Question 16 (3 points) An expansionary monetary policy by the Fed should lead to
ID: 1174299 • Letter: Q
Question
Question 16 (3 points) An expansionary monetary policy by the Fed should lead to: Question 16 options:
A decrease in investment and a decrease in aggregate demand. Leave investment unchanged but decrease aggregate demand.
An increase in investment and an increase in aggregate demand.
An increase in investment and a decrease in aggregate demand.
Save Question 17 (3 points) Federal Reserve policy may have little impact on aggregate demand if: Question 17 options:
Exchange rates do not respond to a change in market interest rates.
Investment by firms fails to respond to lower interest rates.
Banks meet their reserve requirements.
People fail to spend the extra money they receive when the Fed cuts taxes.
Save Question 18 (3 points) A liquidity trap is said to exist when a change in monetary policy has no effect on:
Question 18 options:
The supply of government bonds.
The natural level of employment
. Aggregate supply.
Interest rates.
Save Question 19 (3 points)
Because of the problem of lags, monetary authorities should probably respond to conditions:
Question 19 options: Expected to exist in the future.
Immediately as they arise.
In the recent past.
Based on past statistics.
Explanation / Answer
(16). c. an increase in investment and an increase in aggregate demand
An expansionary monetary policy is a policy to increase money supply by reducing interest rates. In this way companies are encouraged to borrow and increase in investment leads to increase in employment therby increasing income and as a result aggregate demand also increases
(17). b. investment by firms fails to respond to lower interest rates
Interest rates are reduced to increase investment and ultimately it increase aggregate demand but sometimes due to liquidity trap investments fail to respond to low interest rates in such case Federal monetary policy have little impact on aggregate demand
(18). d. Interest rates
When change in money supply cannot change interest rate, liquidity trap is said to exist. In this situation monetary policy becomes ineffective because increase in money supply cannot increase spending as interest rate can't fall further
(19). a. expected to exist in the future
lag is a time period it takes to implement a policy action after an economic disturbance take place and once implemented time period it takes to have an effect on economy. The problem of lag suggests that monetary policies should not respond to statistical reports but to the conditions expected to exist in the future