Question 1

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. 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

The answer of Figure 34-4. On the figure, MS represents...

Question 2

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. Each of these actions affects the level of reserves in the banking system, which in turn affects the ability of banks to create new loans and thus the overall money supply.

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

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 5

"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

Monetary policy can be implemented in two ways, either by changing the money supply or by changing the interest rate. When the Federal Reserve wants to contract aggregate demand, it can decrease the money supply or raise interest rates. Both methods will have a similar effect of reducing spending and slowing down inflation. Therefore, changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate. Option A, B, and D are incorrect because they do not accurately reflect the relationship between monetary policy, money supply, and interest rates.

Question 6

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 7

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. 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 lowering the interest rates they offer.
D) in response, the money-demand curve will shift rightward 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 currently MD1, then the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. This creates an excess supply of money, which will lead individuals to respond by either selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. This will cause bond issuers and banks to lower the interest rates they offer in response to the decrease in demand for interest-bearing assets. This adjustment in the interest rate will continue until the demand for money and the supply of money are equal, which will occur at a new equilibrium point where the money-demand curve has shifted rightward from its current position.

Question 8

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. 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 rightward 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 shortage of money.

Accepted Answer

The answer of Figure 34-4. On the figure, MS represents...

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) 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

The statement is asserting that regardless of whether monetary policy is described in terms of the money supply or interest rates, the analysis of monetary policy remains fundamentally the same. Therefore, choice D is the best answer.

Question 10

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. 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

According to the figure, an increase in the money supply shifts the MD curve to the right, resulting in a new equilibrium point with a lower interest rate, higher quantity of goods and services demanded (Y2 in this case), and the same price level (P1). Therefore, there will be an increase in the equilibrium quantity of goods and services demanded.

Question 11

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 12

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. 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

The answer of Figure 34-4. On the figure, MS represents...

Question 13

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 14

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 15

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

Marcus's opinion aligns with the Keynesian approach, which emphasizes the importance of liquidity preference in the short run. Keynes believed that the interest rate is primarily determined by the demand for and supply of money, rather than the productivity of capital. This view is more applicable to the short run because in the long run, the interest rate is likely to be influenced by factors such as productivity and technological progress. Additionally, classical economists tend to view the market as self-correcting, with any imbalances in demand and supply being resolved in the long run.

Question 16

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 classical economics, which suggests that interest rates are determined by the forces of supply and demand in the market for loanable funds. In the long run, saving propensities and investment opportunities determine the supply of and demand for loanable funds, respectively, and thus affect the interest rate. In the short run, however, other factors such as changes in money supply and government policies can have a more significant impact on interest rates. Therefore, Charisse's view is more valid for the long run than for the short run, which is consistent with the classical perspective.

Question 17

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. 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

If money demand increases, the money demand curve shifts to the right, leading to a new equilibrium point with a higher interest rate. Option A is incorrect because an increase in money supply would shift the money supply curve to the right without affecting the equilibrium interest rate. Option C is incorrect because a decrease in price level would lead to a rightward shift in the money demand curve, which would lower the equilibrium interest rate.

Question 18

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Which of the following events could explain a decrease in the equilibrium interest rate from r1 to r3?
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

The answer of Figure 34-4. On the figure, MS represents...

Question 19

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 in order to stimulate economic growth and avoid a recession. This strategy successfully prevented a recession from occurring.

Question 20

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. 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

The answer of Figure 34-4. On the figure, MS represents...

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

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

The Fed can influence the money supply by

When the interest rate is above the equilibrium level,

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

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

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then

"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

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

When the interest rate is below the equilibrium level,

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

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

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 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Which of the following events could explain a decrease in the equilibrium interest rate from r1 to r3?

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

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease?