1. If the Fed acts to increase the money supply, a. it will sell bonds, drive bo
ID: 1112539 • Letter: 1
Question
1. If the Fed acts to increase the money supply,
a. it will sell bonds, drive bond prices up, and drive interest rates down.
b. it will sell bonds, drive bond prices up, and drive interest rates up.
c. it will buy bonds, drive bond prices up, and drive interest rates down.
d. it will buy bonds, drive bond prices down, and drive interest rates down.
2. If the Fed acts to decrease the money supply,
a. it will increase the demand for bonds, drive bond prices down, and drive interest rates down.
b. it will increase the supply of bonds, drive bond prices down, and drive interest rates up
c. it will increase the demand for bonds, drive bond prices up, and drive interest rates down
d. it will increase the supply of bonds, drive bond prices up, and drive interest rates down
3. All other things unchanged, why does an increase in money demand cause the aggregate demand curve will shift to the left?
a. Because the resulting lower interest rate will lead to lower net exports.
b. Because the resulting higher interest rate will lead to a lower quantity of investment and net exports.
c. Because the resulting increase in bond prices reduces consumption spending.
d. Because the resulting decrease in bond interest rate will lead to an increase in the quantity of investment and net exports
4. An increase in the money supply by the Federal Reserve is likely to increase
I. consumption expenditures
II. investment expenditures
III. interest rates
IV. the exchange rate
a. I, II, III, and IV
b. I, II, and III
c. I and II
d. I, II, and IV
5. An increase in the money supply by the Federal Reserve is likely to increase
I. net exports.
II. the exchange rate.
III. interest rates.
IV. aggregate demand.
a. I and IV
b. I, III, and IV
c. I, II, and IV
d. I, II, III, and IV
Explanation / Answer
1. When the Fed wants to increase the money supply, the Fed will buy bonds from the public, and as a result, money supply increases. This will also lead to a lower interest rate of the bond, so the bond price will go up. This is because there is an inverse relationship between bond price and interest rate.
Hence option c is the correct answer,
2.
When the Fed wants to decrease the money supply, the Fed will sell the bond to the public, and as a result, money supply decreases. This will also lead to a higher interest rate of the bond, so the bond price will go down. This is because there is an inverse relationship between bond price and interest rate.
Hence option b is the correct answer.
Option b is; it will increase the supply of bonds, driving bond prices down, and drive interest rates up.
3. All other things unchanged, an increase in money demand cause the aggregate demand curve shift to the left because the resulting higher interest rate will lead to a lower quantity of investment and net exports.
This is because with the increased money demand, the interest rate increases which leads to lower investment due to more expensiveness of the investment.
On the other hand, with the more interest rate more foreign capital inflow will be there in the country which appreciates the domestic currency and as a result export decreases and import increases. So the net export decrease.
Since Net export and investment is part of the AD, so when Net export and investment decrease, it leads to a leftward shift of the AD curve.
hence option b is the correct answer.
4. An increase in the money supply by the Federal Reserve would lead to decrease in the interest rate, as a result the investment is less expensive now, so the investment will increase.
With the increase in the money supply, people will purchase more goods and services because with the reduction in the interest rate people hold more money in cash.
With the lower interest rate, the more foreign capital outflow will be there which depreciates the domestic currency and with the depreciation of the domestic currency, the exchange rate will increase.
An increase in the money supply by the Federal Reserve is likely to increase consumption, investment, and exchange rate.
Hence the correct answer is option d. (I, II, and IV)
#According to Chegg guidelines, i have solved first four question.
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