EC140 Lecture Notes - Lecture 16: Monetary Reform, Potential Output, Money Supply

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coppermuskrat283

26 Jun 2017

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Ec140 class 16 money, interest rates and economic activity chapter 27. If the supply curve is flat there is a large change in real gdp. When there is an excess supply of $ Assuming the money supply is constant, an increase in price level will increase interest rates. Doubling bank deposits, the value of cash, and prices would have no effect. Key to effective monetary policy is slow adjustment of prices. Changing the money supply change in int rate change in ae and ad increase in real gdp and inflationary gap increase in wages and input prices return to potential gdp. Monetary policy to eliminate recessionary gaps may have lt value. Inflationary gaps would lead to increasing input prices. Aggregate supply shifts left (leads to an even higher price level) Investment and technology may respond to effective monetary policy. Human capital may be significantly reduced by recessionary gaps.

Related Questions

The demand for money
A) d and e are correct
B) all of the following are correct
C) decreases as the average selling price of a unit of outputincreases
D) increases as GDP increases
E) is increased by credit card usage
2. The higher the interest rate, the more of their wealth peoplewill hold as money.
A) True
B) False
3. The money demand curve slopes
A) downward because the cost of holding money decreases as theinterest rate decreases
B) downward because the cost of holding money increases as theinterest rate decreases
C) upward because people demand more money as GDP increases
D) upward because people demand more money as GDP decreases
E) downward because people demand more money as the price levelincreases
4. Which of the following, other things constant, will shift themoney demand curve to the left?
A) an increase in the interest rate
B) a decrease in the interest rate
C) a decrease in real GDP
D) an increase in real GDP
E) an increase in the price level
5. An increase in the money supply will
A) increase the demand for money at each interest rate
B) decrease the demand for money at each interest rate
C) lead people to try to exchange money for interest-bearingassets
D) lead people to try to exchange interest-bearing assets formoney
E) increase the interest rate
6. When an increase in the money supply reduces the interest rate,investment and nominal GDP increase.
A) True
B) False
7. In the short run, a decrease in the money supply will cause adecrease in Gross Domestic Product and a decrease in the pricelevel.
A) True
B) False
8. The demand curve for investment is graphed with __________ onthe vertical axis and __________ on the horizontal axis.
A) the interest rate; investment
B) investment; the interest rate
C) the price level; investment
D) investment; the price level
E) real GDP; investment
9. As the interest rate increases,
A) the demand for investment curve shifts to the right
B) the demand for investment curve shifts to the left
C) there is a movement downward along the demand for investmentcurve
D) there is a movement upward along the demand for investmentcurve
E) GDP increases
10. If the economy experiences a contractionary gap and the Fedstimulates the economy, then:
A) The money supply is increasing because the Fed prints moremoney
B) The money supply is decreasing because the Fed hoardsmoney
C) The money supply is increasing because the Fed makes open-marketpurchases
D) The money supply is decreasing because the Fed makes open-marketsales
E) There is no change in the money supply because the Fed cannotinfluence the money supply
11. If the Fed decreases the money supply, GDP
A) increases because the resulting increase in the interest rateleads to a decrease in investment
B) increases because the resulting decrease in the interest rateleads to an increase in investment
C) decreases because the resulting increase in the interest rateleads to a decrease in investment
D) decreases because the resulting increase in the interest rateleads to an increase in investment
E) decreases because the resulting decrease in the interest rateleads to an increase in investment
12. An increase in the money supply can increase the price level,real GDP, or both, but it is impossible to tell exactly what willhappen without knowing the slope of the aggregate supplycurve.
A) True
B) False
13. If the economy experiences an expansionary gap and the Fedsells US government securities in the open-market, then:
A) Money supply increases, investment increases, aggregate demandincreases
B) Money supply increases, the interest rate increases, and theaggregate demand increases
C) Money supply decreases, the interest rate decreases, and theaggregate demand falls
D) Money supply decreases, the investment decreases, and theaggregate demand decreases
E) Interest rate falls, investment falls, aggregate demandincreases
14. If the money supply equals $1,000 and nominal GDP equals$3,000, then V
A) equals 1/3
B) equals 3
C) equals 3 million
D) cannot be determined since we do not know anything aboutprices
E) cannot be determined since we do not know anything about realGDP
15. If the money supply is increasing at a constant 8 percent,velocity is constant, real GDP is increasing at 5 percent, and theinflation rate is 3 percent, which of the following is true?
A) The growth rate of GDP is too low to be maintained.
B) The inflation rate is too low to be maintained.
C) Velocity is too low to be maintained.
D) The money supply growth rate is too low to be maintained.
E) This situation can continue indefinitely.
16. If real output and velocity are stable and predictable, thenthe equation of exchange can be used to derive a simplerelationship between
A) the money supply and the price level
B) the money supply and the interest rate
C) the money supply and the foreign exchange rate
D) velocity and real GDP
E) velocity and nominal GDP
17. For the quantity theory of money to yield usefulpredictions,
A) fiscal policy must be ineffective in altering aggregatedemand
B) fiscal policy must be effective in altering aggregatedemand
C) the economy must be operating at the potential level of realGross Domestic Product
D) velocity must be stable or predictable
E) velocity must be unstable
18. A rising rate of inflation
A) makes people more willing to hold money as an asset
B) reduces the usefulness of money as a store of value and thusincreases the velocity of money
C) increases the usefulness of money as a medium of exchange andthus reduces the velocity of money
D) is usually preceded by a reduction in the money supply
E) does not, apparently, have any effect on the velocity ofmoney
19. There is considerable disagreement about whether the Fedshould
A) engage in open market operations
B) have the power to set reserve requirements
C) reduce the money supply when the economy is growing
D) allow banks to invest in the stock market
E) attempt to control interest rates or should instead attempt tocontrol the money supply
20. For interest rates to remain stable during economic expansions,the growth rate of the money supply should
A) exceed the growth in the demand for money
B) just match the growth in the demand for money
C) be less than the growth in the demand for money
D) be zero
E) just match the growth in nominal GDP

salmonpug424

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply generates:

a. lower interest rates, which causes an increase in planned real investment spending and an increase in aggregate demand.

b. spending on consumer goods and services directly, which causes an increase in aggregate demand.

c. an increase in nominal GDP and a change in the price level, but no change in real GDP.

d. an increase in aggregate supply since the supply of money is part of aggregate supply.

azuregerbil469

1. What happens when the price level rises?
a. The value of money rises, and exchange rates and interest rates also rise.
b. The value of money rises, while exchange rates and interest rates fall.
c. The value of money falls while exchange rates and interest rates rise.
d. The value of money falls, and exchange rates and interest rates also fall.

2. Which of the following best describes what happens when the price level rises?
a. Households increase foreign bond purchases, and the supply of dollars increases.
b. Households increase foreign bond purchases, and the supply of dollars decreases.
c. Households decrease foreign bond purchases, and the supply of dollars increases.
d. Households decrease foreign bond purchases, and the supply of dollars decreases.

3. In which of the following situations does investment spending increase?
a. when the price level rises, causing interest rates to rise
b. when the price level rises, causing interest rates to fall
c. when the price level falls, causing interest rates to rise
d. when the price level falls, causing interest rates to fall

4. If a government started with a deficit and moved to a surplus, which of the following best describes the
effects of these changes?
a. Domestic investment and the real exchange rate would rise.
b. Domestic investment and the real exchange rate would fall.
c. Domestic investment would rise, and the real exchange rate would fall.
d. Domestic investment would fall, and the real exchange rate would rise.

5. Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp increase in the
minimum wage. In the short run, what would we expect to happen?
a. the price level to rise, and real GDP to fall
b. the price level to fall, and real GDP to remain unchanged
c. the price level to remain unchanged, and real GDP to fall
d. the price level to fall, and the real GDP to rise the same

skyleopard547

EC140 Lecture Notes - Lecture 16: Monetary Reform, Potential Output, Money Supply

EC140 Full Course Notes

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