Question 1

Suppose the economy is experiencing an inflationary gap.Based on available data,the Fed starts implementing contractionary monetary policy,but this moves the economy into a recessionary gap.The most probable explanation is that,because of the total lag in monetary policy,the government did not realize that the economy was already healing itself,i.e. ,that the

Accepted Answer

The answer of Suppose the economy is experiencing an inflationary...

Question 2

The existence of a liquidity trap implies that

Accepted Answer

The answer of The existence of a liquidity trap implies...

Question 3

The economy is in the horizontal portion of the AS curve,there is no liquidity trap and investment is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply increases the interest rate will __________,investment spending will __________,the AD curve will shift to the __________,and Real GDP will __________.

Accepted Answer

In the Keynesian framework, an increase in the money supply lowers the interest rate, which makes investment cheaper and thus increases investment spending. This increase in investment shifts the aggregate demand (AD) curve to the right, leading to an increase in real GDP. However, because the economy is in the horizontal portion of the aggregate supply (AS) curve, output can increase without changing the price level, meaning real GDP increases without inflationary pressure.

Question 4

As the interest rate increases,the opportunity cost of holding money __________ and individuals choose to hold __________ money.

Accepted Answer

As the interest rate increases, the return on holding money also increases, making the opportunity cost of holding money higher. Therefore, individuals choose to hold less money. This is because holding money provides no return, whereas investing in interest-bearing assets provides a return.

Question 5

The SRAS curve is upward sloping,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the monetarist transmission mechanism,if the money supply increases the AD curve __________ and the price level __________.

Accepted Answer

According to the monetarist transmission mechanism, an increase in the money supply will shift the AD curve to the right, leading to an increase in output and a rise in the price level. This is because with an upward-sloping SRAS curve and sensitivity of investment spending to interest rates, an increase in the money supply will lead to a decrease in interest rates and an increase in demand for goods and services.

Question 6

Which of the following statements is true?

Accepted Answer

The statement D is true because in the context of the money market, if individuals wish to hold less money than is supplied at a given interest rate, they are likely to invest the excess money in interest-bearing assets, which increases the supply of loanable funds and puts downward pressure on the interest rate.

Question 7

Last year,Leah bought a bond for $1,000 that promises to pay $105 a year.This year,a person who buys a bond for $1,000 receives $95 a year.If Leah were to sell her (old)bond,its price would be approximately

Accepted Answer

The answer of Last year,Leah bought a bond for $1,000...

Question 8

Last year,Danielle bought a bond for $10,000 that promises to pay $1,150 a year.This year,a person who buys a bond for $10,000 receives $1,210 a year.If Danielle were to sell her (old)bond,its price would be approximately

Accepted Answer

The value of a bond is directly proportional to its annual yield. As the yield on the newly issued bond is higher than what Danielle holds, the value of her bond will decrease to adjust for the lower yield. We can use the formula for present value of a bond to determine the approximate price at which Danielle can sell her old bond:

PV = C / r * (1 - 1/(1+r)^n)

where PV is the present value, C is the annual coupon payment, r is the yield or interest rate, and n is the number of years.

For Danielle's bond, C = $1,150, r = 0.115 (since she gets $1,150 from a $10,000 investment), and n = 1. Plugging these values into the formula, we get:

PV = $1,150 / 0.115 * (1 - 1/(1+0.115)^1) = $9,504.35

Therefore, Danielle can sell her old bond for approximately $9,504. This is lower than the face value of $10,000 because the yield on the newly issued bond is higher.

Question 9

Interest rates and the price of old or existing bonds are

Accepted Answer

Interest rates and bond prices have an inverse relationship. When interest rates rise, bond prices fall as investors are less willing to pay a high price for a bond that has a lower yield compared to newly issued bonds with higher interest rates. Conversely, when interest rates fall, bond prices tend to rise as investors are willing to pay more for existing bonds with higher yields than newly issued bonds with lower interest rates.

Question 10

Assume that because of a long policy lag,the Fed starts implementing expansionary monetary policy too late,i.e. ,at a time when the economy is already healing itself.As a result,the economy will probably move from an initial

Accepted Answer

When the Fed implements expansionary monetary policy too late, during a period when the economy is already recovering, it can lead to excessive demand. This can push the economy from a recessionary gap, where output is below potential, to an inflationary gap, where output exceeds the economy's long-run sustainable level, leading to inflation.

Question 11

One criticism of monetary policy based on a predetermined steady growth rate in money supply is that

Accepted Answer

The answer of One criticism of monetary policy based on...

Question 12

As the interest rate __________,the quantity supplied of money __________ and the quantity demanded of money __________.

Accepted Answer

The quantity supplied of money is typically controlled by the central bank and does not change with interest rates. However, as interest rates rise, the cost of borrowing money increases, leading to a decrease in the quantity of money demanded.

Question 13

The economy is in the horizontal portion of the AS curve,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply increases the interest rate __________,investment spending __________,the AD curve __________ and the price level __________.

Accepted Answer

In a liquidity trap, increasing the money supply does not change the interest rate, investment spending, or the AD curve, and thus the price level remains unchanged.

Question 14

According to Keynesian economists,monetary policy is __________ effective at changing the price level and Real GDP.

Accepted Answer

According to Keynesian economists, monetary policy is sometimes effective at changing the price level and Real GDP. This is because Keynesians believe that in certain situations, particularly during a recession, monetary policy may be ineffective due to the presence of liquidity traps and the inability of consumers and investors to respond to changes in interest rates. However, in other circumstances, such as when the economy is at or near full employment, monetary policy may be effective in influencing aggregate demand and output.

Question 15

The price of holding money balances is equal to the

Accepted Answer

The price of holding money balances is the opportunity cost of not earning interest on those balances, which is the interest rate that could have been earned had the money been invested in an interest-bearing alternative such as a bond. Therefore, option C is the correct choice. Option A is incorrect because the price of bonds is not directly related to the price of holding money balances, and option B is incorrect because it refers to the price of goods and services, which is irrelevant to the cost of holding money balances. Option D is incorrect because it is too broad and includes all the choices, even those that are incorrect.

Question 16

The economy is in the horizontal portion of the AS curve,investment spending is interest insensitive and there is no liquidity trap.According to the Keynesian transmission mechanism,if the money supply increases the interest rate will __________,investment spending will __________,the AD curve will __________,and Real GDP will __________.

Accepted Answer

In the horizontal portion of the AS curve, an increase in the money supply would typically lower interest rates, but since investment spending is interest insensitive, it remains unchanged. There's no liquidity trap, so the traditional mechanism of lowering interest rates to stimulate investment doesn't apply here. Therefore, the AD curve does not shift, and Real GDP remains unchanged.

Question 17

The economy is in the horizontal portion of the AS curve,there is no liquidity trap and investment is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply drops the interest rate will __________,investment spending will __________,the AD curve will shift to the __________,and the price level will __________.

Accepted Answer

In the Keynesian transmission mechanism, a drop in the money supply leads to higher interest rates as there is less money available for borrowing. Higher interest rates make borrowing more expensive, which reduces investment spending. With lower investment spending, the aggregate demand (AD) curve shifts to the left. However, because the economy is in the horizontal portion of the AS curve, output changes but the price level does not change, reflecting excess capacity or slack in the economy.

Question 18

Equilibrium in the money market exists when

Accepted Answer

Equilibrium in the money market is achieved when the supply of money equals the demand for money, which is reflected in the intersection of the supply and demand curves on a graph. Therefore, choice C is the correct answer. Choices A and B represent situations of excess supply or demand, respectively, and are not indicative of equilibrium. Choice D is incorrect because excess demand is not equal to quantity demanded, but rather the difference between quantity demanded and quantity supplied.

Question 19

According to the Keynesian transmission mechanism (and assuming there is no liquidity trap and investment is not interest insensitive),if the money supply increases,the interest rate __________,investment spending __________ and the AD curve shifts to the __________.

Accepted Answer

According to the Keynesian transmission mechanism, an increase in money supply will lead to a fall in interest rates, as banks compete to lend out the increased funds. This fall in interest rates will stimulate investment spending, as borrowing costs are now lower. This increase in investment spending will lead to an overall increase in aggregate demand (AD), shifting the AD curve to the right. Thus, option D is the correct answer as it states that interest rates will fall, investment spending will rise, and the AD curve will shift to the right.

Question 20

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will __________ Real GDP.According to a Keynesian,an increase in the money supply will __________ Real GDP.

Accepted Answer

Monetarists believe that increasing the money supply will raise Real GDP because they see the economy as naturally adjusting to changes in money supply with changes in prices and output. Keynesians, however, might argue that if investment spending is insensitive to changes in interest rates (a liquidity trap scenario), an increase in the money supply will not change Real GDP because the additional money will not stimulate additional investment or consumption.

Quiz 15: Monetary Policy

The existence of a liquidity trap implies that

As the interest rate increases,the opportunity cost of holding money and individuals choose to hold money.

The SRAS curve is upward sloping,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the monetarist transmission mechanism,if the money supply increases the AD curve and the price level .

Which of the following statements is true?

Last year,Leah bought a bond for $1,000 that promises to pay $105 a year.This year,a person who buys a bond for $1,000 receives $95 a year.If Leah were to sell her (old) bond,its price would be approximately

Last year,Danielle bought a bond for $10,000 that promises to pay $1,150 a year.This year,a person who buys a bond for $10,000 receives $1,210 a year.If Danielle were to sell her (old) bond,its price would be approximately

Interest rates and the price of old or existing bonds are

Assume that because of a long policy lag,the Fed starts implementing expansionary monetary policy too late,i.e. ,at a time when the economy is already healing itself.As a result,the economy will probably move from an initial

One criticism of monetary policy based on a predetermined steady growth rate in money supply is that

As the interest rate ,the quantity supplied of money and the quantity demanded of money __.

According to Keynesian economists,monetary policy is __________ effective at changing the price level and Real GDP.

The price of holding money balances is equal to the

The economy is in the horizontal portion of the AS curve,investment spending is interest insensitive and there is no liquidity trap.According to the Keynesian transmission mechanism,if the money supply increases the interest rate will ,investment spending will ,the AD curve will ,and Real GDP will .

Equilibrium in the money market exists when

According to the Keynesian transmission mechanism (and assuming there is no liquidity trap and investment is not interest insensitive) ,if the money supply increases,the interest rate ,investment spending and the AD curve shifts to the __.

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will Real GDP.According to a Keynesian,an increase in the money supply will Real GDP.

Quiz 15: Monetary Policy

The existence of a liquidity trap implies that

As the interest rate increases,the opportunity cost of holding money __________ and individuals choose to hold __________ money.

The SRAS curve is upward sloping,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the monetarist transmission mechanism,if the money supply increases the AD curve __________ and the price level __________.

Which of the following statements is true?

Last year,Leah bought a bond for $1,000 that promises to pay $105 a year.This year,a person who buys a bond for $1,000 receives $95 a year.If Leah were to sell her (old) bond,its price would be approximately

Last year,Danielle bought a bond for $10,000 that promises to pay $1,150 a year.This year,a person who buys a bond for $10,000 receives $1,210 a year.If Danielle were to sell her (old) bond,its price would be approximately

Interest rates and the price of old or existing bonds are

Assume that because of a long policy lag,the Fed starts implementing expansionary monetary policy too late,i.e. ,at a time when the economy is already healing itself.As a result,the economy will probably move from an initial

One criticism of monetary policy based on a predetermined steady growth rate in money supply is that

As the interest rate __________,the quantity supplied of money __________ and the quantity demanded of money __________.

According to Keynesian economists,monetary policy is __________ effective at changing the price level and Real GDP.

The price of holding money balances is equal to the

Equilibrium in the money market exists when

According to the Keynesian transmission mechanism (and assuming there is no liquidity trap and investment is not interest insensitive) ,if the money supply increases,the interest rate __________,investment spending __________ and the AD curve shifts to the __________.

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will __________ Real GDP.According to a Keynesian,an increase in the money supply will __________ Real GDP.

As the interest rate increases,the opportunity cost of holding money and individuals choose to hold money.

The SRAS curve is upward sloping,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the monetarist transmission mechanism,if the money supply increases the AD curve and the price level .

As the interest rate ,the quantity supplied of money and the quantity demanded of money __.

According to the Keynesian transmission mechanism (and assuming there is no liquidity trap and investment is not interest insensitive) ,if the money supply increases,the interest rate ,investment spending and the AD curve shifts to the __.

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will Real GDP.According to a Keynesian,an increase in the money supply will Real GDP.