Which of the following is appropriate monetary policy given a from a negative AD

Question

Which of the following is appropriate monetary policy given a from a negative AD shock? Increase the discount rate But government Securities through open market operations increase the amount of required reserve ratio increase interest paid on reserves held at the Fed Which of the following is true regarding fiscal policy and time tags? Fiscal policy does not have time lag Fiscal policy's longest tag is the recoginitionlag Fiscal policy can have a long legislative tag whereas monetary policy has no legislative lat Fiscal policy has a shorter legislative then monetary policy The monetary base (MB) refers to currency, savings deposits money market mutual funds are small time deposits currency plus total reserves held at the Fed currency plus checkable deposits currency According to the quantity theory of money the ultimate cause of sustained inflation over time is an increase in the growth of the money supply the velocity of money the growth of real GDP technology

Explanation / Answer

1. Option B is correct.

When the economy is in AD shock and hence a recessionary phase, the monetary policy in this situation should be to increase the money supply so that people have purchasing power and the AD could be revived. Buying government securities would imply infusing money into the economy and hence is a form of expansionary monetary policy.

2. Option C is correct.

This is so because for the fiscal policy, in order to implement any policy, the legislature procedure is little long and complicated that first it would be presented in the parliament and when it gets approved then the president's assent is required and then the policy would be enacted, which is not so in the monetary policy which has comparatively small member committee.

3. Option B is correct.

Monetary base is the known as narrow money as it is the most liquid tye of money. IT includes the currencyin circulation plus the reserve balances with the central bank.

4. Option A is correct.

To have a sustained inflation over time the necessary condition is the continuous growth of money supply. the quantity theory of money supports this by the equation MV = PY where M is money supply and P is the price V is the velocity and Y is the real GDP.

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