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1. Which of the following sequence of events follows an expansionary monetary policy? A) ↑ interest...

1. Which of the following sequence of events follows an expansionary monetary policy? A) ↑ interest rate → ↓ investment → ↓ total demand → ↓ real GDP B) ↓ interest rate → ↑ investment → ↑ total demand → ↑ real GDP C) ↑ interest rate → ↑ investment → ↓ total demand → ↑ real GDP D) ↓ interest rate → ↓ investment → ↑ total demand → ↑ real GDP

1.1 Which of the following sequence of events would follow a decrease in the reserve requirement? A) ↓ interest rate → ↑ investment → ↑ aggregate demand → ↑ real GDP B) ↑ interest rate → ↓ investment → ↓ aggregate demand → ↓ real GDP C) ↓ interest rate → ↓ investment → ↑ aggregate demand → ↑ real GDP D) ↑ interest rate → ↑ investment → ↓ aggregate demand → ↓ real GDP

1.2 Which of the following sequence of events would follow an open market sale of bonds? A) ↓ interest rate → ↑ investment → ↑ aggregate demand → ↑ real GDP B) ↑ interest rate → ↓ investment → ↓ aggregate demand → ↓ real GDP C) ↓ interest rate → ↓ investment → ↑ aggregate demand → ↑ real GDP D) ↑ interest rate → ↑ investment → ↓ aggregate demand → ↓ real GDP

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Answer #1

Answer 1. B) ↓ interest rate → ↑ investment → ↑ total demand → ↑ real GDP

reason- Due to expansionary monetary policy, money supply rises and interest rate falls. Investment rises and AD rises and real GDP rises.

Answer 1.1 ↓ interest rate ↑ investment ↑ aggregate demand ↑ real GDP

reason- Decrease in reserve requirement means expansionary monetary policy. money supply rises and interest rate falls. Investment rises and AD rises and real GDP rises.

Answer 1.2. B) ↑ interest rate → ↓ investment → ↓ aggregate demand → ↓ real GDP

reason- Open market sale of bonds lead to rise money supply falls, interest rate rises and investment falls and aggregate demand falls and real GDP falls.

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