- When does the value of the spending multiplier decrease?
A. When taxes are reduced
B. When imports decline
C. When exports decline
D. When the marginal propensity to save increases
E. When government spending increases
- When would the Fed implement a restrictive monetary policy?
A. During low inflation
B. During high unemployment
C. During high inflation
D. When aggregate demand is low
E. During a budget deficit
- Which one of the following is a part of M1?
A. Gold
B. Silver
C. Savings accounts
D. Checkable deposits
E. Certificates of deposits
10. An increase in the money supply would lead to which of the following?
A. Lower interest rates
B. A recession
C. Higher government spending
D. Higher interest rates
E. An increased reserve requirement
Answers to Review Questions
- D. Selling government bonds is an example of an open-market activity. Open-market operations are designed to
control the money supply through the banking system. When the Fed decides to sell open-market securities, it is
decreasing the money supply; when it buys securities, it is increasing the money supply.
- D. Lowering the discount rate encourages banks to offer a more consumer-friendly interest rate on loans. When
interest rates decrease, consumers increase their demand for money. The Fed hopes that the decrease in interest
rates leads to an increase in consumption.
- A.Increasing the money supply helps the economy achieve full employment by encouraging consumers to
increase spending.
- A.High interest rates would weaken the value of the spending multiplier because it would give consumers a
negative incentive to spend money. When interest rates are high, consumers are discouraged from spending
money, thereby reducing the value of the spending multiplier.
- C.To fight a recession, the Fed would buy government bonds. The purchase of government bonds increases the
money supply, lowers interest rates, and stimulates consumption.
- D. The Fed’s role is to control the money creation process. The money supply is an area that can help the
economy pull out of a recession or slow down an increasing price level.
Monetary Policy
