Question

If there is a sudden increase in the demand for money, what could the Fed do to hold interest rates steady at their current levels? Select one: a. Cut taxes. b. Sell government securities. c. Raise the discount rate. d. Raise the required reserve ratio. e. None of the above is correct

. Which of the following sequence of events follows a decrease in the discount rate? Select one: a. r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↑ b. r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓ c. r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑ d. r↑ ⇒ I↑ ⇒ AE↑ ⇒ Y↑

If a decrease in government spending in the United States resulted in a very large decrease in aggregate output and a very small decrease in the price level, then the U.S. economy must have been

a. on the very steep part of the short-run aggregate supply curve. b. on the very flat part of the short-run aggregate supply curve. c. on the very steep part of the short-run aggregate demand curve. d. on the very flat part of the short-run aggregate demand curve.

The Macroland Finance Ministry increases both government spending (G) and net taxes (T) by one million dollars. Aggregate demand will Select one: a. shift to the right. b. shift to the left. c. remain unchanged, but the price level will increase. d. remain unchanged, but the price level will decrease. e. remain unchanged, and the price level will also stay the same.

Answer 1

(1) (e)

Higher money demand increases interest rate. To lower interest rate, Fed has to increase money supply by buying federal bonds, decreasing discount rate or decreasing required reserve ratio.

(2) (c)

Lower discount rate decreases interest rate, which increases investment, aggregate expenditure and GDP.

(3) (b)

When SRAS is very flat, a small shift of AD curve causes a small change in price level but large change in GDP.

(4) (a)

Government spending multiplier being higher than tax multiplier, an equal increase in G and T will effectively increase GDP (by amount of the increase).