Question 1

People choose to hold a smaller quantity of money if​
A)​the interest rate increases,which causes the opportunity cost of holding money to increase.
B)​the interest rate increases,which causes the opportunity cost of holding money to decrease.
C)​the interest rate decreases,which causes the opportunity cost of holding money to increase.
D)​the interest rate decreases,which causes the opportunity cost of holding money to decrease.

Accepted Answer

When the interest rate increases, the opportunity cost of holding money increases because the individual can earn a higher return by investing in interest-bearing assets. Therefore, individuals are incentivized to hold a smaller quantity of money and invest in these assets instead.

Question 2

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

If money demand increases, the demand for loanable funds will increase, causing an increase in the equilibrium interest rate from r₁ to rS2U2B21S2U2B0. An increase in money supply or a decrease in the price level would shift the money supply curve to the right, resulting in a decrease in the equilibrium interest rate. Therefore, options A and C are incorrect.

Question 3

"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 suggests that whether the Federal Reserve targets the money supply or the interest rate, the analysis of monetary policy remains the same. Therefore, Option D is the correct answer. Option A is incorrect because a shift in the money supply curve could occur even if the interest rate is targeted. Option B is incorrect because the Federal Reserve's bond traders can influence the interest rate even if it is targeted. Option C is partially true, but it doesn't cover the full extent of the statement.

Question 4

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

If the current interest rate is r2 and the money-demand curve is MD2, it indicates that the interest rate is above the equilibrium level. Bond issuers and banks will respond by lowering the interest rates they offer to reach equilibrium.

Question 5

"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)shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate.
B)the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate.
C)changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.
D)the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.

Accepted Answer

Monetary policy aimed at contracting aggregate demand can be described in two ways: decreasing the money supply or raising the interest rate. Similarly, monetary policy aimed at expanding aggregate demand can be described either as increasing the money supply or lowering the interest rate. Therefore, the statement that "monetary policy can be described either in terms of the money supply or in terms of the interest rate" is true, and the correct answer is C. Choices A, B, and D are all incorrect because none of them accurately reflects the meaning of the statement.

Question 6

Consider the following sequence of events:
Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑
⇒ quantity of goods and services demanded ↓
Τhis sequence explains why the
A)money-supply curve is vertical.
B)aggregate-demand curve shifts leftward in response to a monetary injection.
C)aggregate-demand curve shifts rightward in response to a monetary injection.
D)aggregate-demand curve slopes downward.

Accepted Answer

The sequence of events implies that an increase in the price level leads to a higher demand for money which, in turn, pushes up the equilibrium interest rate. A higher interest rate reduces the quantity of goods and services that firms and households are willing and able to buy, implying a leftward shift in the aggregate-demand curve. Therefore, the correct answer is the downward slope of the aggregate-demand curve (option D).

Question 7

Economists who are skeptical about the relevance of "liquidity traps" argue that
A)a central bank continues to have tools to stimulate the economy,even after its interest rate target hits its lower bound of zero.
B)a central bank continues to have the option of committing itself to future monetary contraction,even after its interest rate target hits its lower bound of zero.
C)a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero.
D)while the concept of a liquidity trap is theoretically possible,nothing resembling a liquidity trap ever has been observed in the real world.

Accepted Answer

Economists who are skeptical about the relevance of "liquidity traps" argue that a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero. For example, a central bank can engage in unconventional monetary policy measures such as quantitative easing, forward guidance, or negative interest rates. Therefore, they argue that a liquidity trap is not a constraint on monetary policy effectiveness, but rather a situation where central banks have not yet exhausted all of their policy options.

Question 8

Using the liquidity-preference model,when the Federal Reserve increases the money supply,
A)​the equilibrium interest rate decreases.
B)​the aggregate-demand curve shifts to the left.
C)​the quantity of goods and services demanded is unchanged for a given price level.
D)​the short-run aggregate-supply curve shifts to the right.

Accepted Answer

According to the liquidity-preference model, an increase in the money supply leads to a decrease in the equilibrium interest rate. This is because an increase in the money supply lowers the demand for money, which in turn lowers the interest rate needed to encourage borrowing and investment. Therefore, the correct choice is A.

Question 9

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

With an increase in the money supply, the MD curve shifts outward to the right, leading to a new equilibrium point at a lower interest rate (rS2U2B11S2U2B0). At this new equilibrium, the quantity of goods and services demanded increases (YS2U2B11S2U2B0>Y₁) as firms and consumers have more access to credit to finance investments and purchases. Therefore, choice (A) is the correct answer. There is no reason to believe that the equilibrium interest rate will increase, and while it is possible that some firms may choose to invest less, there is no evidence to support choice (D).

Question 10

The Fed can influence the money supply by
A)changing how much it lends to banks.
B)changing the interest rate it pays banks on the reserves they are holding.
C)using open-market operations.
D)All of the above are correct.

Accepted Answer

The Fed can influence the money supply by changing how much it lends to banks, changing the interest rate it pays banks on the reserves they are holding, and using open-market operations. Therefore, all of the above choices are correct.

Question 11

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

All of the events listed (A, B, and C) would lead to a decrease in the equilibrium interest rate. Increasing the money supply (A) shifts the money supply curve right, decreasing interest rates. A decrease in money demand (B) shifts the money demand curve left, also decreasing interest rates. A decrease in the price level (C) reduces money demand, leading to lower interest rates.

Question 12

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the
A)open-market rate.
B)discount rate.
C)preference rate.
D)None of the above are correct.

Accepted Answer

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the "interest on reserves" or "interest on excess reserves," not any of the options listed.

Question 13

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a
A)liquidity preference.
B)liquidity trap.
C)open-market trap.
D)interest-rate contraction.

Accepted Answer

A liquidity trap occurs when interest rates are so low that they do not provide any incentive for banks to lend money, and consumers and businesses do not want to borrow, even when credit is cheap. This can create a situation where monetary policy is ineffective in stimulating the economy, as interest rates cannot be lowered any further.

Question 14

In response to the sharp decline in stock prices in October 1987,the Federal Reserve
A)increased interest rates,and the economy avoided a recession.
B)increased interest rates,but the economy was unable to avoid a recession.
C)decreased interest rates,and the economy avoided a recession.
D)decreased interest rates,but the economy was unable to avoid a recession.

Accepted Answer

In response to the sharp decline in stock prices in October 1987, the Federal Reserve decreased interest rates to keep the economy from falling into a recession. This action proved successful, as the economy was able to avoid a recession.

Question 15

In response to the sharp decline in stock prices in October 1987,the Federal Reserve
A)increased the money supply and increased interest rates.
B)increased the money supply and decreased interest rates.
C)decreased the money supply and increased interest rates.
D)decreased the money supply and decreased interest rates.

Accepted Answer

The Federal Reserve increased the money supply and decreased interest rates to stabilize the financial markets and restore confidence after the stock market crash in October 1987.

Question 16

Which of the following sequences best explains the negative slope of the aggregate-demand curve?
A)price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
B)price level ↑ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
C)price level ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
D)price level ↑ ⇒ equilibrium interest rate ↑ ⇒ demand for money ↑ ⇒ quantity of goods and services demanded ↓

Accepted Answer

The negative slope of the aggregate-demand curve is explained by the following sequence:Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓

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 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

A decrease in the money supply leads to higher interest rates, making borrowing more expensive. As a result, fewer firms will choose to borrow to build new factories and buy new equipment.

Question 18

Which of the following sequences best explains the negative slope of the aggregate-demand curve?
A)price level ↑ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
B)price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓
C)price level ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↑
D)price level ↓ ⇒ equilibrium interest rate ↓ ⇒ demand for money ↑ ⇒ quantity of goods and services demanded ↑

Accepted Answer

The answer of Which of the following sequences best explains...

Quiz 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: How Monetary Policy Influences Aggregate Demand

People choose to hold a smaller quantity of money if​

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?

"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

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

"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

Consider the following sequence of events: Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ Τhis sequence explains why the

Economists who are skeptical about the relevance of "liquidity traps" argue that

Using the liquidity-preference model,when the Federal Reserve increases the money supply,

The Fed can influence the money supply by

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?

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

In response to the sharp decline in stock prices in October 1987,the Federal Reserve

In response to the sharp decline in stock prices in October 1987,the Federal Reserve

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

People choose to hold a smaller quantity of money if

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

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?