Question 1

When the interest rate is below the equilibrium level,

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

Question 2

"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

Accepted Answer

This statement means that the Federal Reserve can choose to implement its monetary policy by either adjusting the money supply or changing the interest rate. For example, if the Fed wants to decrease aggregate demand to combat inflation, they can either decrease the money supply or increase the interest rate. Both methods would have the same effect of reducing the amount of money available for lending and borrowing, and thus decreasing spending and aggregate demand.

Question 3

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

Accepted Answer

Charisse's opinion reflects classical economic theory, which holds that interest rates are determined by the supply and demand for loanable funds, which depends on saving and investment decisions. This view is more applicable in the long run when price levels are flexible and markets are free to adjust to changes in supply and demand. In the short run, factors such as changes in the money supply and government policy can also influence interest rates, making Charisse's view less applicable.

Question 4

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the money-demand curve is currently MD₁. If the current interest rate is r₂, then

Accepted Answer

If the current 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 5

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then

Accepted Answer

If the interest rate is currently at the level represented by r₂, the quantity of money supplied (MS) exceeds the quantity of money demanded (MD). As a result, people will respond to the excess supply of money by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts, which will shift the money-demand curve downward to establish equilibrium in the money market. Bond issuers and banks may respond by lowering interest rates, but this is a result of the shift in the money-demand curve, not the cause of it. There is not enough information to determine whether there is a surplus of money or not.

Question 6

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

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

Question 7

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

Accepted Answer

In response to the sharp decline in stock prices in October 1987, the Federal Reserve decreased interest rates to keep the economy from falling into a recession. This action proved successful, as the economy was able to avoid a recession.

Question 8

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?

Accepted Answer

An increase in the price level would increase the demand for money, as individuals and businesses would need more money to purchase goods and services at the higher prices. This would shift the money-demand curve to the right, from MD₁ to MD₂. A decrease in the price level, a decrease in the cost of borrowing, or an increase in the cost of borrowing would not directly affect the demand for money and would not cause a shift in the money-demand curve.

Question 9

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

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 10

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?

Accepted Answer

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

Question 11

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

Accepted Answer

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

Question 12

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

Accepted Answer

Marcus's opinion is Keynesian in nature because the theory of liquidity preference is a key component of Keynesian economics. The theory states that the interest rate is determined by the demand and supply of money in the short run, and that this can lead to interest rate fluctuations. However, in the long run, classical economists argue that the interest rate is determined by real factors such as productivity and the supply of savings. Therefore, Marcus's view is more valid for the short run than for the long run.

Question 13

The Fed can influence the money supply by

Accepted Answer

All of the options are correct ways in which the Fed is able to influence the money supply.

A) By changing how much it lends to banks, the Fed can impact the amount of reserves banks have on hand, which in turn can affect their ability to extend loans and thus impact the money supply.

B) By changing the interest rate it pays banks on the reserves they are holding, the Fed can influence whether or not banks choose to lend out more of their reserves or hold on to them, again impacting the overall money supply.

C) Open-market operations refer to the Fed's buying and selling of government securities in the open market. When the Fed buys these securities, it injects money into the economy which increases the money supply. When it sells these securities, it takes money out of the economy which leads to a decrease in the money supply.

Thus, all of these options are correct methods through which the Fed can influence the money supply.

Question 14

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the current equilibrium interest rate is r₃. Which of the following events would cause the equilibrium interest rate to decrease?

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 supply curve of money to the right, a decrease in money demand (B) shifts the demand curve to the left, and a decrease in the price level (C) reduces money demand, all leading to a lower interest rate.

Question 15

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. 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

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 16

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

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

Question 17

When the interest rate is above the equilibrium level,

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

Question 18

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. 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

Accepted Answer

Increasing the money supply shifts the money supply curve to the right, causing the equilibrium interest rate to decrease (move from r₁ to rS2U2B11S2U2B0) and the equilibrium quantity of goods and services demanded to increase (move from Y₁ to YS2U2B11S2U2B0). This is because there is more money available in the market, lowering the cost of borrowing and increasing spending. The price level remains the same, so there is no impact on firms' borrowing decisions.

Question 19

"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

Accepted Answer

The statement suggests that whether the Federal Reserve targets the money supply or the interest rate, the analysis of monetary policy remains the same. Therefore, Option D is the correct answer. Option A is incorrect because a shift in the money supply curve could occur even if the interest rate is targeted. Option B is incorrect because the Federal Reserve's bond traders can influence the interest rate even if it is targeted. Option C is partially true, but it doesn't cover the full extent of the statement.

Question 20

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase?

Accepted Answer

An increase in money demand would shift the MD curve to the right. This would lead to a new equilibrium at a higher interest rate (rS2U2B11S2U2B0). An increase in money supply or a decrease in price level would shift the MS curve to the right and lead to a new equilibrium at a lower interest rate. Therefore, options A and C would not cause an increase in the equilibrium interest rate.

Quiz 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

When the interest rate is below 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

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 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then

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 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

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

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

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

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

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease?

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

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

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the money-demand curve is currently MD₁. If the current interest rate is r₂, then

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the current equilibrium interest rate is r₃. Which of the following events would cause the equilibrium interest rate to decrease?

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase?