4. Refer to the figure above. If the Federal funds market is at equilibrium at p

Question

4. Refer to the figure above. If the Federal funds market is at equilibrium at point B and the Federal Reserve decides to change the rate by a percentage point in order to reduce the chances of the economy going into recession, the supply of funds curve will have to shift to:

Select one:

a. Sf1

b. Sf2

c. Sf3

d. Sf4

6. Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point X on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?

Select one:

a. Decrease aggregate demand from AD1 to AD2

b. Increase the money supply from $75 to $150 billion

c. Increase interest rates from 4 to 8 percent

d. Make no change in monetary policy

7. Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP?

Select one:

a. $50

b. $100

c. $150

d. $225

Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Z on the investment demand curve. Given these conditions, what policy should the monetary authorities pursue to achieve a noninflationary full-employment level of real GDP?

Select one:

a. Decrease the reserve ratio

b. Decrease the discount rate

c. Sell government securities in the open market

d. Make no change in monetary policy

Explanation / Answer

4. Federal funds market is at equilibrium at point B and the Federal Reserve decides to change the rate by a percentage point in order to reduce the chances of the economy going into recession, the supply of funds curve will have to shift to:

a) Sf1

To counter the recession, the supply of money needs to be increased and this can be achieved by decreasing Federal funds rate and hence it is evident from the graph that for 4 % Rate supply is 250 i.e Point Sf1.

6. Refer to the graphs above, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point X on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment level of real GDP?

Select one:

b. Increase the money supply from $75 to $150 billion

Because by doing so, the interest rate will come down from 12 % to 8% and total investment will be $100 Billion and real GDP is also 100 $ Billion.Hence full potential output will be produced with full employment and no inflation.

7. As explained above the correct answer is $100 Billion.

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