Question

1. For any given increase in reserves, which of the following reduces the money supply creation process?      
a. high currency preference among the banking public       
b. banks holding large amounts of excess reserves       
c. high interest elasticity of money demand       
d. both a and b

2. The classical approach to dealing with the Great Depression would have been?       
a. do nothing, wait for the long run       
b. active fiscal and monetary policy
c. active fiscal policy in the form of government expenditure and no monetary policy
d. inactive fiscal policy but aggressive expansionary monetary policy

3. During the Great Depression widespread banking crises in the United States had which of the following effects?  
a. collapse of the money supply      
b. cleaning out bad banks      
c. removal of the gold standard      
d. reduction of consumer confidence

4. How might the central bank use open market operations to increase the monetary base and overall money supply?  
a. Open market sale of bonds  
b. Open market purchase of bonds      
c. increase reserve requirements      
d. increase the federal funds rate

5. One historic policy often associated with a Keynesian fiscal policy prescription was?

a. the Banking Act of 1933
b. WWII
c. The New Deal      
d. Glass-Steagal Act

Answer 1

1. (D) Both A and B

Reason: Both these factors reduce supply of money in the economy

2. (A) Do nothing, wait for the long run

Reason: Classical economics believes in no government intervention and thus no action in case of crisis in the economy

3. (D) Reduction of consumer confidence

Reason: Banking crisis led to massive fall in consumer confidence in the US, which made things even worse

4. (B) Open market purchase of bonds

Reason: Open market purchase of bonds leads to an increase in money supply in the economy

5. (C) The New Deal

Reason: This involved increasing public expenditure on infrastructure to create more jobs, on the lines of Keynesian prescription