Refer to the informa provided in Figure 10.1 below to answer the questions that

Question

Refer to the informa provided in Figure 10.1 below to answer the questions that .8 M Mt Money Figure 10.1 5) Refer to Figure 10.1. A movement from Point B to Point A can be caused by 5) A) an increase in the price level. C) a decrease in nominal income. B) an increase in the interest rate. D) a decrease in the interest rate. 6) Refer to Figure 10.1. The money demand curve will shift from M to Mi t A) interest rates fall. ) nominal income decreases B) interest rates rise. D) the price level increases. When the interest rate falls, bond values A) rise. B) fall C) are unchanged because the interest rate paid on a bond is fixed. D) will either increase or decrease depending on the type of bond. 8) Which of the follow money supply? A) a decrease in federal spending B) an increase in the discount rate ) buying government securities in the open market D) an increase in the required reserve ratio 9) When the Fed raises the required reserve ratio, the banks' excess reserves will initially and the money supply 9) A) decrease decreases C) increase; remain constant B) increase; increases D) remain constant, decreases

Explanation / Answer

5) A movement from point B to point A can be caused by an increase in the interest rate. This is because there is a movement in the curve and not a shift of the curve.

6) Md2 will shift to Md1 only when the nominal income falls. When nominal income falls, demand for money reduces at each and every interest rate, so money demand curve shifts leftwards.

7) When the interest rate falls, bond prices rise. This is because as interest rate falls, demand for the present bonds with higher interest rate leading to higher bond prices.

8) Buying government securities in the open market is an action by the Fed that is designed to increase the money supply.

9) When the required reserve ratio increases, the excess reserves will initially fall and the money supply also falls. As required ratio falls, more of the excess reserves fall into the required reserves category and hence excess reserves fall. Now since, more of reserves are required, funds available to banks to give out loans are now lesser leading to lower money supply.

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