ANY HELP WOULD BE APPRECIATED, THANK YOU IN ADVANCE 61) Your roommate is having

Question

ANY HELP WOULD BE APPRECIATED, THANK YOU IN ADVANCE

61) Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

A) causes people to spend more because they know prices will rise in the future.

B) lowers the interest rate, and firms increase investment spending.

C) raises the interest rate and consumers decrease spending on durable goods.

D) lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports.

62) Refer to Figure 15-8. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to

A) raise interest rates.

B) raise income taxes.

C) lower interest rates.

D) lower income taxes.

63) If the Fed pursues expansionary monetary policy then

A) the money supply will increase, interest rates will fall and GDP will rise.

B) the money supply will decrease, interest rates will rise and GDP will fall.

C) the money supply will increase, interest rates will rise and GDP will rise.

D) the money supply will decrease, interest rates will fall and GDP will fall.

64) If the Fed pursues expansionary monetary policy,

A) aggregate demand will rise, and the price level will fall.

B) aggregate demand will fall, and the price level will fall.

C) aggregate demand will fall, and the price level will rise

D) aggregate demand will rise, and the price level will rise.

65) Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

A) Potential GDP is forecasted to be higher than equilibrium GDP.

B) Aggregate demand is growing too slowly and the economy is in danger of producing GDP above full employment.

C) Aggregate demand is growing too fast to keep the economy at full employment.

D) Potential GDP is forecasted to be lower than equilibrium GDP.

66) Contractionary monetary policy causes

A) aggregate demand to rise and the price level to fall.

B) aggregate demand to fall and the price level to rise.

C) aggregate demand to rise and the price level to rise.

D) aggregate demand to fall and the price level to fall.

67) In which of the following situations would the Fed conduct contractionary monetary policy?

A) The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.

B) The Fed fears that unemployment is climbing above the natural rate.

C) The Fed believes that aggregate demand was growing too slowly to keep up with potential GDP.

D) The Fed is worried that deflation will become a problem.

Explanation / Answer

(61) (B)

In expansionary monetary policy Fed increases money supply which decreases interest rate, increases investment and raises aggregate demand.

(62) (A)

Since real GDP > Potential GDP, Fed has to use contractionary monetary policy by increasing interest rate, which by lowering investment, will decrease aggregate demand.

(63) Option (A)

Explained in (61).

(64) Option (D)

Increase in money supply will increase aggregate demand, shifting AD curve rightward, increasing price level and raising real GDP.

(65) Option (A)

In this case there is a potential recession and Fed has to increase money supply to boost aggregate demand.

(66) Option (D)

Decrease in money supply will decrease aggregate demand, shifting AD curve leftward, lowering price level and lowering real GDP.

(67) Option (A)

In this case there is a potential possibility of high inflation, so Fed will lower money supply to lower aggregate demand and decrease inflation.

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