Question

Question 1. (0.1 pt) According to the wealth effect, a higher price level will (decrease, increase)

the number of goods and services demanded. (Circle the correct answer for each.)

 

Question 2. (0.2 pt) If the central bank wants to expand aggregate demand, it can (decrease, increase)

the money supply, which would (decrease, increase) the interest rate.

(Circle the correct answer for each.)

 

Question 3. (0.2 pt) Monetary policy that contracts the money supply, will (decrease, increase) the

interest rate causing the aggregate demand curve to shift (in, out).

(Circle the correct answer for each.)

 

Question 4. (0.7 pt) The Federal Reserve contracts the money supply by 5 percent.

(Make sure to label your axes.)

 

a. ) Use the supply of money and the demand for money diagram to illustrate the impact of this policy on the interest rate.

b. ) Use the model of aggregate demand and aggregate supply to illustrate the impact of this change in the interest rate on output and the price level in the short run.

 

Question 5 . (0.8 pt) Explain how each of the following developments would affect the supply of money,

the demand for money, and the interest rate. Illustrate your answers with diagrams.

(Make sure to label your axes.)

 

a. ) The Fed's bond traders sell bonds in open-market operations.

 

b. ) An increase in credit-card availability reduces the cash people hold.

 

c. ) The Federal Reserve reduces banks' reserve requirements.

 

d. ) Households decide to hold more money to use for holiday shopping.