Question 1

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

When the interest rate is at r₂ and the money-demand curve is MD₁, the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. Therefore, people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts, which results in a decrease in the money supply. This will push up the interest rates until they reach the equilibrium point where the money supply equals the money demand. Bond issuers and banks will respond by increasing the interest rates they offer to attract more buyers. The money-demand curve would not shift in response to this situation.

Question 2

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 3

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 4

To decrease the interest rate the Federal Reserve could
A)buy bonds. The fall in the interest rate would increase investment spending.
B)buy bonds. The fall in the interest rate would decrease investment spending.
C)sell bonds. The fall in the interest rate would increase investment spending
D)sell bonds. The fall in the interest rate would decrease investment spending.

Accepted Answer

When the Federal Reserve buys bonds, it increases the money supply in the economy, which leads to a decrease in the interest rate. This decrease in the interest rate makes borrowing cheaper and more attractive to businesses, leading to increased investment spending. Therefore, buying bonds is the best choice to decrease interest rates if the goal is to increase investment spending.

Question 5

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?
A)the wealth effect
B)the interest-rate effect
C)the exchange-rate effect
D)All of the above are correct.

Accepted Answer

The answer of Which of the effects listed below increases...

Question 6

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 is classical in nature, as classical economists believe that interest rates are determined by the supply and demand of loanable funds, which are affected by saving propensities and investment opportunities. They also believe that this relationship is more valid for the long run than for the short run, as short-run fluctuations can be caused by other factors such as changes in the money supply or government intervention.

Question 7

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 8

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 9

If the Federal Reserve increases the money supply, then initially people want to
A)sell bonds so the interest rate rises.
B)sell bonds so the interest rate falls.
C)buy bonds so the interest rate rises.
D)buy bonds so the interest rate falls.

Accepted Answer

When the Federal Reserve increases the money supply, it leads to an increase in demand for bonds, causing the price of bonds to rise and the interest rates to fall. Therefore, people will want to buy bonds to take advantage of the low interest rates.

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 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...

Question 11

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

The theory of liquidity preference is a Keynesian theory, and it explains the determination of the interest rate in the short run. In the long run, classical economists believe that the interest rate is determined by the real rate of return, which is independent of the demand for money. Therefore, Marcus's opinion is more valid for the short run than for the long run.

Question 12

If the Federal Reserve decreases the money supply, then initially there is a
A)shortage in the money market, so people will want to sell bonds.
B)shortage in the money market, so people will want to buy bonds.
C)surplus in the money market, so people will want to sell bonds.
D)surplus in the money market, so people will want to buy bonds.

Accepted Answer

The answer of If the Federal Reserve decreases the money...

Question 13

"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 implies that even if the Federal Reserve decides to target an interest rate, monetary policy can still be analyzed in terms of the money supply. Therefore, our analysis of monetary policy is not fundamentally altered if the Federal Reserve decides to target an interest rate.

Question 14

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could
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 money demand shifted to the right...

Question 15

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

An increase in the money supply will shift the MS curve to the right, leading to a new equilibrium point at a lower interest rate and a higher quantity demanded (YS2U1B11S1U1B0). Since the price level remains constant, there is no reason for firms to decrease investment, so there is no reason to believe choice D would be correct. The equilibrium interest rate decreases, so choice C is incorrect.

Question 16

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 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

An increase in money demand would shift the MD curve to the right, causing the equilibrium interest rate to increase (to rS2U2B11S2U2B0). The other choices would cause the equilibrium interest rate to decrease. When the Federal Reserve increases the money supply, the MS curve shifts to the right, causing the equilibrium interest rate to decrease (to rS2U2B11). When the price level decreases, the MD curve shifts to the left, causing the equilibrium interest rate to decrease (to r_1S2U2B0).

Question 18

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 19

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 20

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, such as cash and checking account balances, make up a relatively small part of household wealth in the U.S. Therefore, the wealth effect, which relates changes in the value of assets to changes in consumer spending, is likely to be small. Similarly, the interest-rate effect, which is based on changes in the cost and availability of borrowing, is likely to be limited because relatively few households rely on interest income or credit for their consumption decisions.

Quiz 34: 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. 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. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

To decrease the interest rate the Federal Reserve could

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?

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

When the interest rate is below the equilibrium level,

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?

If the Federal Reserve increases the money supply, then initially people want to

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?

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

If the Federal Reserve decreases the money supply, then initially there is a

"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

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could

When the interest rate is above the equilibrium level,

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?

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 MD2. If the current interest rate is r2, then

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

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. Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?

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?

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?

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. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then