Week 11 Quiz

Which order correctly states the five links of the transmission mechanism after the Fed changes the money supply?

Select one.

• Money supply → investment → interest rate → spending multiplier → aggregate demand
• Money supply → interest rate → aggregate demand → spending multiplier → investment
• Money supply → interest rate → investment → spending multiplier → aggregate demand
• Money supply → spending multiplier → interest rate → investment → aggregate demand

In the course's illustrative money market, money demand is M_d = 1,200 − 25r and the money supply starts at 1,050, so r = 6%. The Fed buys bonds and the money supply rises to 1,100. What is the new interest rate?

Select one.

• 4%
• 8%
• 6%
• 2%

The interest rate falls from 6% to 4%. Under the course's engineered rule, investment rises 20 billion dollars for each one-point fall in the rate. What is the change in investment, ΔI?

Select one.

• 20 billion dollars
• 80 billion dollars
• 10 billion dollars
• 40 billion dollars

Investment rises by ΔI = 40 billion dollars. The MPC is 0.8 and the money multiplier is 10. By how much does aggregate demand shift right at the old price level?

Select one.

• 400 billion dollars
• 200 billion dollars
• 50 billion dollars
• 32 billion dollars

After a Fed bond purchase, investment rises. On the AD–AS diagram, what happens?

Select one.

• Short-run aggregate supply shifts right, so the price level falls and real output rises
• Aggregate demand shifts left, so the price level and real output both fall
• Aggregate demand shifts right, so the price level and real output both rise
• The economy moves along aggregate demand, and neither curve shifts

The Fed sells bonds. Which chain correctly describes contractionary monetary policy?

Select one.

• Money supply falls, interest rate falls, investment rises, aggregate demand shifts left
• Money supply rises, interest rate falls, investment rises, aggregate demand shifts left
• Money supply falls, interest rate rises, investment rises, aggregate demand shifts right
• Money supply falls, interest rate rises, investment falls, aggregate demand shifts left

True or false: when the Fed lowers the interest rate and investment rises, the economy moves along the aggregate demand curve rather than shifting it.

True or false.

• True
• False

Which of these delays are part of the inside lag of monetary policy? Select all that apply.

Select every option that applies.

• Data on output and jobs arrive late and get revised, so the problem takes time to recognize
• Builders take time to plan, borrow, and break ground after a rate cut
• The central bank's committee has to meet and decide on a response
• Firms take time to order and install new machines after borrowing gets cheaper

A headline says the Fed "set interest rates" this week. Which statement best describes how the Fed moves the market interest rate?

Select one.

• It sets the quantity of reserves and the rate it pays on them, and the market rate follows
• It orders every bank to charge borrowers one fixed rate, set by decree
• It changes government spending, and lower spending pushes market rates down
• It raises the reserve requirement, which lets banks lend more at lower rates

In the debate over fine-tuning versus rules, which statement is normative?

Select one.

• Monetary policy affects output with lags that vary in length
• Shortening a spell of unemployment is worth the risk of a mistimed policy move
• A bond purchase lowers the interest rate in the money market
• The outside lag is the time for borrowing and spending to respond after a decision