Question

1. Using a graph, show the impact of the contractionary monetary policy using Keynesian analysis.

2. To create 3% growth in the economy, monetarists think the money supply should:

a) increase by more than 3% yearly

b) incr. less than 3% yearly

c)incr. at 3% yearly

d)decrease 3% yearly

e) be constant

3. Use two graphs to depict what would happen If the fed buys a lot more T bonds than it sells, show the effect it will have in both AD/AS analysis and Keynesian analysis.

4. According to the quantity theory of money:

a) the fed is in control of the entire production level

b)the fed has to be extremely careful in using monetary policies to figure out the level of production

c) The fed determines both the prices and output

d) The fed doesn't have control of the production level

e) The fed doesn't have control of the price levels

Answer 1

1)

According to Keynesian views, contractionary monetary policy would force down money supply and it will cause rise in interest rate in market.

Rise in interest rate will affect the rate of investment negatively. Fall in investments is accompanied by the fall in GDP of country. Fall in GDP of country or output will cause widespread unemployment in economy.

Following is diagram:

In above diagram, fall in money supply causes leftward shift in LM curve thereby causing rise in the interest rate, so the national income of country also falls.

2)

Monetarist argues in support of constant monetary rule. Money supply must be increased equivalent to the rise in the real GDP.

Hence, right answer: (C)