Question 1

The theory of liquidity preference illustrates the principle that
A)monetary policy can be described either in terms of the money supply or in terms of the interest rate.
B)monetary policy can be described either in terms of the exchange rate or the interest rate.
C)monetary policy must be described in terms of the money supply.
D)monetary policy must be described in terms of the interest rate.

Accepted Answer

The answer of The theory of liquidity preference illustrates the...

Question 2

An increase in the money supply will
A)increase interest rates, decreasing investment and aggregate demand.
B)reduce interest rates, increasing investment and aggregate demand.
C)reduce interest rates, decreasing investment and increasing aggregate demand.
D)increase interest rates, increasing investment and aggregate demand.

Accepted Answer

An increase in the money supply leads to an increase in liquidity in the economy. This increase in liquidity leads to a lower cost of borrowing, which in turn leads to a reduction in interest rates as person and firms demand more credit/lending. This can lead to increased investment and aggregate demand.

Question 3

Which of the following shifts aggregate demand to the right?
A)The price level rises.
B)The price level falls.
C)The Fed purchases government bonds on the open market.
D)None of the above is correct.

Accepted Answer

The Fed purchasing government bonds on the open market increases the money supply, which in turn leads to lower interest rates and increased consumer and business spending, thereby shifting aggregate demand to the right. Option A (price level rises) would shift aggregate demand to the left, and option B (price level falls) would also shift aggregate demand to the left as it would reduce producer profits and cause them to reduce output and employment. Option D (none of the above is correct) is incorrect as option C is the correct answer.

Question 4

Which of the following shifts aggregate demand to the right?
A)The price level rises.
B)The price level falls.
C)The money supply falls.
D)None of the above is correct.

Accepted Answer

The answer of Which of the following shifts aggregate demand...

Question 5

Which of the following shifts aggregate demand to the left?
A)an increase in the price level
B)an increase in the money supply
C)a decrease in the price level
D)a decrease in the money supply

Accepted Answer

The answer of Which of the following shifts aggregate demand...

Question 6

If the Fed conducts open-market purchases, the money supply
A)increases and aggregate demand shifts right.
B)increases and aggregate demand shifts left.
C)decreases and aggregate demand shifts right.
D)decreases and aggregate demand shifts left.

Accepted Answer

When the Fed conducts open-market purchases, it increases the money supply in the economy. This leads to a decrease in interest rates, which in turn increases investment and consumption spending. Therefore, aggregate demand shifts right.

Question 7

In the short run, open-market purchases
A)increase investment and real GDP, and decrease nominal interest rates.
B)increase real GDP and nominal interest rates, and decrease investment.
C)increase investment and nominal interest rates, and decrease real GDP.
D)decrease investment, nominal interest rates, and real GDP.

Accepted Answer

Open-market purchases refer to the Federal Reserve buying government securities from banks and other financial institutions, which increases the reserves held by these institutions. This leads to an increase in the supply of money in the economy, which in turn reduces nominal interest rates, making borrowing and investing cheaper. As a result, businesses and individuals are incentivized to spend and invest more, leading to an increase in investment and real GDP. Therefore, option A is the correct answer.

Question 8

In recent years, the Fed has chosen to target interest rates rather than the money supply because
A)Congress passed a law requiring them to do so.
B)the President requested them to do so.
C)the money supply is hard to measure with sufficient precision.
D)changes in the interest rate change aggregate demand, but changes in the money supply do not.

Accepted Answer

The money supply is hard to measure with sufficient precision, which makes it difficult for the Fed to manipulate it directly. Targeting interest rates instead allows the Fed to more easily influence the economy by affecting borrowing costs and investment decisions. Congress did not pass a law requiring the Fed to target interest rates, and the President cannot make unilateral decisions about monetary policy. While changes in both interest rates and the money supply can affect aggregate demand, targeting interest rates has become the preferred tool for the Fed in recent years.

Question 9

If the Fed conducts open-market sales, which of the following quantities increase(s)?
A)interest rates, prices, and investment spending
B)interest rates and prices, but not investment spending
C)interest rates and investment, but not prices
D)interest rates, but not investment or prices

Accepted Answer

The answer of If the Fed conducts open-market sales, which...

Question 10

If the Federal Reserve decided to raise interest rates, it could
A)buy bonds to lower the money supply.
B)buy bonds to raise the money supply.
C)sell bonds to lower the money supply.
D)sell bonds to raise the money supply.

Accepted Answer

When the Federal Reserve decides to raise interest rates, it can sell bonds to lower the money supply. When bonds are sold, it reduces the amount of money available in the economy, which increases interest rates. Therefore, option C is the correct answer.

Question 11

If the Fed conducts open-market sales, the money supply
A)increases and aggregate demand shifts right.
B)increases and aggregate demand shifts left.
C)decreases and aggregate demand shifts right.
D)decreases and aggregate demand shifts left.

Accepted Answer

When the Fed conducts open-market sales, it means that it is selling securities to banks and other financial institutions. This reduces the amount of reserves that the banks have, leading to a decrease in the money supply. As a result, aggregate demand shifts leftward, because consumers and businesses have less money to spend and invest.

Question 12

In recent years, the Federal Reserve has conducted policy by setting a target for
A)bank reserves.
B)the monetary growth rate.
C)the exchange rate.
D)the federal funds rate.

Accepted Answer

The Federal Reserve has conducted policy in recent years by setting a target for the federal funds rate. This rate is the interest rate at which depository institutions lend reserve balances to each other overnight, and it is an important tool for the Fed in controlling inflation, promoting economic growth, and maintaining financial stability. By adjusting the federal funds rate target, the Fed affects the overall level of interest rates in the economy and influences borrowing, lending, and investment decisions by households, businesses, and financial institutions.

Question 13

In which of the following cases does the aggregate-demand curve shift to the right?
A)The price level rises, causing the interest rate to fall.
B)The price level falls, causing the interest rate to fall.
C)The money supply increases, causing the interest rate to fall.
D)The money supply decreases, causing the interest rate to fall.

Accepted Answer

An increase in the money supply will cause the interest rate to fall, which will in turn increase consumption and investment, causing an increase in aggregate demand. A rise in the price level (A) would cause a decrease in aggregate demand, while a fall in the price level (B) would cause an increase in aggregate demand only if it was due to a decrease in production costs. A decrease in the money supply (D) would cause an increase in the interest rate and a decrease in consumption and investment, leading to a decrease in aggregate demand.

Question 14

Which of the following shifts aggregate demand to the right?
A)an increase in the price level
B)an increase in the money supply
C)a decrease in the price level
D)a decrease in the money supply

Accepted Answer

An increase in the money supply will shift aggregate demand to the right because it increases consumer spending power and lowers interest rates, leading to increased borrowing and investment.

Question 15

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by
A)buying government bonds, which decreases the supply of money.
B)selling government bonds, which increases the supply of money.
C)buying government bonds, which increases the supply of money.
D)selling government bonds, which decreases the supply of money.

Accepted Answer

The answer of To stabilize interest rates, the Federal Reserve...

Question 16

The Federal Funds rate is the interest rate
A)banks charge each other for short-term loans.
B)the Fed charges depository institutions for short-term loans.
C)the Fed pays on deposits.
D)interest rate on 3 month Treasury bills.

Accepted Answer

The Federal Funds rate is the interest rate banks charge each other for short-term loans. It is used as a benchmark for many other interest rates, including consumer loans and mortgages.

Question 17

In the short run, a decrease in the money supply causes interest rates to
A)increase, and aggregate demand to shift right.
B)increase, and aggregate demand to shift left.
C)decrease, and aggregate demand to shift right.
D)decrease, and aggregate demand to shift left.

Accepted Answer

The answer of In the short run, a decrease in...

Question 18

If the Fed conducts open-market purchases, then which of the following quantities increase(s)?
A)interest rates and investment spending
B)interest rates, but not investment spending
C)investment spending, but not interest rates
D)neither interest rates nor investment spending

Accepted Answer

When the Fed conducts open-market purchases, it increases the money supply, which in turn reduces interest rates. This can lead to an increase in investment spending as businesses and consumers are more likely to borrow at lower interest rates. Therefore, investment spending increases, but interest rates decrease.

Question 19

If the interest rate is above the Fed's target, the Fed should
A)buy bonds to increase the money supply.
B)buy bonds to decrease the money supply.
C)sell bonds to increase the money supply.
D)sell bonds to decrease the money supply.

Accepted Answer

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

Question 20

In the short run, open-market sales
A)increase the price level and real GDP.
B)decrease the price level and real GDP.
C)increases the price level and decreases real GDP.
D)decreases the price level and increases real GDP.

Accepted Answer

The answer of In the short run, open-market sales
A)increase the...

Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

The theory of liquidity preference illustrates the principle that

An increase in the money supply will

Which of the following shifts aggregate demand to the right?

Which of the following shifts aggregate demand to the right?

Which of the following shifts aggregate demand to the left?

If the Fed conducts open-market purchases, the money supply

In the short run, open-market purchases

In recent years, the Fed has chosen to target interest rates rather than the money supply because

If the Fed conducts open-market sales, which of the following quantities increase(s) ?

If the Federal Reserve decided to raise interest rates, it could

If the Fed conducts open-market sales, the money supply

In recent years, the Federal Reserve has conducted policy by setting a target for

In which of the following cases does the aggregate-demand curve shift to the right?

Which of the following shifts aggregate demand to the right?

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by

The Federal Funds rate is the interest rate

In the short run, a decrease in the money supply causes interest rates to

If the Fed conducts open-market purchases, then which of the following quantities increase(s) ?

If the interest rate is above the Fed's target, the Fed should

In the short run, open-market sales