Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Chapter 33, Problem 6MCQ
To determine
To identify:
The option that correctly states the Fed's choice of
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When the Fed sells bonds, the amount of money in circulation in the economy_______ . This drives interest rates_________ , which causes businesses to invest________ in capital improvements such as new factories and upgraded equipment. The result is_________ in aggregate demand,________ in the equilibrium price level, and______ in the equilibrium level of real GDP.
28) When the Fed raises the federal funds rate
A) the value of the dollar rises on the foreign exchange market.
B) consumption increases.
C) net exports increase.
D) the value of the dollar falls on the foreign exchange market.
29) An inflation rate targeting rule
A) reduces uncertainty about monetary policy.
B) means that the inflation rate must exceed 5 percent in order for the rule to be effective.
C) has been adopted the by the Fed in response to the financial crisis of 2008-2009.
D) will not work if the Fed continues to sue open market operations.
SUBMISSION IS DUE ON WEDNESDAY, 4th AUGUEST 2021.
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The commodity market for a simple economy is in equilibrium and when Y = C + 1
+ G. The money market is in equilibrium when the supply of money (M) equals
Demand for money (Md). Demand for money composes of transaction-
precautionary demand for money (Mt) and the speculative demand for money
(Ms). Assume the economy is characterised by the following information.
C = 4800 + 0.8Yd
T = 100,
| = 1900 - 75i,
G = 4000,
M = 5000,
Mt = 0.3Yd
Ms = 100 – 15i
a) Derive an expression to show the IS function
b) Derive the LM function
c) What values of Income and Interest rate provides for both the goods
market and money market equilibrium in this economy
d) Sketch the IS and LM curves for this economy.
e) Outline four factors that cause a shift in the IS curve.
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Chapter 33 Solutions
Foundations of Economics (8th Edition)
Ch. 33 - Prob. 1SPPACh. 33 - Prob. 2SPPACh. 33 - Prob. 3SPPACh. 33 - Prob. 4SPPACh. 33 - Prob. 5SPPACh. 33 - Prob. 6SPPACh. 33 - Prob. 7SPPACh. 33 - Prob. 8SPPACh. 33 - Prob. 9SPPACh. 33 - Prob. 10SPPA
Ch. 33 - Prob. 11SPPACh. 33 - Prob. 1IAPACh. 33 - Prob. 2IAPACh. 33 - Prob. 3IAPACh. 33 - Prob. 4IAPACh. 33 - Prob. 5IAPACh. 33 - Prob. 6IAPACh. 33 - Prob. 7IAPACh. 33 - Prob. 8IAPACh. 33 - Prob. 9IAPACh. 33 - Prob. 10IAPACh. 33 - Prob. 11IAPACh. 33 - Prob. 12IAPACh. 33 - Prob. 1MCQCh. 33 - Prob. 2MCQCh. 33 - Prob. 3MCQCh. 33 - Prob. 4MCQCh. 33 - Prob. 5MCQCh. 33 - Prob. 6MCQCh. 33 - Prob. 7MCQ
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- Assume that the prevailing interest rate in this economy is 6%. If the central bank decides to reduce the interest rate to 4% then: (a) This is contractionary monetary policy action and the price of exports would increase; (b) This is expansionary monetary policy and exports would increase; (c) This is expansionary fiscal policy and imports will increase; (d) This is contractionary monetary policy and imports will decrease.arrow_forwardThe more bonds the central bank buys, the ____________the money supply grows, and the ______________ the inflation will be. A. slower; lower B. slower; higher C. faster; lower D. faster; higherarrow_forwardWhen the value of the dollar falls, the price of assets rise. When the Fed injects money into the banking system increasing the money supply,_______________ the interest rates tend to increase, and stock market tends to rise. the interest rates tend to increase, and stock market tends to fall. the interest rates tend to decrease, and the stock market tends to rise. the interest rates tend to decrease, and the stock market tends to fall.arrow_forward
- If the Bank of England’s desired intermediate target is a monetary aggregate, then its policy instrument will most likely be a(n) ________ variable like the ________. A) interest rate; one-year T-bill rate B) reserve aggregate; monetary base C) interest rate; federal funds rate D) reserve aggregate; narrow money supply M1 Explain your answer and based on the conduct of monetary policy in practice.arrow_forwardConsider the economy in two alternative situations, A and B . In A , the economy has an inflationary gap and the core inflation rate is 3 percent a year. In B , the economy has a recessionary gap and the core inflation rate is 1 percent a year. In which situation is the Fed likely to have the higher federal funds rate target range? Why? The Fed is likely to have the higher federal funds rate target range in situation _______ because the higher federal funds rate _______. A. B ; increases the recessionary gap and lowers the core inflation rate B. A ; increases the inflationary gap and lowers the core inflation rate C. A ; decreases the inflationary gap and lowers the core inflation rate D. B ; decreases the recessionary gap and lowers the core inflation ratearrow_forward63. Suppose Canadian real GDP is currently equal to potential GDP. Then the Canadian dollar depreciates due to the reduced demand by European producers to purchase Canadian-made raw materials. If the Bank of Canada is committed to its inflation target then it should implement an expansionary monetary policy by increasing its target for the overnight interest rate. not intervene in the economy at all since this shock will not have any real effects in the short run. implement a contractionary monetary policy by increasing its target for the overnight interest rate. implement a contractionary monetary policy by decreasing its target for the overnight interest rate. implement an expansionary monetary policy by decreasing its target for the overnight interest rate.arrow_forward
- Review the rubric to make sure you understand the criteria for earning your grade. Read the articles An Update on the Economy and Monetary Policy and Recent and Near-Term Fiscal Policy Write a five- to six-page paper answering the following regarding fiscal and monetary policy changes: Explain the key aspects of today’s monetary policy and how they are affecting GDP and aggregate demand/aggregate supply. Explain the key aspects of today’s fiscal policy and how they are affecting GDP and aggregate demand/aggregate supply. Are these policies being well coordinated today? In essence, are they both working in unison to address current economic conditions? Explain. What are these policies’ effects on aggregate supply and aggregate. Do understand they affect supply as well as demand. You must use a minimum of five sources for your research paper, at least three of which are scholarly. Use proper spelling, grammar, and APA formatting for your analysis paper. When you have completed your…arrow_forwardIf the Fed increases the money supply, in the short run interest rates will ________ and investment spending will __________. Rise; go down Decline; go down Rise; increase Decline; increasearrow_forwardI. Identification__________1. Shows combination of interest rates and the levels of output such that planned spending equals income.__________2. Monetary policy characterized by a decrease in money supply that results to a higher interest rate.__________3. Shows all combinations of interest rates and levels of income such that the demand for real balances is equal to the supply.__________4. It occurs when expansionary fiscal policy causes interest rates to rise, thereby reducing private spending, particularly investment.__________5. A policy on the regulation of the supply of money in the circulation.__________6. The policy of the government with regard to the level of government purchases, the level of transfers and the tax structures.II. Modified TRUE or FALSE: Write TRUE if the statement is correct and if the statement is false, choose the word or group of words that makes the statement false and write the correct word or group of words to make the statement correct.1. The lower the…arrow_forward
- Explain the Fed's policy tools and briefly describe how each works. The Fed uses its policy tools to _______. A. regulate the amount of money circulating in the United States by printing enough money each year for the purchase of consumer goods and services B. influence the exchange rate and the country's trade balance by adjusting the interest rate C. keep the government budget debt under $20 trillion by adjusting loans to Congress D. influence the interest rate and regulate the amount of money circulating in the United States by adjusting the reserves of the banking systemarrow_forward1. If the domestic currency depreciates,a) using a graph of aggregate demand and supply EXPLAIN in detail how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium. b) using a graph of aggregate demand and supply EXPLAIN in detail how lags in this policy process (mentioned in (a)) can result in undesirable fluctuations in output and inflation.arrow_forward14) During a period when economic growth is very strong and inflation rates are rising to uncomfortable levels, Federal Reserve policymakers might decide to pursue which type of monetary policy? 15) Which of the following pairs of terms is used to describe fluctuations in the economy? 16) During a contractionary phase of the business cycle which of the following most likely occurs? 17) Which of the following regulations prevent price gouging? 18) what does fiscal policy include?arrow_forward
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