Question

In an economy where the money supply and aggregate demand have been decreased by the Central Bank, you know that the Central Bank is using

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a contractionary monetary policy.

an expansionary monetary policy.

a loose monetary policy.

follow expansionary fiscal policy

How does monetary policy affect the market?

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Monetary policy has a more of an impact on consumption than investment.

Monetary policy has a more of an impact on government spending than investment.

Monetary policy has an indirect impact on aggregate demand.

Monetary policy has a direct impact on aggregate demand.

In order to ________ the money supply, the federal reserve should ________ bonds in open market operations.

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decrease; buy

increase; issue

increase; buy

increase; sell

A contractionary or tight monetary policy

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increase bank’s lending ability.

reduces borrowing.

stimulates borrowing.

lowers interest rates.

How do central bank policies affect interest rates?

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When the central bank decides to increase the discount rate, its member banks will borrow more from the central bank.

When the central bank decides to decrease the discount rate, then other interest rates increase.

When the central bank decides to increase the discount rate, then other interest rates increase.

When the central bank decides to increase the discount rate, interest rates will initially increase, and then decrease in the long run.

An expansionary monetary policy affects aggregate demand

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directly, by increasing government expenditure.

directly by decreasing investments.

indirectly, by increasing interest rates and decreasing the available quantity of loans, which reduces spending.

indirectly, by lowering interest rates and increasing the available quantity of loans, which stimulates spending.

In the scenario where the Central Bank creates policies which increase the money supply, it is following what type of monetary policy?

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A balanced policy.

A contractionary policy.

An expansionary policy.

a tight money policy.

Which of the following is NOT an important role of the Federal Reserve Bank?

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monitoring discrimination in lending.

generating profits

ensuring the health of the financial system.

monitoring anti-competitive behavior in the banking sector.

If the Fed increases the discount rate, then Key Bank will

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make more loans.

decrease the interest rates it charges its customers.

increase its reserves.

decrease its reserves.

An open market operation decreases the money supply when the Federal Reserve

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buys bonds from banks, which increases bank reserves.

sells bonds to banks, which increases bank reserves.

sells bonds to banks, which decreases bank reserves.

buys bonds from banks, which decreases bank reserves.

The experience of the 1970’s led Keynesian economists to understand that when it comes to aggregate supply and stagflation, policy responses

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had no good solution because using either an expansionary or contractionary policy lead to increasing either unemployment or inflation.

were easier to implement and have successful results when using a expansionary monetary or fiscal policy.

were easier to implement and have successful results when using a contractionary monetary or fiscal policy.

According to Keynesian, policy during a recession government should investment in capital, which includes

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physical capital investments such as maintenance of federal office buildings.

financial capital investments such as government treasury bills.

human capital investments such as primary education.

A Phillips curve shows the tradeoff between unemployment and inflation, therefore ________.

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if one is high the other must be high

if one is higher the other must be low

if one is low the other must be low

A negative supply shock will cause price levels and unemployment to ________.

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not change

fall

rise

Which of the following viewpoints uses the Phillips curve?

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Monetarist

Neoclassical

Keynesian

Which of the following distinct economic schools of thought is excluded from neoclassical style economics?

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Supply side economics

New classical economics

Keynesian economics

Why does the recognition lag influence fiscal policy effectiveness?

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Because it takes time to collect data on the current state of the economy.

Because it takes time to evaluate differences between states of the economy.

Because it takes time to agree on a resolution.

Decreasing taxes according to a neoclassical economist will

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lower GDP levels.

increase the natural rate of unemployment.

raise the price level.

New classical economists argue that a tax cut does not shift the aggregate demand curve because:

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consumers doubt future government debt will have an effect on future taxes.

prices are inflexible, so real GDP does not change.

households reduce their consumption so they can pay afford to pay higher taxes in the future.

After the 1970’s stagflation, Keynesian economists now understand that when it comes to aggregate supply, policy responses in that type of economic scenario:

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were more successful when using a contractionary monetary or fiscal policy.

were more successful when using a expansionary monetary or fiscal policy.

lead to increasing either unemployment or inflation and offered no good economic solution regardless of policy type implemented.

Answer 1

Question 1

Option A is correct - a contractionary monetary policy

Under a contractionary monetary policy, the central bank increases the interest rates to reduce the money supply and aggregate demand in the economy. When interest rates are increases, the investments decrease, savings increase and consumption decreases and this leads to a decrease in aggregate demand and money supply in the economy.

Question 2

Option C is correct - Monetary policy has an indirect impact on aggregate demand

Under the monetary policy, interest rates are changed and that leads to either decrease or an increase in aggregate demand. Thus the changes depends on the interest rates and thus monetary policy has an indirect impact on aggregate demand. The interest rates increases/decrease which leads to a decrease/increase in aggregate demand.

Question 3

Option C is correct - Increase;buy

In order to increase the money supply, the federal reserve should buy bonds in open market operations. Open market operations involve buying and selling of bonds in the market for increasing and decrease the money supply in the economy. When the economy is in recession and the money supply is low, the federal reserve buys bonds and give money in return of those bonds and that leads ti increase in money supply in the economy.

Question4

Oprion B is correct - Reduces borrowing

Under a contractionary monetary policy, the interest rates are increased to reduce the money supply and aggregate demand in the economy. As a result of increase in interest rates, investments and borrowings decrease because the rate of borrowing (interest rates) have increased.