Question

QUESTION 8

Monetary policy impacts GDP mainly through its effect on…

	a.	government spending.
	b.	investment.
	c.	taxes.
	d.	consumption.
	e.	net exports.

QUESTION 10

Which of the following best describes the sequence of events in the conduct of contractionary monetary policy using open market operations (in an economy with low inflation and a stable banking system)?

	a.	The Fed lowers the interest rate, which leads to an increase in intended investment spending and an increase in the supply of federal funds, which decreases aggregate demand and output.
	b.	The Fed sells bonds, which decreases the supply of federal funds, which raises the interest rate, which leads to a decrease in intended investment spending, aggregate demand and output.
	c.	The Fed buys bonds, which increases the supply of federal funds, which lowers the interest rate, and leads to a decrease in intended investment spending and aggregate demand and output.
	d.	The Fed raises the interest rate, which leads to a decrease in intended investment spending and a decrease in the supply of federal funds, which decreases aggregate demand and output.
	e.	The Fed decreases intended investment spending, which leads to a decrease in aggregate demand and output, and a decrease in the supply of federal funds and the interest rate.

Answer 1

Question 8

Monetary policy generally impacts interest rates.

Change in interest rate impacts the investment spending.

So, in a way, monetary policy impacts GDP mainly through its effect on investment.

Hence, the correct answer is the option (b).

Question 10

The sequence of events in the conduct of contractionary monetary policy using open market operations is as follows -

The Fed sells bonds, which decreases the supply of federal funds, which raises the interest rate, which leads to a decrease in intended investment spending, aggregate demand and output.

Hence, the correct answer is the option (b).