Question

1.In the money market model, a higher demand for money would cause a new equilibrium with... Select one: a. lower interest rate and higher quantity of money b. higher interest rate and higher quantity of money c. higher interest rate and lower quantity of money d. lower interest rate and lower quantity of money

2In the money market model, which of the following would cause the money demand curve to shift right? Select one: a. a decrease in real GDP b. a lower discount rate c. an open market purchase of Treasury securities by the Federal Reserve d. an increase in the price level

3.Which components of GDP are most likely to be affected by an expansionary monetary policy? Select one: a. C and G b. C and I c. C, I, and G d. I e. C

4.Which components of GDP are likely to be affected by a contractionary fiscal policy? Select one: a. C and I b. C & G c. I & G d. C e. C, I, and G

5. In the short run, lower federal income taxes on households will result in a new equilibrium with... Select one: a. lower P and higher Y b. higher P and lower Y c. higher P and higher Y d. lower P and lower Y

Answer 1

Question 1

Higher demand for money implies an increase in demand for money.

Given the supply of money, an increase in demand for money will result in an increase in interest rate and increase in quantity of money.

Hence, the correct answer is the option (b).

Question 2

The shift of the money demand curve to the right implies an increase in money demand.

An increase in price level induces the household to demand more money and thus leads to increase in money demand.

Hence, the correct answer is the option (d).

Question 3

An expansionary moentary policy leads to increase in money supply.

An increase in money supply leads to increase in money holding with households and a decrease in interest rate.

This leads to increase in consumption and investment.

So,

C and I component of GDP are most likely to be affected by an expansionary monetary policy.

Hence, the correct answer is the option (b).

Question 4

A contractionary moentary policy leads to decrease in money supply.

A decrease in money supply leads to decrease in money holding with households and an increase in interest rate.

This leads to decrease in consumption and investment.

So,

C and I component of GDP are most likely to be affected by a contractionary monetary policy.

Hence, the correct answer is the option (a).

Question 5

Lower federal income taxes on households will boost the disposable income of houoseholds.

This will induce the households to consume more.

This increase in consumption will result in an increase in aggregate demand.

Given the short-run aggregate supply, an increase in aggregate demand will lead to an increase in price level and increase in real output.

Hence, the correct answer is the option (c).