Question

What is the effect of decreasing the money supply on the interest rate?

Question 1 options:

	Decrease the interest rate
	Increase the interest rate

Question 2 (1 point)

What is the main cost of holding money/cash?

Question 2 options:

	Prices of goods
	The real inflation rate
	The nominal interest rate
	The rate of inflation

Question 3 (1 point)

What should the Federal Reserve do in the bond market to address a recession?

Question 3 options:

	Sell bonds in order to decrease the money supply
	Buy bonds in order to increase the money supply
	Buy bonds in order to decrease the money supply
	Sell bonds in order to increase the money supply

Question 4 (1 point)

Which of the following is true about interest rates?

Question 4 options:

	There is a maximum rate which results in liquidity traps
	There is a zero lower bound which results in liquidity traps
	There is a maximum rate which stifles investment
	There is a zero lower bound which results in bank runs

Question 5 (1 point)

What is the effect of the Federal Reserve selling bonds in the AD/AS model?

Question 5 options:

	Decrease aggregate demand
	Increase aggregate demand
	Increase short-run aggregate supply
	Decrease short-run aggregate supply

Question 6 (1 point)

Suppose that the MPC is 0.75 and the government reduces spending by $20 billion. How much will the aggregate demand curve shift as a result?

Question 6 options:

	Increase AD by $15 billion
	Reduce AD by $15 billion
	Reduce AD by $20 billion
	Increase AD by $80 billion
	Reduce AD by $80 billion
	Increase AD by $20 billion

Question 7 (1 point)

If the government lowers taxes, what will happen in the AD/AS model?

Question 7 options:

	Short-run aggregate supply will decrease
	Aggregate demand will decrease
	Long-run aggregate supply will decrease
	Short-run aggregate supply will increase
	Aggregate demand will increase
	Long-run aggregate supply will increase

Question 8 (1 point)

Which of the following fiscal policies would increase aggregate demand?

Question 8 options:

	Increase government spending
	Lower rates by buying bonds
	Reducing the reserve rate
	Increase taxes

Question 9 (1 point)

Which of the following is not an automatic stabilizer?

Question 9 options:

	Unemployment insurance
	Infrastructure spending
	Food stamps
	Income taxes

Question 10 (1 point)

Which of the following faces a bigger lag in terms of implementation?

Question 10 options:

	fiscal policy
	monetary policy

Answer 1

Ans 1: Decrease the interest rate (decrease in money supply decreases the interest rate)

Ans 2: The nominal interest rate (because you could have earned the nominal interest rate if you would have invested the money in the bonds)

Ans 3: Buy bonds in order to increase the money supply (this would raise the aggregate demand in the economy).

Ans 4: There is a zero lower bound which results in liquidity traps (when interest rates are at zero or near to zero and cannot be decreased further, then creates a situation of liquidity trap in the economy).

Ans 5: Decreases the aggregate demand (People will buy bond and money supply reduces in the economy which reduces the aggregate demand)

Ans 6: MPC = 0.75, so multiplier = 1/(1-mpc) = 4

Change in GDP = Multiplier (Change in Government expenditure)

= 4 x $20 billion = $80 billion.

Increase AD by $80 billion

Ans 7: Aggregate demand will increase (people will spend more as their disposable income has increased)

Ans 8: Increase government spending (Government spending is a component of aggregate spending. So, as government spending rises, aggregate spending and hence aggregate demand rises).

Ans 9 : Infrastructure spending (this does not change due to changes in the level of income in the economy).

Ans 10: Monetary policy (for monetary policy the lags could be 12-18 months but for fiscal policy it could be few months)