1. Starting from a position of macroeconomic equilibrium at thefull-employment l

Question

1. Starting from a position of macroeconomic equilibrium at thefull-employment level of real GDP, in the
short run, an unanticipated decrease in the money supply will:
a. raise real interest rates, lower the price level, and reducereal GDP.
b. raise real interest rates, lower the price level, and leave realGDP unchanged.
c. raise nominal interest rates, lower the price level, and leavereal GDP unchanged.
d. lower real interest rates, raise the price level, and increasereal GDP.

2. When the Fed unexpectedly increases the money supply, it willcause an increase in aggregate demand because:
a. real interest rates will fall, stimulating business investmentand consumer purchases.
b. the dollar will depreciate on the foreign exchange market,leading to an increase in net
exports.
c. lower interest rates will tend to increase asset prices, whichincreases wealth and thereby
stimulates current consumption.
d. of all the above reasons.

3. If the Fed sells bonds, the short run impact of this policy willtend to include:
a. an increase in the inflation rate.
b. a reduction in unemployment.
c. an increase in real output.
d. an increase in real interest rates.

4. Profitable investment is most effectively promoted when:
a. the money supply and price level are stable.
b. inflation is rising rapidly.
c. monetary policy is unanticipated.
d. persistent inflation increases uncertainty.

5. What can the Fed increase to decrease the supply of money?
a. Open market purchases of government bonds.
b. Reserve requirements
c. The discount rate.
d. Any of the above.
e. b. or c.

Explanation / Answer

1. Starting from a position of macroeconomic equilibrium atthe full-employment level of real GDP, in the
short run, an unanticipated decrease in the money supply will:
a. raise real interest rates, lower the price level, and reducereal GDP.
b. raise real interest rates, lower the price level, and leave realGDP unchanged.
c. raise nominal interest rates, lower the pricelevel, and leave real GDP unchanged.
d. lower real interest rates, raise the price level, and increasereal GDP.

2. When the Fed unexpectedly increases the money supply, it willcause an increase in aggregate demand because:
a. real interest rates will fall, stimulating business investmentand consumer purchases.
b. the dollar will depreciate on the foreign exchange market,leading to an increase in net
exports.
c. lower interest rates will tend to increase asset prices, whichincreases wealth and thereby
stimulates current consumption.
d. of all the above reasons.

3. If the Fed sells bonds, the short run impact of this policy willtend to include:
a. an increase in the inflation rate.
b. a reduction in unemployment.
c. an increase in real output.
d. an increase in real interest rates.- bondprice falls (inverse relationship with interest rate, thus increaseinterest rate) ~
4. Profitable investment is most effectively promoted when:
a. the money supply andprice level are stable.
b. inflation is risingrapidly.
c. monetary policy is unanticipated.
d. persistent inflation increases uncertainty.

5. What can the Fed increase to decrease the supply of money?
a. Open market purchases of government bonds.
b. Reserve requirements
c. The discount rate.
d. Any of the above- all can as mentionedbefore
e. b. or c.
~

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