Question 1

If nominal interest rates rise, what will happen to demand for money?​

Accepted Answer

The answer of If nominal interest rates rise, what will...

Question 2

When there is a liquidity trap, when the Fed adds bank reserves, there is a large effect on borrowing, investment and aggregate demand.

Accepted Answer

In a liquidity trap, adding bank reserves does not have a significant impact on borrowing, investment, or aggregate demand as interest rates are already near zero and banks may choose to hold on to excess reserves instead.

Question 3

Quantitative easing involved Fed purchases of long term securities rather than short term securities.​

Accepted Answer

Quantitative easing (QE) involves the purchase of long-term securities, such as government bonds or mortgage-backed securities, from banks and other financial institutions in order to increase the money supply and encourage lending. This is in contrast to traditional monetary policy, which typically involves the purchase or sale of short-term securities, such as Treasury bills.

Question 4

If economic recovery has already occurred by the time the effects of expansionary monetary policy are felt, it could cause an inflation problem rather than curing a recession problem.

Accepted Answer

Expansionary monetary policy, such as increasing the money supply and lowering interest rates, is aimed at stimulating economic activity and boosting aggregate demand. However, if the economy is already at or close to full employment and output, the additional demand generated by monetary policy can lead to inflationary pressures. This is because when there is more money chasing the same amount of goods and services, prices tend to rise. Therefore, if the economy has already recovered from a recession by the time the effects of expansionary monetary policy are felt, it could exacerbate inflation rather than solving a recession problem.

Question 5

If money supply and money demand both increased:

Accepted Answer

The change in nominal interest rates and investment would be indeterminate, as both factors have increased, which could potentially offset each other. The impact on nominal interest rates and investment would depend on the magnitude of the increase in money supply and money demand, as well as other economic factors at play.

Question 6

The supply-of-money curve is almost perfectly inelastic because:

Accepted Answer

Banks prefer to lend their money out instead of keeping it as cash or reserve deposits at the Fed, regardless of interest rates. This makes the supply of money curve almost perfectly inelastic. None of the other options correctly explain this characteristic of the supply-of-money curve.

Question 7

The quantity of money demanded varies ____ with the nominal interest rate, but the supply of money is almost perfectly ____ with respect to nominal interest rates.

Accepted Answer

The quantity of money demanded varies inversely with the nominal interest rate, meaning that when the interest rate is high, the demand for money is low and when the interest rate is low, the demand for money is high. On the other hand, the supply of money is almost perfectly inelastic with respect to nominal interest rates, meaning that it is not affected by changes in the interest rate. Therefore, the best choice is C, inversely for quantity demanded and inelastic for money supply.

Question 8

If money supply increases, P will rise as long as V and Q remain constant.

Accepted Answer

According to the Quantity Theory of Money, an increase in money supply, with constant velocity and output, will lead to a proportionate increase in the general price level (P). Therefore, if V and Q remain constant, P will rise as the money supply increases.

Question 9

In an open economy, when the Fed increases the supply of money, it will increase net exports and aggregate demand.

Accepted Answer

Increasing the money supply typically lowers interest rates, which can lead to a depreciation of the currency. This makes exports cheaper and imports more expensive, potentially increasing net exports and aggregate demand.

Question 10

The problem of time lags in making policy changes is less acute for monetary policy than it is for fiscal policy.

Accepted Answer

Monetary policy changes can be implemented relatively quickly by central banks, whereas fiscal policy changes often require legislative approval and can take longer to implement.

Question 11

Velocity represents the average number of times that a dollar is used in purchasing final goods and services in a one-year period.

Accepted Answer

Velocity of money is defined as the number of times a unit of currency is spent in a given time period. It represents the rate at which money is exchanged in an economy. It is calculated as the ratio of nominal Gross Domestic Product (GDP) to the money supply.

Question 12

In the long run, inflation results from increases in a nation's money supply that exceed increases in its output of goods and services.

Accepted Answer

Inflation occurs when there is an excess supply of money in the economy relative to the supply of goods and services. As the money supply increases, individuals and businesses have more money to spend, which drives up demand but can also result in higher prices. If the supply of goods and services does not increase at the same rate as the money supply, inflation will occur. Therefore, in the long run, inflation results from increases in a nation's money supply that exceed increases in its output of goods and services.

Question 13

The Fed can force the banking system to decrease the money supply by tightening monetary policy, but it cannot force the banking system to increase the money supply by loosening monetary policy.

Accepted Answer

The Fed can increase the money supply by buying government bonds, which injects money into the banking system. However, the Fed cannot force banks to lend out this money.

Question 14

The Fed sometimes works to partly offset or even neutralize the effects of fiscal policy with monetary policy

Accepted Answer

The Fed often adjusts its monetary policy to offset or neutralize the effects of fiscal policy, such as changes in government spending or taxation. This is done in order to achieve macroeconomic stability and keep inflation and unemployment under control.

Question 15

If inflation is the major problem in the economy, which of the following would be an appropriate monetary policy response?

Accepted Answer

Inflation is typically addressed through monetary policy by the central bank, such as increasing interest rates or reserve requirements, not by decreasing government spending (a fiscal policy), decreasing the discount rate, or decreasing reserve requirements, as these actions would likely stimulate demand and potentially increase inflation further.

Question 16

According to the growth version of the quantiy theory of money, the growth rate of the money supply equals the inflation rate plus the growth rate of real output.

Accepted Answer

The answer of According to the growth version of the...

Question 17

The steeper the short-run aggregate supply curve over the relevant range, the more contractionary monetary policy will reduce prices and the less it will decrease real output.

Accepted Answer

If the short-run aggregate supply curve is steep, it means that the economy is operating close to its potential output and there is little slack in the economy. Therefore, if monetary policy is contractionary and reduces aggregate demand, the resulting decrease in output will be small, but there will be a significant decrease in prices as firms have less room to adjust their output in response to lower demand. On the other hand, if the short-run aggregate supply curve is flat, meaning there is more slack in the economy, a contractionary monetary policy will result in a larger decrease in output and a smaller decrease in prices.

Question 18

If inflation is the major problem in the economy, which of the following would be an appropriate monetary policy response?​

Accepted Answer

Increasing the discount rate is an appropriate monetary policy response to combat inflation as it will increase the cost of borrowing and reduce the money supply, thereby reducing consumer and business spending and demand-pull inflation. Decreasing reserve requirements and buying government bonds would increase the money supply, which would exacerbate inflation.

Question 19

Policy makers have adequate information to know what appropriate monetary policies to adopt.

Accepted Answer

While policy makers have access to a vast amount of data and economic indicators, the economy is highly complex and unpredictable. This makes it difficult for policy makers to know which monetary policies will be most effective in achieving their desired outcomes. Additionally, there are often disagreements among economists and political stakeholders about the best course of action. Therefore, policy makers may have some information, but it may not be adequate or conclusive.

Question 20

The lag before the full effects of monetary policy on inflation are felt is longer than the lag before its effects on real output and unemployment are felt.

Accepted Answer

This is because changes in interest rates take time to be transmitted through the economy and affect consumer and business behavior, leading to changes in inflation over a longer period of time. On the other hand, changes in interest rates generally have more immediate effects on spending and investment decisions, which impact real output and employment more quickly.

Quiz 18: Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

If nominal interest rates rise, what will happen to demand for money?

When there is a liquidity trap, when the Fed adds bank reserves, there is a large effect on borrowing, investment and aggregate demand.

Quantitative easing involved Fed purchases of long term securities rather than short term securities.

If economic recovery has already occurred by the time the effects of expansionary monetary policy are felt, it could cause an inflation problem rather than curing a recession problem.

If money supply and money demand both increased:

The supply-of-money curve is almost perfectly inelastic because:

The quantity of money demanded varies with the nominal interest rate, but the supply of money is almost perfectly with respect to nominal interest rates.

If money supply increases, P will rise as long as V and Q remain constant.

In an open economy, when the Fed increases the supply of money, it will increase net exports and aggregate demand.

The problem of time lags in making policy changes is less acute for monetary policy than it is for fiscal policy.

Velocity represents the average number of times that a dollar is used in purchasing final goods and services in a one-year period.

In the long run, inflation results from increases in a nation's money supply that exceed increases in its output of goods and services.

The Fed can force the banking system to decrease the money supply by tightening monetary policy, but it cannot force the banking system to increase the money supply by loosening monetary policy.

The Fed sometimes works to partly offset or even neutralize the effects of fiscal policy with monetary policy

If inflation is the major problem in the economy, which of the following would be an appropriate monetary policy response?

According to the growth version of the quantiy theory of money, the growth rate of the money supply equals the inflation rate plus the growth rate of real output.

The steeper the short-run aggregate supply curve over the relevant range, the more contractionary monetary policy will reduce prices and the less it will decrease real output.

If inflation is the major problem in the economy, which of the following would be an appropriate monetary policy response?

Policy makers have adequate information to know what appropriate monetary policies to adopt.

The lag before the full effects of monetary policy on inflation are felt is longer than the lag before its effects on real output and unemployment are felt.

Quiz 18: Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

If nominal interest rates rise, what will happen to demand for money?​

When there is a liquidity trap, when the Fed adds bank reserves, there is a large effect on borrowing, investment and aggregate demand.

Quantitative easing involved Fed purchases of long term securities rather than short term securities.​

If economic recovery has already occurred by the time the effects of expansionary monetary policy are felt, it could cause an inflation problem rather than curing a recession problem.

If money supply and money demand both increased:

The supply-of-money curve is almost perfectly inelastic because:

The quantity of money demanded varies ____ with the nominal interest rate, but the supply of money is almost perfectly ____ with respect to nominal interest rates.

If money supply increases, P will rise as long as V and Q remain constant.

In an open economy, when the Fed increases the supply of money, it will increase net exports and aggregate demand.

The problem of time lags in making policy changes is less acute for monetary policy than it is for fiscal policy.

Velocity represents the average number of times that a dollar is used in purchasing final goods and services in a one-year period.

In the long run, inflation results from increases in a nation's money supply that exceed increases in its output of goods and services.

The Fed can force the banking system to decrease the money supply by tightening monetary policy, but it cannot force the banking system to increase the money supply by loosening monetary policy.

The Fed sometimes works to partly offset or even neutralize the effects of fiscal policy with monetary policy

If inflation is the major problem in the economy, which of the following would be an appropriate monetary policy response?

According to the growth version of the quantiy theory of money, the growth rate of the money supply equals the inflation rate plus the growth rate of real output.

The steeper the short-run aggregate supply curve over the relevant range, the more contractionary monetary policy will reduce prices and the less it will decrease real output.

If inflation is the major problem in the economy, which of the following would be an appropriate monetary policy response?​

Policy makers have adequate information to know what appropriate monetary policies to adopt.

The lag before the full effects of monetary policy on inflation are felt is longer than the lag before its effects on real output and unemployment are felt.

If nominal interest rates rise, what will happen to demand for money?

Quantitative easing involved Fed purchases of long term securities rather than short term securities.

The quantity of money demanded varies with the nominal interest rate, but the supply of money is almost perfectly with respect to nominal interest rates.

If inflation is the major problem in the economy, which of the following would be an appropriate monetary policy response?