and consumption. The indirect effect is an increase in the supply of loanable funds, which reduces the cost of borrowing and encourages businesses to invest in new projects. As a result, aggregate demand shifts rightward, leading to higher output and employment levels.

Question 3

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

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 known as quantitative easing. This policy is used to stimulate economic growth and encourage lending by banks.

Question 4

How would expansionary monetary policy affect the AD curve?

Accepted Answer

Expansionary monetary policy involves increasing the money supply through measures such as lowering interest rates or purchasing government securities. This results in an increase in consumer and investment spending, leading to a rise in aggregate demand. Therefore, the AD curve would shift to the right.

Question 5

The Federal Reserve conducted the policy of quantitative easing primarily when

Accepted Answer

The policy of quantitative easing was primarily conducted by the Federal Reserve when the interest rate was close to zero, as a way to stimulate the economy and encourage borrowing and investment.

Question 6

An expansionary monetary policy is one that

Accepted Answer

An expansionary monetary policy is one in which the central bank increases the money supply to stimulate economic growth. This results in lower interest rates, which encourages borrowing and spending by consumers and businesses, stimulating aggregate demand.

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 results in higher interest rates and a decrease in the money supply, which in turn decreases consumer and investment spending. This leads to a decrease in aggregate demand, ultimately causing a decrease in both prices and real GDP, resulting in a decrease in economic output.

Question 8

During a period of expansionary monetary policy,

Accepted Answer

During expansionary monetary policy, the central bank increases the rate of growth of the money supply, which leads to an increase in the price level. This is because when there is more money in circulation, demand for goods and services increases, leading to higher prices.

Question 9

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 involves decreasing interest rates, which increases investment and consumption spending, leading to an increase in aggregate demand. This increase in aggregate demand will cause prices to rise, but it will also increase real GDP as firms produce more to meet the higher demand. Therefore, the correct answer is A.

Question 10

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

Accepted Answer

An increase in the money supply shifts the aggregate demand curve to the right, moving the short-run equilibrium from point A to point B, where the economy experiences higher output and a higher price level.

Question 11

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 12

During a period of contractionary monetary policy,

Accepted Answer

During a period of contractionary monetary policy, the central bank reduces the rate of growth of the money supply by raising interest rates or reducing the amount of money banks can lend. This leads to a decrease in the price level as there is less money available to spend, causing a decrease in aggregate demand. Therefore, choice D is the best answer.

Question 13

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 are able to make more loans because they have more money available to lend. This results in an increase in the money supply, which contributes to an increase in aggregate demand.

Question 14

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, the Fed can increase aggregate demand by increasing the rate of growth of the money supply. This can be done through various monetary policy tools, such as open market operations, reserve requirements, and discount rate changes. By increasing the money supply, interest rates will decrease, which will stimulate spending and investment, ultimately boosting aggregate demand in the economy.

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

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

Accepted Answer

Quantitative easing involves a central bank buying government securities in order to increase the money supply and stimulate economic activity. This increases the reserves that banks hold at the central bank, which can then be lent out to businesses and consumers.

Question 17

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, lowering interest rates and increasing investment and consumption. This leads to an increase in aggregate demand, shifting the aggregate demand curve to the right. The result is a higher equilibrium level of income and output. The aggregate supply curve does not shift in response to expansionary monetary policy.

Question 18

An increase in the money supply will

Accepted Answer

An increase in the money supply will increase the amount of money available to be spent on goods and services, leading to an increase in aggregate demand. This is because individuals and businesses will have more money to spend and invest, which will stimulate economic activity and increase the demand for goods and services.

Question 19

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

Accepted Answer

Contractionary monetary policy involves reducing the money supply and raising interest rates, which helps to slow down inflationary pressures by discouraging spending and investment. Therefore, option B is the correct answer as it aims to reduce the rate of inflation. Option A is incorrect as expansionary monetary policy would be used to combat a recession, which involves increasing the money supply and lowering interest rates to stimulate spending and investment. Option C is incorrect as contractionary monetary policy would lead to a decrease in nominal GDP, not an increase. Option D is incorrect as monetary policy does not directly affect long-run aggregate supply, which is determined by factors such as technology, capital stock, and labor supply.

Question 20

-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.

Quiz 16: Domestic and International Dimensions of Monetary Policy