Question

5.

If a macroeconomy has the money supply and aggregate demand increased by the Central Bank, what monetary policy is the Central Bank following?

An expansionary monetary policy.

A contractionary monetary policy.

A tight monetary policy.

7. In the 1980s the U.S. Central Bank had the goal of increasing the interest rate and decreasing the money supply. To implement its goal the Central Bank uses a ________ monetary policy.

contractionary

relaxed

expansionary

9.

Central bank policy requires all banks to hold 10% of deposits as reserves. Pacific Bank policy prevents it from holding excess reserves. Suppose banks cannot trade any of the bonds they already have. If the central bank decides to lower the reserve requirement to 9%, which of the following will result?

An increase Pacific's ability to make loans.

The money supply in the economy decreases.

A decrease in Pacific's net worth.

Answer 1

5. Expansionary monetary policy is one in which the central bank increases the money supply in the economy by purchasing Treasuries and other government securities from the public, to stimulate the economy. This shifts the LM curve (in the IS-LM framework) in the rightward direction and decreases the interest rates. This further shifts the AD curve (in the AD-AS framework) in the rightward direction as well. Hence, if a macroeconomy has the money supply and aggregate demand increased by the Central Bank, it is an expansionary monetary policy.

7. Contractionary monetary policy is just the opposite of what we talked about above. It is one in which the central bank decreases the money supply by selling Treasuries and other government securities, to raise the interest rates. The LM curve as well as the AD curve shifts leftward. Hence, the central bank uses a contractionary monetary policy.

8. If Pacific Bank does not hold excess reserves, then a decrease in the reserve requirement from 10% to 9% will render more money with the bank to lend. Hence this will increase Pacific's ability to make loans.