Question 1

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

All of the above options are correct. 
The Fed can influence the money supply by changing how much it lends to banks through the discount rate, which is the interest rate the Fed charges banks to borrow money. Changing the interest rate it pays banks on reserves can also impact the money supply by encouraging or discouraging banks from lending money. Finally, the Fed can use open market operations, which involve buying or selling government securities in the open market, to influence the money supply by injecting or removing money from the economy.

Question 2

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.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

If the Federal Reserve increases the money supply and the price level remains constant, the money demand curve shifts to the right (from MD to MD'). This leads to a lower equilibrium interest rate (rS'1U1B1) and higher quantity demanded of goods and services (YS'1U1B1). Therefore, there will be an increase in the equilibrium quantity of goods and services demanded. There is no indication that the firms' borrowing decisions will change in this scenario.

Question 3

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 4

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 5

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

When the interest rate is below the equilibrium level, people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. This is because the demand for money will be greater than the supply, leading to a higher demand for bonds and a lower supply of money. Bond issuers and banks may also respond by lowering the interest rates they offer in order to attract borrowers, but this is not always guaranteed. Option A is incorrect because if the quantity of money supplied exceeds the quantity of money people want to hold, this would lead to inflation and an increase in the interest rate. Option C is also incorrect as bond issuers and banks may not necessarily lower interest rates in response to a low interest rate environment.

Question 6

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.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

If the current interest rate is r2 and the money-demand curve is MD1, the quantity of money that people want to hold is less than the quantity of money supplied by the Federal Reserve, leading to an excess supply of money.

Question 7

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.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

When the interest rate is at r₂ and the money-demand curve is at MD₂, there is a surplus of money. To reach equilibrium in the money market, people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts, causing the money-demand curve to shift downward. Bond issuers and banks may also respond by lowering the interest rates they offer in order to stimulate borrowing and spending.

Question 8

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.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

An increase in the money supply, a decrease in money demand, or a decrease in the price level would all lead to a lower equilibrium interest rate.

Question 9

"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

This statement is highlighting that there are two ways to describe the effects of monetary policy - either in terms of changes in the money supply or changes in the interest rate. This option acknowledges that both approaches can be used to achieve the same goal of contracting aggregate demand. Option A and D are both incorrect as they suggest that targeting the interest rate eliminates the need for changes in the money supply or Fed traders' activities, which is not the case. Option B is incorrect as changes in monetary policy will affect aggregate demand regardless of whether they are communicated in terms of money supply or interest rates.

Question 10

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 aligns with the classical economic theory, which argues that interest rates are determined by the supply and demand for loanable funds in the economy, which in turn depend on saving propensities and investment opportunities. This view is more valid for the long run because in the short run, interest rates can be influenced by factors such as monetary policy and market fluctuations. The Keynesian theory, on the other hand, emphasizes the role of government intervention in managing the economy and achieving full employment, which can involve manipulating interest rates.

Question 11

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.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, shifting the money-demand curve to the right.

Question 12

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.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 13

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 that explains the determination of the interest rate in the short run. Marcus's opinion is in line with the Keynesian perspective and applies more to the short run rather than the long run. Therefore, option C is the correct choice.

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 led to an increase in consumer spending and investment, which helped the economy avoid a recession.

Question 15

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.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 shift the money demand curve to the right, causing a new equilibrium at a higher interest rate (rS2U2B). Option A is incorrect because an increase in money supply would shift the money supply curve to the right, causing a new equilibrium at a lower interest rate (rS2U1B). Option C is incorrect because a decrease in the price level would also shift the money demand curve to the right, causing a new equilibrium at a higher interest rate (rS2U2B).

Question 16

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,on the...

Question 17

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 18

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.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 leads to higher interest rates, making borrowing more expensive. As a result, fewer firms will choose to borrow for investments like building new factories or buying new equipment.

Question 19

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 20

"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 regardless of whether the central bank targets the money supply or interest rate, the overall goal and impact of monetary policy on the economy remains the same. Therefore, our analysis of monetary policy is not fundamentally altered if the Federal Reserve decides to target an interest rate.

Quiz 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Fed can influence the money supply by

When the interest rate is above the equilibrium level,

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

When the interest rate is below the equilibrium level,

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the money-demand curve is currently MD1.If the current interest rate is r2,then

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the money-demand curve is currently MD2.If the current interest rate is r2,then

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the current equilibrium interest rate is r3.Which of the following events would cause the equilibrium interest rate to decrease?

"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 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

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

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

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the current equilibrium interest rate is r1.Which of the following events would cause the equilibrium interest rate to increase?

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

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

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

"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

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the money-demand curve is currently MD₁.If the current interest rate is r₂,then

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the money-demand curve is currently MD₂.If the current interest rate is r₂,then

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the current equilibrium interest rate is r₃.Which of the following events would cause the equilibrium interest rate to decrease?

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the current equilibrium interest rate is r₁.Which of the following events would cause the equilibrium interest rate to increase?