Question

14. An increase in the money supply will increase real GDP growth in the long run in

A) the Real Business Cycle model.

B) the New Keynesian model.

C) Neither the Real Business Cycle model nor the New Keynesian model.

D) Both the Real Business Cycle model and the New Keynesian model.

15. Suppose The Fed lowers the reserve ratio requirement for banks to increase the money supply in an economy. Which of the following best describes why this may not have the desired effect on M1 and M2?

A) The monetary base can at times be rigid to Fed policy.
B) Pessimistic banks may hold onto reserves even though the required reserve amount is lower.

C) Optimistic banks may lend out more reserves than anticipated.

D) There might not be a strong market for loanable funds.

16. If the reserve ratio requirement is 7%, a $2000 deposit will increase the money supply by (roughly)

1. 12,000.
2. 15,000.
3. 20,000.
4. 28,500.

Answer 1

14.Option C. While Keynesian economics rejects the concept of long run and assumes that the economy should be treated for its short run fluctuations, RBC rejects the monetary policy to influence the economy.

15. Option B. Banks may not behave in the manner expected by the Fed perhaps because of their own concerns about the economy. Hence they may not extend as many loans as they are expected.

16. Select 4. If the reserve ratio requirement is 7%, multiplier is 1/rr = 1/7% = 14.28. This implies that a $2000 deposit will increase the money supply by 14.28*2000 = 28500 approximately