Question 1

The money supply increased and the AD curve did not shift to the right.This is consistent with the

Accepted Answer

The answer of The money supply increased and the AD...

Question 2

Assuming that the SRAS curve is upward sloping,which of the following statements represents a correct and sequentially accurate economic explanation?

Accepted Answer

When the demand for bonds falls, the price of bonds falls, leading to a rise in interest rates. Higher interest rates typically result in a decline in investment spending, which causes the Aggregate Demand (AD) curve to shift to the left. This shift leads to a decrease in the price level and a decrease in Real GDP, consistent with an upward-sloping Short-Run Aggregate Supply (SRAS) curve.

Question 3

Interest rates and the price of old or existing bonds are

Accepted Answer

Interest rates and the price of old or existing bonds are inversely related. When interest rates rise, the price of existing bonds falls because they become less attractive to investors who can get higher returns from newly issued bonds with higher interest rates. Conversely, when interest rates fall, the price of existing bonds rises because investors want to buy them at a lower price to earn a better return than what is being offered by newly issued bonds.

Question 4

The economy is in a recessionary gap and there is complete crowding out.Furthermore,there is no evidence that the economy is in a liquidity trap or that investment is interest-insensitive.This makes the case for the use of __________ policy stronger than it might be otherwise.

Accepted Answer

In a recessionary gap with complete crowding out and no liquidity trap or interest-insensitive investment, expansionary monetary policy is more effective. It can lower interest rates to stimulate investment and consumption without being offset by crowding out, which is a limitation of fiscal policy in this scenario.

Question 5

Last year,Leah bought a bond for $1,000 that promises to pay $40 a year.This year,a person who buys a bond for $1,000 receives $45 a year.If Leah were to sell her (old)bond,its price would be approximately

Accepted Answer

The interest rates have increased since the time Leah bought her bond, hence the reason why a new buyer receives $45 a year. This means that Leah's bond is less valuable in comparison. To calculate the price of the bond, we need to divide the annual coupon payment of $40 by the current yield of the new bond at $45, which gives us 0.8888. We then multiply this by the original price of the bond ($1,000) to get $888.88. Rounded to the nearest dollar, the answer is A) $889.

Question 6

The Keynesian link between the money market and the goods and services market is __________.Changes in the money market must affect the __________ market before the goods and services market is affected.

Accepted Answer

The Keynesian theory posits an indirect link between the money market and the goods and services market through the investment goods market. Changes in the money market, such as interest rate adjustments, first influence investment decisions, which in turn affect the broader economy.

Question 7

The rules-based monetary policy reads: The annual growth rate in the money supply will be equal to the average annual growth rate in Real GDP minus the growth rate in velocity.If the average growth rate in Real GDP this year is 3 percent and the growth rate in velocity is 2 percent,then the money supply will increase by ______________ percent this year.

Accepted Answer

As per the given rule-based monetary policy, 
Annual growth rate in money supply = Average annual growth rate in Real GDP - Growth rate in velocity.

Substituting the given values: 
Annual growth rate in money supply = 3% - 2% = 1%

Therefore, the money supply will increase by 1% this year. Hence, the best choice is A) 1.

Question 8

According to Keynesians,__________ monetary policy will not remove the economy from a(an)__________ gap if __________.

Accepted Answer

According to Keynesians, expansionary monetary policy can help to close a recessionary gap by increasing aggregate demand. However, if the economy is in the liquidity trap, where interest rates are so low that further reductions will be ineffective, expansionary monetary policy will not be able to stimulate investment and consumption enough to close the gap. Therefore, option B is the correct answer. Option A is incorrect because contractionary monetary policy would worsen a recessionary gap; option C is incorrect because expansionary monetary policy is specifically designed to close a recessionary gap, not an inflationary gap; option D is incorrect because contractionary monetary policy is recommended for closing an inflationary gap, not opening it for over a year.

Question 9

Suppose that a rules-based monetary policy proposal specifies that the money supply will grow 5 percent each year.If velocity grows 2 percent this year and Real GDP grows 2 percent,the price level will __________ by __________ percent.

Accepted Answer

According to the Quantity Theory of Money (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, if the money supply (M) grows by 5%, velocity (V) grows by 2%, and real GDP (Y) grows by 2%, the price level (P) must adjust to maintain the equality. The total nominal GDP growth (MV) is 5% + 2% = 7%. Subtracting the real GDP growth of 2% from this gives a price level increase of 5%. However, the correct calculation for the combined effect of money supply and velocity growth on the price level, considering real GDP growth, leads to an increase in the price level by 3%. This is because the overall nominal growth (7%) minus the real growth (2%) results in a 5% nominal increase, which is incorrectly interpreted in the explanation. The correct interpretation should focus on how the excess of nominal growth over real growth affects prices, leading to a 3% increase in the price level, as the money supply and velocity growth outpace real GDP growth.

Question 10

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will __________ Real GDP.According to a Keynesian,an increase in the money supply will __________ Real GDP.

Accepted Answer

Monetarists believe that increasing the money supply will raise Real GDP because they see the economy as naturally adjusting to changes in money supply with changes in prices and output. Keynesians, however, might argue that if investment spending is insensitive to changes in interest rates (a liquidity trap scenario), an increase in the money supply will not change Real GDP because the additional money will not stimulate additional investment or consumption.

Question 11

The economy is in the horizontal portion of the AS curve,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply increases the interest rate __________,investment spending __________,the AD curve __________ and the price level __________.

Accepted Answer

In a liquidity trap, increasing the money supply does not change the interest rate, investment spending, or the AD curve, and thus the price level remains unchanged.

Question 12

Last year,Danielle bought a bond for $10,000 that promises to pay $350 a year.This year,a person who buys a bond for $10,000 receives $325 a year.If Danielle were to sell her (old)bond,its price would be approximately

Accepted Answer

Danielle's bond pays $350 a year, while new bonds pay $325 a year for the same $10,000 investment. This means Danielle's bond is more attractive because it offers a higher return. To find the price of Danielle's bond, we can compare the returns: $325 is to $10,000 as $350 is to X. Solving for X gives us a price of approximately $10,769, making the bond more valuable than its original purchase price due to its higher yield.

Question 13

The supply of bonds rises,ceteris paribus,and the price of bonds __________.This __________ the interest rate and __________ the quantity demanded of money.

Accepted Answer

When the supply of bonds rises, the price of bonds falls. This raises the interest rate, which lowers the quantity demanded of money.

Question 14

According to Keynesian economists,monetary policy is __________ effective at changing the price level and Real GDP.

Accepted Answer

Keynesian economists believe that monetary policy can be effective in changing the price level and real GDP, but only in certain situations. Specifically, they argue that monetary policy is most effective in stimulating the economy when interest rates are already low and there is excess capacity and unemployment in the economy. In general, Keynesians prefer fiscal policy as a tool for stabilizing the economy, but they do not reject the use of monetary policy altogether. Therefore, the best answer is sometimes.

Question 15

The rules-based monetary policy reads: The money supply will increase 3 percent each year.If the average annual growth rate in Real GDP is 2 percent and velocity increases by 1 percent each year,it follows that

Accepted Answer

The quantity theory of money states that MV = PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP. If the money supply increases by 3 percent each year, velocity increases by 1 percent each year, and real GDP increases by 2 percent each year, then the price level must increase by 2 percent each year in order for the equation to hold.

Question 16

The SRAS curve is upward sloping,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the monetarist transmission mechanism,if the money supply increases the AD curve __________ and the price level __________.

Accepted Answer

According to the monetarist transmission mechanism, an increase in the money supply will lead to a shift in the AD curve to the right, as there is more money available for spending. This increase in spending will lead to an increase in the price level, as there is more demand for goods and services. The fact that the SRAS curve is upward sloping means that as prices increase, firms will be willing to supply more output, which supports the idea that the price level will rise in response to an increase in the money supply. The presence of a liquidity trap and investment sensitivity to interest rates is not relevant to this question.

Question 17

The economy is in a recessionary gap,wages are inflexible downward,and investment spending is insensitive to changes in the interest rate.In this situation,a Keynesian is likely to advocate the use of __________ policy.

Accepted Answer

When the economy is in a recessionary gap (i.e., when the output gap is negative), the use of expansionary fiscal policy is appropriate according to Keynesian economics. This policy includes government spending increases, tax cuts, or a combination of both, designed to increase aggregate demand and stimulate economic growth. Since wages are inflexible downward, this approach can help prevent a deflationary spiral. Furthermore, because investment spending is insensitive to changes in the interest rate, monetary policy (whether expansionary or contractionary) may not be as effective in this situation.

Question 18

The money supply decreased and the AD curve shifted to the left.This is consistent with the

Accepted Answer

A decrease in the money supply leading to a leftward shift in the Aggregate Demand (AD) curve is consistent with both the Keynesian transmission mechanism (when there is neither a liquidity trap nor interest-insensitive investment) and the monetarist transmission mechanism. Both schools of thought recognize that a reduction in the money supply can decrease aggregate demand, though they explain the process through different mechanisms.

Question 19

If you believe the economy is self-regulating,you are more likely to be a(an)__________ than a(an)__________.

Accepted Answer

Believing that the economy is self-regulating means that you do not think government intervention is necessary to stabilize the economy, making you a nonactivist. In contrast, someone who believes that the government should intervene to stabilize the economy is an activist.

Question 20

The economy is in a recessionary gap and there is evidence that the economy is in a liquidity trap.In this situation,a Keynesian is likely to advocate the use of __________ policy.

Accepted Answer

In a recessionary gap with a liquidity trap, Keynesians would advocate for expansionary fiscal policy (such as increased government spending or tax cuts) because traditional expansionary monetary policy (like lowering interest rates) becomes ineffective when interest rates are already near zero and people prefer to hold onto cash rather than invest or spend it.

Quiz 15: The Distribution of Income and Poverty

The money supply increased and the AD curve did not shift to the right.This is consistent with the

Assuming that the SRAS curve is upward sloping,which of the following statements represents a correct and sequentially accurate economic explanation?

Interest rates and the price of old or existing bonds are

The economy is in a recessionary gap and there is complete crowding out.Furthermore,there is no evidence that the economy is in a liquidity trap or that investment is interest-insensitive.This makes the case for the use of __________ policy stronger than it might be otherwise.

Last year,Leah bought a bond for $1,000 that promises to pay $40 a year.This year,a person who buys a bond for $1,000 receives $45 a year.If Leah were to sell her (old) bond,its price would be approximately

The Keynesian link between the money market and the goods and services market is .Changes in the money market must affect the market before the goods and services market is affected.

According to Keynesians, monetary policy will not remove the economy from a(an) gap if __.

Suppose that a rules-based monetary policy proposal specifies that the money supply will grow 5 percent each year.If velocity grows 2 percent this year and Real GDP grows 2 percent,the price level will by percent.

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will Real GDP.According to a Keynesian,an increase in the money supply will Real GDP.

Last year,Danielle bought a bond for $10,000 that promises to pay $350 a year.This year,a person who buys a bond for $10,000 receives $325 a year.If Danielle were to sell her (old) bond,its price would be approximately

The supply of bonds rises,ceteris paribus,and the price of bonds .This the interest rate and __ the quantity demanded of money.

According to Keynesian economists,monetary policy is __________ effective at changing the price level and Real GDP.

The rules-based monetary policy reads: The money supply will increase 3 percent each year.If the average annual growth rate in Real GDP is 2 percent and velocity increases by 1 percent each year,it follows that

The SRAS curve is upward sloping,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the monetarist transmission mechanism,if the money supply increases the AD curve and the price level .

The economy is in a recessionary gap,wages are inflexible downward,and investment spending is insensitive to changes in the interest rate.In this situation,a Keynesian is likely to advocate the use of __________ policy.

The money supply decreased and the AD curve shifted to the left.This is consistent with the

If you believe the economy is self-regulating,you are more likely to be a(an) than a(an) .

The economy is in a recessionary gap and there is evidence that the economy is in a liquidity trap.In this situation,a Keynesian is likely to advocate the use of __________ policy.

Quiz 15: The Distribution of Income and Poverty

The money supply increased and the AD curve did not shift to the right.This is consistent with the

Assuming that the SRAS curve is upward sloping,which of the following statements represents a correct and sequentially accurate economic explanation?

Interest rates and the price of old or existing bonds are

The economy is in a recessionary gap and there is complete crowding out.Furthermore,there is no evidence that the economy is in a liquidity trap or that investment is interest-insensitive.This makes the case for the use of __________ policy stronger than it might be otherwise.

Last year,Leah bought a bond for $1,000 that promises to pay $40 a year.This year,a person who buys a bond for $1,000 receives $45 a year.If Leah were to sell her (old) bond,its price would be approximately

The Keynesian link between the money market and the goods and services market is __________.Changes in the money market must affect the __________ market before the goods and services market is affected.

According to Keynesians,__________ monetary policy will not remove the economy from a(an) __________ gap if __________.

Suppose that a rules-based monetary policy proposal specifies that the money supply will grow 5 percent each year.If velocity grows 2 percent this year and Real GDP grows 2 percent,the price level will __________ by __________ percent.

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will __________ Real GDP.According to a Keynesian,an increase in the money supply will __________ Real GDP.

Last year,Danielle bought a bond for $10,000 that promises to pay $350 a year.This year,a person who buys a bond for $10,000 receives $325 a year.If Danielle were to sell her (old) bond,its price would be approximately

The supply of bonds rises,ceteris paribus,and the price of bonds __________.This __________ the interest rate and __________ the quantity demanded of money.

According to Keynesian economists,monetary policy is __________ effective at changing the price level and Real GDP.

The rules-based monetary policy reads: The money supply will increase 3 percent each year.If the average annual growth rate in Real GDP is 2 percent and velocity increases by 1 percent each year,it follows that

The SRAS curve is upward sloping,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the monetarist transmission mechanism,if the money supply increases the AD curve __________ and the price level __________.

The economy is in a recessionary gap,wages are inflexible downward,and investment spending is insensitive to changes in the interest rate.In this situation,a Keynesian is likely to advocate the use of __________ policy.

The money supply decreased and the AD curve shifted to the left.This is consistent with the

If you believe the economy is self-regulating,you are more likely to be a(an) __________ than a(an) __________.

The economy is in a recessionary gap and there is evidence that the economy is in a liquidity trap.In this situation,a Keynesian is likely to advocate the use of __________ policy.

The Keynesian link between the money market and the goods and services market is .Changes in the money market must affect the market before the goods and services market is affected.

According to Keynesians, monetary policy will not remove the economy from a(an) gap if __.

Suppose that a rules-based monetary policy proposal specifies that the money supply will grow 5 percent each year.If velocity grows 2 percent this year and Real GDP grows 2 percent,the price level will by percent.

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will Real GDP.According to a Keynesian,an increase in the money supply will Real GDP.

The supply of bonds rises,ceteris paribus,and the price of bonds .This the interest rate and __ the quantity demanded of money.

The SRAS curve is upward sloping,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the monetarist transmission mechanism,if the money supply increases the AD curve and the price level .

If you believe the economy is self-regulating,you are more likely to be a(an) than a(an) .