Monetary Policy Quiz

If the Federal Reserve wants to increase the money supply, which open market operation should they conduct? (Pg. 624 Paragraph 5)

• They should sell bonds

• They should lower the required reserve rate

• They should buy bonds

• They should increase the discount rate

Take a look at the bank balance sheet, what is the required reserve ratio and the maximum possible growth of the money supply?

• 2.4%, $249,021

• 10%, $24,000

• 24%, $0

• 24%, $317,000

What is a possible explanation for the scenario presented for this Phillips curve?

• An increase in unemployment

• A negative supply shock

• An increase in inflation

• Appreciation of the Japanese Yen

According to the short-run Phillips Curve, which of the following scenarios would likely lead to a decrease in both inflation and unemployment?

• A) An increase in aggregate demand.

• B) A decrease in aggregate supply.

• C) A decrease in aggregate demand.

• D) An increase in expected inflation.

Which of the following best explains why a fast increase in the money supply leads to inflation in the long run?

• A) Increased money supply reduces interest rates, which decreases investment spending.

• B) Increased money supply raises the purchasing power of households, increasing real GDP beyond its potential level.

• C) Aggregate supply shifts to the left due to increased production costs.

• D) More money in the economy leads to higher aggregate demand, but real output is limited by full employment.

• E) Banks hold onto excess reserves, limiting the money multiplier effect.

If a central bank continually increases the money supply quickly, which of the following is the most likely long-term consequence?

• A) Decreased nominal interest rates as inflation expectations fall.

• B) A stable price level as the economy adjusts to higher demand.

• C) Hyperinflation, as the value of money decreases rapidly.

Which of the following scenarios best illustrates the crowding-out effect?

• The government borrows heavily to finance deficit spending, causing private firms to delay investment due to rising interest rates.

• The Federal Reserve lowers the federal funds rate, leading to an increase in private investment.

• A decrease in government spending results in higher levels of private savings and investment.

• Foreign investors increase their purchase of domestic bonds, lowering domestic interest rates.

Crowding out is most likely to occur when:

• The economy is in a recession, and there is significant unused capacity.

• The government runs a surplus and repays its existing debt.

• Private investment demand is relatively inelastic, and the government increases borrowing.

• The government finances spending by increasing taxes rather than borrowing.

If a nation's government consistently runs large budget deficits that add to the national debt, which of the following long-term effects is most likely if the debt-to-GDP ratio continues to rise?

• The national debt will become unsustainable, leading to default and a loss of investor confidence.

• Higher future taxes will be required to service the debt, potentially reducing incentives to work and invest.

Which of the following statements best explains why a high national debt might burden future generations?

• Future generations will have to pay higher taxes to repay the debt, which could reduce their disposable income and consumption.

• A high national debt always leads to immediate inflation, eroding the purchasing power of future generations.

• National debt held by foreign investors means that future interest payments will transfer wealth out of the country.

• High national debt levels automatically lead to higher productivity, increasing the workload for future generations.