Question

When the Federal Reserve increases the federal funds interest rate, the short-run impact of the action is

		investment spending declines and the aggregate demand curve shifts to the left
		investment spending declines and the short-run aggregate supply curve shifts to the left
		investment spending increases and the aggregate demand curve shifts to the right
		investment spending increases and the short-run aggregate supply curve shifts to the right

If the Federal Reserve decreases the federal funds interest rate, in the short run

		only prices increase
		employment, production and prices decline
		employment and production rise but prices fall
		employment, production and prices rise

If the Federal Reserve decreases the federal funds interest rate, as the economy transitions from the short run to the long run

		wages rise and the aggregate demand curve shifts to the left
		wages decline and the short-run aggregate supply curve shifts up/left
		wages rise and the short-run aggregate supply curve shifts up/left
		wages rise and the short-run aggregate supply curve shifts down/right

In the long-run, the only lasting impact of monetary policy is on

		prices
		production
		employment
		spending

Answer 1

Ans 1. Option A is correct. Investment spending will decline and the aggregate demand curve will shift to the left.

This happens because after the federal reserve increases the federal fund's interest rate, the cost of borrowing of the firms and the households will increase and thus resulting in the decreased consumption and further investments. This will therefore affect the aggregate demand and it will fall. All scenarios originate from the fed fund rates as they also significantly influence the prime rates that the banks charge to their customers.

Ans 2. Option D is correct. Employment, production, and price rise.

When the federal reserve decreases the fed fund rate, cost of borrowing will reduce and firms and households will increase their consumption and investments. This will enable the businesses and farmers to increase their purchases of better equipment and other resources which will eventually lead to the improvement in their output and productivity. The increase in all these will also lead to demand for the labors to rise, thus employment will also improve.

However, the prices will rise gradually and can cause inflation.

Ans 3. Option C is correct. Wages rise and aggregate supply shifts up/left.

The lowering of the interest rates which resulted from the reduced rates of fed funds and the abundant supply in the market will cause the demand to eventually rise and then the prices will also increase with time. So that's why the wages will rise in long run. Moreover, with the free play of the market, the supply will also start to decrease when the economy transitions from short run to long run. This is because when the prices increase, the firms will be discouraged to produce more as the inputs are being too expensive and there is not much profit that they can earn. This simply means that their cost of production will increase which is not a very favorable condition for them.

Ans 4. Option A is correct. Price.

Monetary policy affects the long run price through the money creation. And there are long-run adjustments when the monetary policy stimulation effect wears off, thus making the goods and services expensive.