Question 1

If the Fed uses its tools to expand the money supply, bond prices will be bid down and interest rates will rise.

Accepted Answer

When the Fed uses its tools to expand the money supply, it usually leads to a decrease in interest rates and an increase in bond prices.

Question 2

A decrease in the supply of money, other things being equal, will raise the equilibrium interest rate.

Accepted Answer

This is because with less money available, lenders can charge higher interest rates since borrowers are willing to pay more to secure the limited funds.

Question 3

A rightward shift in the money supply curve is likely to produce a rightward shift in the money demand curve.

Accepted Answer

A rightward shift in the money supply curve would lower the interest rate, leading to an increase in investment and consumption spending, which would shift the AD curve to the right. However, this increase in output and income would raise the demand for money, leading to a leftward shift in the money demand curve.

Question 4

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess demand for money, leading people to buy bonds.

Accepted Answer

An increase in the money supply will lead to an excess supply of money, not an excess demand for money. This will cause people to sell bonds, not buy them.

Question 5

If the investment curve is relatively flat, the Keynesian conclusion is that the transmission mechanism has little effect on the economy.

Accepted Answer

If the investment curve is relatively flat, it means that changes in interest rates or other transmission mechanisms have a limited effect on investment. This would not lead to the conclusion that the transmission mechanism has little effect on the economy, but rather that investment is not highly responsive to these changes.

Question 6

If the Fed uses its tools to expand the money supply, bond prices will be bid up and interest rates will fall.

Accepted Answer

When the Fed uses tools such as buying bonds or lowering the reserve requirement, it injects liquidity into the economy, which increases the money supply. As a result, demand for bonds will increase, bidding up their prices and lowering their yields or interest rates.

Question 7

Keynesian economists believe monetary policy is more effective than fiscal policy in stabilizing the business cycle.

Accepted Answer

Keynesian economists believe that both monetary and fiscal policy are important tools in stabilizing the business cycle. However, they generally place more emphasis on fiscal policy, particularly in times of recession, because it directly stimulates aggregate demand through government spending and tax policies.

Question 8

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess supply of money, leading people to buy bonds.

Accepted Answer

An increase in the money supply will shift the supply curve to the right, creating an excess supply of money at the original interest rate. This will lead investors to buy more bonds, causing bond prices to rise and interest rates to fall until a new equilibrium is reached.

Question 9

Monetarists argue that the Fed should frequently adjust the money supply in response to ever-changing economic conditions.

Accepted Answer

Monetarists believe in a fixed rule for money supply growth, advocating for a steady, predictable increase rather than frequent adjustments.

Question 10

The Monetarists advocate the monetary rule in order to stabilize the business cycle which states that the money supply should be decreased by a constant rate year after year.

Accepted Answer

The Monetarists do advocate for a monetary rule to stabilize the business cycle, but they advocate for a constant growth rate of the money supply, not a constant decrease. This is known as the "constant growth rate of money hypothesis."

Question 11

According to Keynesian theory, changes in the money supply have a direct and immediate impact on aggregate demand.

Accepted Answer

Keynesian theory emphasizes fiscal policy over monetary policy, suggesting that changes in government spending and taxation have a more direct impact on aggregate demand than changes in the money supply.

Question 12

The transmission mechanism is the effect of changes in monetary policy on the stock market.

Accepted Answer

The answer of The transmission mechanism is the effect of...

Question 13

The transmission mechanism is the effect of changes in monetary policy on prices, real GDP, and employment.

Accepted Answer

The transmission mechanism is the process through which changes in monetary policy decisions affect the overall economy, including prices, real GDP, and employment.

Question 14

Investment is lowered by expansionary monetary policy.

Accepted Answer

Expansionary monetary policy, which involves lowering interest rates, actually tends to increase investment by making borrowing cheaper and more attractive for businesses.

Question 15

If M stand for the money supply, V for the velocity of money, P for the average selling price, and Q for the output of goods and services, the equation of exchange is MV = PQ.

Accepted Answer

This is the correct equation of exchange, which shows the relationship between the money supply, velocity of money, average selling price, and output of goods and services.

Question 16

If the money supply increases this will cause the interest rate to rise, investment to fall and GDP to fall.

Accepted Answer

This statement is incorrect. An increase in the money supply is generally associated with a decrease in interest rates, which can increase investment and stimulate economic growth (GDP).

Question 17

The Monetarists advocate the monetary rule in order to stabilize the business cycle which states that the money supply should be increased by a constant rate year after year.

Accepted Answer

This is a correct statement about the Monetarist school of thought. They believe that a steady, predictable increase in the money supply can help stabilize economic activity and avoid the ups and downs of the business cycle that can be caused by fluctuations in the money supply.

Question 18

The Keynesian viewpoint is that the investment curve is highly responsive to the changes in the rate of interest.

Accepted Answer

The Keynesian viewpoint suggests that the investment curve is relatively inelastic or less responsive to changes in the interest rate, as investment decisions are more influenced by expectations of future profitability and other factors.

Question 19

A rightward shift in the money supply curve is likely to produce a rightward shift in the aggregate demand curve.

Accepted Answer

An increase in the money supply leads to an increase in aggregate demand due to increased spending and investment. This results in a rightward shift in the AD curve.

Question 20

If the investment curve is relatively vertical, the Keynesian conclusion is that the transmission mechanism has little effect on the economy.

Accepted Answer

A relatively vertical investment curve means that changes in interest rates or other factors affecting investment have little impact on overall investment levels in the economy. This implies that the transmission mechanism (how changes in monetary policy affect the economy) has little effect on the economy, which is a Keynesian interpretation.

Quiz 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model