Question

Monetary Policy

If demand is lower than expected, the economy would be experiencing a(an) 1.___________________ gap.

In order to close the gap using monetary policy, the Fed can (buy/sell) 2._____________ U.S. bonds through a process called 3._____________________________.

This would (increase/decrease)4. ______________ the money supply.

This change in the money supply will impact which component of aggregate expenditure? 5.____________________

This will ultimately shift (demand/supply) 6.__________________to the (right/left) 7.____________________ to close the gap.

This will result in (inflation/deflation) 8.___________________________.

Employment will (increase/decrease) 9.________________________.

If demand is higher than expected, the economy would be experiencing a(an) 10.____________________gap.

In order to close the gap using monetary policy, the Fed can (buy/sell) 11._____________ U.S. bonds through a process called 12._____________________________.

This would (increase/decrease) 13.______________ the money supply.

This change in the money supply will impact which component of aggregate expenditure? 14.____________________

This will ultimately shift (demand/supply) 15.__________________to the (right/left) 16.____________________ to close the gap.

This will result in (inflation/deflation) 17.___________________________.

Employment will (increase/decrease) 18.____________________________.

Answer 1

1. Deflationary gap (as demand is lower than expected)

2. Buy ( to increase money supply in market)

3. Open Market Operations (OMO)

4. Increase (as Fed buying will inject money in market)

5. Consumption ( as more money is available, consumption would increase)

6. Demand (demand increase as comsumption increases)

7. Right ( increase in demand)

8. Inflation ( as more consumption in market)

9. Increase (employment will increase as increase in money supply)

10. Inflationary gap (as demand is higher than expected)

11. Sell ( to decrease money supply in market)

12. Open Market Operations (OMO)

13. Decrease (as Fed selling will suck money from market)

14. Consumption ( as less money is available, consumption would decrease)

15. Demand (demand decrease as comsumption decreases)

16. Left ( decrease in demand)

17. Deflation ( as less consumption in market)

18. Decrease (employment will decrease as decrease in money supply)