7) Which of the following would cause the money demand curve to shift to the rig

Question

7) Which of the following would cause the money demand curve to shift to the right? a) an increase in the price level b) an open m arket purchase of Treasury securities by the Federal Reserve c) a decrease in real GDP d) an increase in the interest rate 8) Expansionary monetary policy on the part of the Fed results in a) an increase inthe money supply, a decrease in interest rates, and an increase in real GDP b) a decrease in the money supply, a decrease in interest rates, and a decrease in real GDP c) a decrease in the money supply, an increase in interest rates, and a decrease in real GDP d) an increase in the money supply, an increase in interest rates, and an increase in real GDP Price level GDP deflator 2000 100) LRAS SRAS AD Real GDP (trillions of 2000 dollars 9) Refer to figure above. This economy is experiencing a (n) a) stagflation gap b) inflationary gap c) recessionary gap d) None of these. There is no output gap 10) Congress uses increases in government spending to decrease the supply of money in our economy a True b) False To correct an inflationary gap, the Federal Reserve could increase taxes and/or increase the reserve requirement 11) a) True b) False

Explanation / Answer

Ans 7. a) an increase in the price.

When demand for money increases the money demand curve shifts to the right. In this case due to increase in prices demand for money will increase so demand curve money will shift to the right.

Ans 8. a) an increase in money supply, decrease in interest rate and increase in real GDP.

Due to expansionery policy interest rate decreases, which increases the demand for loans thus increasing the money supply. This money is used for investment which increases production and hensce real GDP increases.

Ans 9. b) Inflationery gap

It refers to the situation when due to inflation or high employment the demand outgrows the consuption and due to that long term prices of goods increase. This can be seen in the graph above as demand has increased but supply has not matched up an long run prices have increased.

Ans10. False.

When govt spending increases money supply in the economy increases. As increased govt spending means more money is in the circulation of the economy which also multiplies due to the money multiplier effect.

Ans11. False

To correct inflationery gap FED can only use monetary policy. Taxation is a fiscal policy so FED cant use that. But it can change reserve requirements to correct the inflationery gap.

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