I’ll post the answers after 5 responses. Questions: 1) A country is experiencing a core inflation rate of 7% during a recessionary period of real GDP growth. If the central bank has a single mandate to achieve price stability and uses inflation targeting with an acceptable range of zero to 4%, its monetary policy response is most likely to decrease: A) GDP growth in the short run. B) short-term interest rates. C) the foreign exchange value of the country’s currency. 2) If a country’s economy is growing at an unsustainably rapid rate and the central bank decreases its target overnight interest rate, the country’s: A) long-term rate of economic growth will increase. B) inflation rate is likely to increase. C) expected rate of inflation is likely to decline. 3) Which of the following items is least likely to be included in the M1 measure of the money supply? A) Checking account deposits owned by businesses. B) Travelers’ checks. C) Currency held at banks. 4) Which of the following statements about the demand for and supply of money is least accurate? A) As gross domestic product rises, the demand for money balances also rises. B) As the interest rate rises, the supply of money also rises. C) As inflation rises, the demand for money by households and businesses also rises. 5) If the money interest rate is measured on the y-axis and the quantity of money is measured on the x-axis, the money supply curve is: A) vertical. B) downward sloping to the lower right. C) upward sloping to the upper right. 6) Which of the following statements about the demand and supply of money is most accurate? People who are: A) holding money when interest rates are lower will try to increase their money balances and, as a result, the supply of money increases. B) holding money when interest rates are higher will try to reduce their money balances and, as a result, the demand for money decreases. C) buying bonds to reduce their money balances will increase the demand for bonds with an associated increase in interest rates. 7) In a recent economic forum meeting, Jason Federmeyer of the Bank of Detroit, and Lawrence Lobovsky of the Bank of Tulsa, were discussing the demand for money and how it has changed over the years. Federmeyer made the following two statements to Lobovsky: Statement 1: Financial innovation has significantly affected the demand for money. The increased use of credit cards and debit cards, interest-bearing checking accounts, internet banking and even the large number of ATMs around the world have all helped to increase the demand for money above what it would have been if only the increase in real GDP were at work. Statement 2: Although the quantity of money demanded is largely determined by interest rates, the supply of money is determined by the central bank and is independent of interest rates. Are Statement 1 and Statement 2 as made by Federmeyer CORRECT? Statement 1 Statement 2 A) Incorrect Correct B) Incorrect Incorrect C) Correct Correct 8) If households are holding larger real money balances than they desire, which of the following is least likely? A) The interest rate is higher than its equilibrium rate in the market for real money balances. B) The central bank must sell securities to absorb the excess money supply and establish equilibrium. C) The opportunity cost of holding money balances will decrease.
have not spent much time on econ, thanks for posting the ?'s A, B, C, B, B, C, C, A
B, B, C, B, B, C, A
Correction: B, B, C, B, C, C, A
Sorry one more correction… B, B, C, B, A, C, A, C
I just did these quickly… 1. A 2. B 3. C 4. B 5. A 6. C 7. A 8. C
For the first one, I think lower interest rates will stimulate economy? How does the government decrease GDP?
- A 2. B 3. C 4. B 5. B 6. B 7. A 8. A
Not so sure: 1 C 2 B 3 A 4 C 5 C 6 C 7 B 8 A
Correct Answers: 1 A 2 B 3 C 4 B 5 A 6 B 7 A 8 B No one got them all right. Nice try though!
Damil do you have the justifications for #1, 6 and 8?
- Which of the following statements about the demand and supply of money is most accurate? People who are: A) holding money when interest rates are lower will try to increase their money balances and, as a result, the supply of money increases. B) holding money when interest rates are higher will try to reduce their money balances and, as a result, the demand for money decreases. C) buying bonds to reduce their money balances will increase the demand for bonds with an associated increase in interest rates. Answer A ****Reasoning - Buying bonds would drive bond prices up and interest rates down. Selling bonds would have the opposite effect; driving bond prices down and interest rates up. When interest rates are lower, there is an excess demand for money. The supply of money is determined by the monetary authorities. 8) If households are holding larger real money balances than they desire, which of the following is least likely? A) The interest rate is higher than its equilibrium rate in the market for real money balances. B) The central bank must sell securities to absorb the excess money supply and establish equilibrium. C) The opportunity cost of holding money balances will decrease. Answer A ****Reasoning - If households’ real money balances are larger than they desire, the interest rate (opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their undesired excess cash to buy securities, bidding up securities prices and reducing the interest rate toward equilibrium. This market process does not require any action by the central bank. I’ll check Schweser again for the reasoning behind the answer for Question 1
Could you explain #5 I think its B and C are wrong options, so the answer is obviously A, but i dont get the concept… If the curve is upward sloping, then if the govt increses money supply (qty of money ) implies IR rises, which is not possible, cos govt would want to increase money supply by lowering interest rate…So it cannot be upward sloping If the curve is downword sloping, then during Infaltionary gap, the IR would be lower which generally do not happen…during infaltion IR are generally higher, so it cannot be downward sloping… Am I correct on these concepts…?
Could you explain #2 also, As per my understanding, if central bank decreases its target overnight interest rate, the country’s Infaltion rate shud decline…Hence C
For #2, increasing interest rates slows the economy which decreases inflation. Decreasing rates spurs investment and growth, but since this economy is already above potential GDP, only inflation will happen. For #5, I can’t remember the reasoning, but the money supply curve is independent of interest rates in the short run, hence why it’s vertical. Probably because it is controlled by the Fed.
is the answer for #8, A or? thanks, John
sbmart is correct. ****Reasoning behind answer for #5**** The money supply schedule is vertical because it is not affected by changes in the interest rate but is determined by the monetary authorities such as the Federal Reserve System (Fed) in the United States. ************Reasoning for #2*********** You should already know option C is incorrect because decreasing the overnight interest rate during an unsustainably rapid growth rate will not make the Inflation rate decline. Option A is incorrectly and sbmarti2 had it on point. Option is correct because decreasing the target overnight interest rate when the economy is already growing at an unsustainably rapid rate will cause the inflation rate to increase.
Yeah, answer for #8 is A. Sorry for the mix-up. Answer A ****Reasoning - If households’ real money balances are larger than they desire, the interest rate (opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their undesired excess cash to buy securities, bidding up securities prices and reducing the interest rate toward equilibrium. This market process does not require any action by the central bank. Thanks!
Hi guys can anyone explain #6 and is the correct answer B or A?? and why ? I don’t get the above reasoning