Name: Fourth 32. If interest rates increase, what is most likely to happen to th

Question

Name: Fourth 32. If interest rates increase, what is most likely to happen to the total expenditure schedule? a. It will increase because G increases. b. It will decrease because I decreases c. It will decrease because (X- IM) decreases. d. It will increase because I increases. 33. If the FOMC orders the sale of T-bills in the open market, then bank reserves are a decreased, but the money supply will remain unchanged. b. decreased, and a multiple contraction of the money supply will occur c. increased, but the money supply will remain unchanged. d. increased, and a multiple expansion of the money supply will occur 34. Which of the following is most sensitive to monetary policy? a. Govenment expenditure b. Consumption spending c. Utility spending d. Investment spending 35·The quantity of reserves demanded decreases as the federal funds rate rises because a. people want more liquid assets as the federal funds rate rises. b. the price of bonds rise as the federal funds rate rises. c. the opportunity cost of holding excess reserves increases as the federal funds rate rises. d. people want more money to invest as the federal funds rate rises. 36. If the Fed reduces the required reserve ratio, a. excess reserves will increase. b. excess reserves will decrease. c. total reserves will increase d. total reserves will decrease. 37. In 2008, the Fed utilized expansionary monetary policy which was made a more effective as banks held more excess reserves. b. less effective as banks held more excess reserves. c. more effective as banks held less excess reserves d. less effective as banks held less excess reserves. 38. Price levels rarely remain the same. This implies that a money is an excellent medium of exchange. b. money is divisible. c. money is a good medium for measuring value. d. money is an imperfect medium for storing value.

Explanation / Answer

A)

The aggregate expenditure equation is given be:

Y = C + I + G + (X – IM)

where,

Y = Aggregate Expenditure;

C = Consumption;

I =   Investment;

G = Government Purchases;

X-IM = Net Exports

Now, if interest rates increase then it increases the cost of loans as well as the earnings from savings. Due to this is there would be a fall in consumption and investments, and thus on the expenditure. Similarly, higher interest rates increases the exchange rate vis-à-vis other currencies, therefore, it increases the cost of exports but it has inverse effect on the cost of imports. Hence, it results in decline of net exports.

Therefore, the correct answer would be b) and c)

B)

The FOMC (Federal Open Market Committee) buys and sells government securities in the form of T-Bills bonds, notes, etc. to establish the money supply in the economy.

Now if FOMC orders the sale of T-Bills, it will deplete the bank reserves as the money would be taken out from the banks and kept in the FOMC reserves. Since, there is lesser money available in the market for lending, the cost of borrowing would increase, and thus there will be a decrease in the investments and spending. This contraction in money supply would further limit the access to capital in the market as investment decreases.

Hence, the correct answer would be b)

C)

The correct answer would be d)

As seen from the above monetary policy is immediately influenced by the interest rates which bears and immediate and direction relation to the cost of borrowing. This bears direct relation to investment spending as it bears an inverse relation to the interest rates.

D)

The correct answer would be c)

As the federal fund rates increases, there would be a propensity to lend more rather than holding reserves because of increased returns. Hence, the opportunity cost of holding excess reserves increases.

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