1. Contractionary monetary policy causes _____ in the price level in the short r
ID: 1158616 • Letter: 1
Question
1. Contractionary monetary policy causes _____ in the price level in the short run and _____ in the price level in the long run
no change: a decrease, a decrease: a decrease, a decrease: no change, no change: no change
2. If the Fed targets the interest rate, contractionary monetary policy causes a short-run _____ in interest rates in the short run and _____ in interest rates in the long run
decrease: no change, increase: an increase, increase: no change, decrease: decrease
3. If the economy is in a recessionary gap, the Federal Reserve should conduct _____ monetary policy by _____ the money supply
expansionary: increasing, expansionary: decreasing, contractionary: decreasing, contractionary: increasing
4. According to the liquidity preference model, a _____ in the money supply shifts the money supply curve to the _____ and increases the equilibrium interest rate
decrease: right, increase: left, decrease: left, increase: right
Explanation / Answer
a decrease, a decrease. [ reducing the money supply will increase interest rates, reducing the investment and will act against increasing inflationary pressures] increase: no change. [there is no change in the long run; money neutral- money supply changes have an effect only on the price level and do not affect the real variables or the GDP hence there is no change in the AD or the interest rates] expansionary: increasing. [ this would lead to a decrease in the interest rate and hence bring in more capital investment] decrease: left. [ because the money supply is plotted on x-axis and interest rate 'r' on the y-axis and the curve is a downward sloping curve.]
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