EC140 Lecture Notes - Lecture 16: Potential Output, Redistribution Of Income And Wealth, Dual Mandate

Under what economic conditions would the Fed wish to increase (expansionary policy) or decrease (contractionary policy) the money supply? How would an increase in the money supply likely affect interest rates, investment, aggregate demand, the price level, output, and employment? Why might monetary policy fail? What does inflation targetingmean?

3.If the demand for labor is plotted against the money wage, with the money wage on the vertical axis, then

A)an increase in the price level will cause the labor demand schedule to shift to the right.

B)an increase in the money wage will cause the labor demand schedule to shift to the left.

C)an increase in the money wage will cause the labor demand schedule to shift to the right.

D)the labor demand schedule will be upward sloping.

5. According to the classical model, a 10-percent increase in the money supply, holding everything else constant, will lead to

A) a 10% increase in prices, a 10% increase in the real wage, and a 10% increase in interest rates.

B)a 10% increase in prices, a 10% increase in the money wage, and a 10% increase in interest rates.

C)a 10% increase in prices, a 10% increase in the money wage, and no change in interest rates.

D)a 10% increase in prices and no change in the money wage or interest rates.

E)none of the above.

7. If the propensity to hold money is 6 and the money supply is 12, then the classical aggregate demand curve is

A) P = 2Y

B)P/Y = 48

C)P = 1/(2Y)

D)P = 2/Y

Part 1

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.

a.The short-run aggregate supply (SAS) curve slopes upward because households spend more as their incomes increase.

b.The long-run aggregate supply curve can never shift.

c.Either a decrease in the nominal money supply by the Federal Reserve, all else held constant or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.

d.The Keynesian portion of the short-run aggregate supply (SAS) curve would be relevant during a recessionary situation.

e.Stagflation occurs when the aggregate demand (AD) curve shifts out on the upward sloping portion of the short-run aggregate supply (SAS) curve.

Part 2

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale, using graphs to support your answer. You can create graphs by hand and take pictures and upload them with your answers, or you may use Word or Excel, and upload the file created by these software packages.

a.If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.

b.The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macroeconomy.

c.A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.

d.The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.

e.Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.