Week 11 — Quiz · Monetary Policy, Interest Rates & Aggregate Demand: The Transmission Mechanism
Course: Principles of Macroeconomics (ECON 2) · Silver Oak University (fictional sample) · Prof. Ashford
Objective 7 · 10 questions · 10 points · closed to AI · one attempt
Auto-graded (Classic QTI): see F-quiz-week-11-qti.xml for the Canvas import. Every numeric answer is pre-computed; every transmission-chain/curve-shift claim is verified.
The questions (human-readable; answer key below)
Q1. Put the links of the monetary-transmission mechanism in the correct order, starting from a Fed open-market bond purchase: (i) the interest rate falls; (ii) aggregate demand shifts right; (iii) the money supply rises; (iv) investment spending rises. —
A) i, ii, iii, iv B) iii, i, iv, ii C) iv, iii, i, ii D) ii, iii, i, iv
Q2. The money supply rises from $600 billion to $700 billion, and the interest rate falls from 6% to 5%. If investment rises $20 billion for every 1-point drop in the interest rate, the change in investment (ΔI) is —
A) $5 billion B) $100 billion C) $20 billion D) $700 billion
Q3. Using ΔI = $20 billion from Q2 and a spending multiplier of 5, the total change in real GDP (ΔY) is —
A) $20 billion B) $25 billion C) $4 billion D) $100 billion
Q4. After the Fed's bond purchase raises investment as in Q2–Q3, which curve shifts, in which direction, and what happens to the price level (P) and real output (Y) walking along a fixed SRAS curve? —
A) SRAS shifts left; P rises, Y falls B) AD shifts right; P rises, Y rises C) AD shifts left; P falls, Y falls D) LRAS shifts right; P falls, Y rises
Q5. The Fed instead SELLS bonds, and the interest rate RISES from 6% to 7%. Using the same $20-billion-per-point rule, what happens to investment, and which direction does aggregate demand shift? —
A) Investment rises; AD shifts right B) Investment stays the same; AD doesn't shift C) Investment falls by $20 billion; AD shifts left D) Investment falls; AD shifts right
Q6. (True/False) When monetary policy is contractionary, walking along a fixed SRAS curve, the price level and real output move in OPPOSITE directions (one rises while the other falls). → False
Q7. Which multiplier correctly converts a change in investment spending (ΔI) into a change in real GDP (ΔY) in the transmission mechanism? —
A) 1/RR, the money multiplier (from bank reserve requirements) B) 1/(1−MPC), the spending multiplier C) MV = PQ, the quantity theory D) There is no multiplier involved
Q8. If many banks respond to a Fed bond purchase by holding a large share of the new reserves as excess reserves instead of lending them out, which specific link of the transmission chain weakens, and what happens to the SIZE (not the direction) of the resulting change in real GDP? —
A) The AD-shift link weakens; the direction reverses B) The investment-response link weakens; the size of ΔY is likely smaller than the model's clean prediction C) The interest-rate link weakens; the interest rate no longer changes at all D) No link weakens; excess reserves have no effect on the model
Q9. (Select all that apply.) Which of the following are TRUE statements about monetary policy and its channel of effect? —
☑ A) An interest-rate change is the mechanism by which monetary policy affects investment spending and aggregate demand ☐ B) Monetary policy is conducted by Congress adjusting government spending and taxes ☑ C) Economists in the monetarist tradition have argued that policy lags are "long and variable" ☐ D) The money multiplier (1/RR) is the correct multiplier to use when converting a change in investment into a change in GDP ☑ E) Expansionary and contractionary monetary policy produce fully mirrored (reversed) chains, link for link
Q10. (Matching) Monetary-transmission link → its correct description: The Fed's action → Buys or sells bonds on the open market, changing the money supply; The interest-rate link → A change in the money supply moves the interest rate in the opposite direction; The investment-response link → A lower interest rate raises planned investment spending; a higher rate lowers it; The AD-and-output link → The resulting change in spending shifts aggregate demand, changing the price level and real output together. (Distractor: "Government spending and tax changes voted on by Congress" — this describes fiscal, not monetary, policy.)
Answer key & feedback (instructor)
| Q | Type | Answer | Feedback (the idea) |
|---|---|---|---|
| 1 | MC | B | The Fed's action changes the money supply FIRST; that moves the interest rate; the rate change moves investment; only THEN does AD shift. Skipping a link hides where the change in spending came from. |
| 2 | MC | C | A 1-point drop × $20B-per-point = $20 billion — the INITIAL change in investment, before the multiplier is applied. |
| 3 | MC | D | ΔY = ΔI × multiplier = $20B × 5 = $100 billion. Don't stop at the initial $20 billion — the multiplier ripples it through the whole economy. |
| 4 | MC | B | AD (not SRAS or LRAS) shifts right because investment — a component of AD — rose; walking up the fixed SRAS curve, both P and Y rise together. |
| 5 | MC | C | A rate RISE makes borrowing to invest MORE expensive, so investment FALLS by $20 billion (the same $20B-per-point rule, opposite direction); AD shifts LEFT as a result. |
| 6 | TF | False | Contractionary policy shifts AD left; walking DOWN the fixed SRAS curve, P and Y move in the SAME direction (both fall) — not opposite directions. |
| 7 | MC | B | 1/(1−MPC) is the SPENDING multiplier, used whenever a change in spending (like ΔI) needs to be converted into a change in GDP. 1/RR (the money multiplier) is a completely different idea about how banks expand the money supply (Week 9). |
| 8 | MC | B | Excess reserves that sit idle never reach borrowers as loans, so the interest-rate change doesn't translate into as much new investment as the clean rule predicts — the DIRECTION of the outcome is unchanged, but the SIZE of ΔY likely comes in smaller. |
| 9 | MA | A, C, E | A and C are established, factual claims about the mechanism and the monetarist critique; E correctly describes that contractionary policy fully mirrors expansionary policy. B is false (monetary policy = the Fed, not Congress); D is false (the money multiplier belongs to a different idea, Week 9's bank-lending model, not this chain). |
| 10 | Match | as above | The Fed's bond-buying/selling changes MS; that moves r the opposite way; r changes move investment (the interest-rate channel); the resulting spending change shifts AD, changing P and Y together. The distractor describes fiscal policy (Congress), a different tool entirely. |
Quantitative gate: PASS — every numeric answer re-computed: Q2 1 point × $20B = $20B; Q3 $20B × 5 = $100B; Q5 1 point × $20B = −$20B (reversed direction).
Graph-logic check: PASS — every transmission-chain/curve-shift claim verified against the NUMBERS_PACK canon: Q1/Q10 chain order (MS → r → I → AD → P/Y); Q4 AD (not SRAS/LRAS) shifts right, P↑/Y↑ walking up fixed SRAS; Q5/Q6/Q9 contractionary policy fully reverses every link (AD left, P↓/Y↓ together — never opposite directions); Q7/Q9 correct multiplier (spending, 1/(1−MPC)) distinguished from the money multiplier (1/RR); Q8 bank-hoarding qualification changes size, not direction; Q9 monetary policy correctly attributed to the Fed, not Congress (fiscal policy's domain).
Quality gate (self-checked): every single-answer item has exactly one correct option; distractors target the named traps (skipped chain links, wrong multiplier, only half-reversing the contractionary chain, fiscal-vs-monetary mix-up, direction-vs-size confusion on the excess-reserves wrinkle). No free numeric entry; no essay.
F-quiz-week-11-qti.xml) ships inside the course's .imscc package — it lands in the Canvas gradebook on import.~ Prof. Ashford's edition · Fall 2026 · built with thecoursemaker.com