1.The main objective of contractionary monetary policy is to A. decrease aggrega

Question

1.The main objective of contractionary monetary policy is to

A.  decrease aggregate demand

B.  close a recessionary gap

C.  increase investment

D.  raise the level of potential output

2.What would we expect to happen to the interest rate when both the price level and the money supply fall?

A.  The interest rate will rise

B.  The interest rate will fall

C.  The interest rate could either rise or fall

D.  Nothing will happen to the interest rate

3.If the central bank's inflation target is 2%, and the current rate of inflation is 4%, appropriate monetary policy would be to

A.  buy bonds on the open market or reduce the target for the overnight rate

B.  sell bonds on the open market or reduce the target for the overnight rate

C.  buy bonds on the open market or increase the target for the overnight rate

D.  sell bonds on the open market or increase the target for the overnight rate

4.If the current unemployment rate is greater than the natural rate of unemployment, an appropriate monetary policy would be to sell bonds on the open market

True

False

5.Bond sellers must offer bond buyers a higher interest rate when the quantity of money demanded is greater than the quantity of money supplied.

True

False

6.The transactions demand for money is most closely related to money functioning as a

A.  unit of account

B.  store of value

C.  medium of exchange

D.  measure of value

1.The main objective of contractionary monetary policy is to

A.  decrease aggregate demand

B.  close a recessionary gap

C.  increase investment

D.  raise the level of potential output

Explanation / Answer

1) The main objective of the contractionary monetary policy is decrease aggregate demand. Option A is correct.

2) When money supply fall LM curve in the IS-LM model shift to the left. As a result interest rate increases. when price level increases, the interest rate falls. So whether interest rate will increase or decrease. Option C is correct.

3) The target rate of inflation is less than the current rate of inflation so the central bank will take contractionary monetary policy. This policy includes the open market sale of bonds and increases the target rate. Option D is correct.

4) If the current rate of unemployment is greater than the natural rate of unemployment, the government should take the contractionary monetary policy to reduce the current rate of unemployment. Selling bond in an open market is contractionary monetary policy. So the statement is TRUE.

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