Question 1

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, when the money supply increases, the interest rate falls due to an increase in the supply of funds available for borrowing. This reduction in interest rates, in turn, causes investment spending to rise as borrowing becomes cheaper. This increase in investment spending leads to an increase in aggregate demand, shifting the AD curve to the right. Therefore, the correct answer is option D: falls; rises; right.

Question 2

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 1 percent per year, then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

Accepted Answer

According to the Quantity Theory of Money represented by the equation MV = PY (where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP), if the goal is to maintain a stable price level (meaning P is constant), the growth rate of the money supply (M) plus the growth rate of velocity (V) should equal the growth rate of real GDP (Y). Given that real GDP grows at 4% and velocity grows at 1%, the money supply should grow at 3% to keep the price level stable.

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 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 (Aggregate Supply) curve, output changes but the price level does not change, reflecting the economy's ability to increase output without increasing prices in this range.

Question 4

If a country's rules-based monetary policy sets the annual money supply growth rate equal to the average annual growth rate of Real GDP, and velocity is a constant, then the price level

Accepted Answer

The answer of If a country's rules-based monetary policy sets...

Question 5

Which of the following might break the link in the Keynesian transmission mechanism between the expansionary monetary policy and the goods-and-services market?

Accepted Answer

The answer of Which of the following might break the...

Question 6

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 7

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 2 percent per year, then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

Accepted Answer

The correct answer is based on the Quantity Theory of Money, represented by the equation MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is the real GDP. To maintain a stable price level (P constant), the growth rate of the money supply (M) plus the growth rate of velocity (V) should equal the growth rate of real GDP (Y). Given that real GDP (Y) increases at 4% and velocity (V) increases at 2%, the money supply (M) should also increase at a rate that keeps the product MV constant with the growth of PY. Therefore, to maintain a stable price level, the money supply should increase at 2% (4% GDP growth - 2% velocity growth = 2% money supply growth).

Question 8

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, it adds stimulus to an already recovering economy, potentially overheating it and leading to an inflationary gap. This is because the additional demand created by the policy can push the economy beyond its natural level of output, causing inflation.

Question 9

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 transmission mechanism, an increase in the money supply lowers the interest rate, which makes investment cheaper and thus increases investment spending. This leads to a rightward shift in the Aggregate Demand (AD) curve. However, if the economy is in the horizontal portion of the Aggregate Supply (AS) curve, output can increase without changing the price level, meaning Real GDP will increase without inflationary pressures. Therefore, Real GDP will not remain unchanged as it will actually increase due to higher investment and consumption. The correct sequence is a fall in interest rates, a rise in investment spending, a rightward shift in the AD curve, but the last part of the statement is incorrect as per the given options.

Question 10

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 11

According to the Keynesian transmission mechanism, if the Fed conducts an open market sale of government securities, it may cause which of the following in the investment goods market?

Accepted Answer

The answer of According to the Keynesian transmission mechanism, if...

Question 12

Equilibrium in the money market exists when

Accepted Answer

Equilibrium in the money market exists when the supply of money curve intersects the demand for money curve at the prevailing interest rate. This is where the quantity of money demanded is equal to the quantity of money supplied, resulting in an equilibrium in the money market. Option A is incorrect because excess supply of money means that the quantity of money supplied is greater than the quantity of money demanded at the given interest rate, implying a surplus of money. Option B is incorrect because excess demand for money means that the quantity of money demanded is greater than the quantity of money supplied at the given interest rate, implying a shortage of money. Option D is incorrect because while both B and C are correct, taking both options together is unnecessary.

Question 13

Suppose a constant-money-growth-rate rule of 3 percent is being considered. If it is estimated that average annual Real GDP growth is 3.5 percent and it turns out that velocity is rising by 2 percent a year on average, the rule would produce an average annual rate of inflation of __________ percent.

Accepted Answer

The answer of Suppose a constant-money-growth-rate rule of 3 percent...

Question 14

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 15

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 16

The price of holding money balances is equal to the

Accepted Answer

The price of holding money balances is equal to the interest rate that could have been earned had those money balances been invested in an interest-bearing alternative (e.g., a bond). When holding money balances, individuals give up the opportunity to earn interest on them, which is the price they pay for the convenience and liquidity of holding money.

Question 17

Which of the following statements is true?

Accepted Answer

If individuals want to hold less money than is supplied, they will try to get rid of their excess money balances by buying securities or making loans, causing prices of securities to increase and interest rates to decrease. This is known as putting downward pressure on the interest rate. Choice A is false because the demand curve for money balances represents an inverse relationship between the quantity demanded of money balances and the interest rate, not the price of holding money balances. Choice B is false because while the Fed has a significant influence on the money supply, it is not the only determining factor. Choice C is false because the "money market" includes all securities with maturities of one year or less, not just short-term securities.

Question 18

According to the Keynesian transmission mechanism, if the Fed conducts an open market purchase of government securities, it may cause which of the following in the investment goods market?

Accepted Answer

The answer of According to the Keynesian transmission mechanism, if...

Question 19

The existence of a liquidity trap implies that

Accepted Answer

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

Question 20

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

Accepted Answer

Changes in the velocity of money, if not accounted for, can indeed be a source of price instability. This is because the velocity of money (how quickly money circulates in the economy) can change due to various factors, and if a monetary policy is solely focused on maintaining a steady growth rate in the money supply without considering changes in velocity, it may not achieve its intended outcomes in terms of price stability.

Quiz 15: Monetary Policy

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 __.

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 1 percent per year, then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

If a country's rules-based monetary policy sets the annual money supply growth rate equal to the average annual growth rate of Real GDP, and velocity is a constant, then the price level

Which of the following might break the link in the Keynesian transmission mechanism between the expansionary monetary policy and the goods-and-services market?

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 2 percent per year, then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

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

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

According to the Keynesian transmission mechanism, if the Fed conducts an open market sale of government securities, it may cause which of the following in the investment goods market?

Equilibrium in the money market exists when

Suppose a constant-money-growth-rate rule of 3 percent is being considered. If it is estimated that average annual Real GDP growth is 3.5 percent and it turns out that velocity is rising by 2 percent a year on average, the rule would produce an average annual rate of inflation of __________ percent.

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

The price of holding money balances is equal to the

Which of the following statements is true?

According to the Keynesian transmission mechanism, if the Fed conducts an open market purchase of government securities, it may cause which of the following in the investment goods market?

The existence of a liquidity trap implies that

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

Quiz 15: Monetary Policy

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 __________.

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 1 percent per year, then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

If a country's rules-based monetary policy sets the annual money supply growth rate equal to the average annual growth rate of Real GDP, and velocity is a constant, then the price level

Which of the following might break the link in the Keynesian transmission mechanism between the expansionary monetary policy and the goods-and-services market?

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 2 percent per year, then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

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

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

According to the Keynesian transmission mechanism, if the Fed conducts an open market sale of government securities, it may cause which of the following in the investment goods market?

Equilibrium in the money market exists when

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

The price of holding money balances is equal to the

Which of the following statements is true?

According to the Keynesian transmission mechanism, if the Fed conducts an open market purchase of government securities, it may cause which of the following in the investment goods market?

The existence of a liquidity trap implies that

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

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 __.

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

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