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Multiple Choice Questions: d) d) R d) θ (1−c) M θ) increase

The document contains multiple choice questions, short answer questions, and explanations of economic concepts. It discusses monetary policy tools like open market operations and reserve requirements. It also explains the relationship between money supply, interest rates, and money demand. Fiscal and monetary policy mixes are discussed. The effects of changes in government spending and taxes on aggregate output and components are analyzed using the IS-LM model.

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Helen To
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39 views3 pages

Multiple Choice Questions: d) d) R d) θ (1−c) M θ) increase

The document contains multiple choice questions, short answer questions, and explanations of economic concepts. It discusses monetary policy tools like open market operations and reserve requirements. It also explains the relationship between money supply, interest rates, and money demand. Fiscal and monetary policy mixes are discussed. The effects of changes in government spending and taxes on aggregate output and components are analyzed using the IS-LM model.

Uploaded by

Helen To
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Multiple Choice Questions

1. c 2. b 3. b 4. a 5. b
6. a 7. b 8. d 9. c 10. e
11. c 12. d 13. d 14. a 15. c
16. e 17. d 18. a 19. b 20. a
21. d 22. a 23. c 24. b 25. b

Short Questions
1. A central bank can implement expansionary monetary policy to reduce the
interest rate. For example, when the central bank buys bonds through open
market operation, the money supply increase leading to a decrease in interest
rate. It can also reduce the reserve deposit ratio to rise the money supply and
thus lower the interest rate too.

2.

The demand for central bank money ( H ¿¿ d )¿ consists of two parts. They are the
demand for currency by people (CU ¿¿ d )¿ and the demand for reserves by banks
( R¿¿ d ) ¿. As Rd =θ(1−c) M d , Rd rises when the reserve deposit ratio (θ) increase.
Therefore, the demand curve for central bank money will shift rightwards while
the equilibrium interest rate will also increase.

3(a). M d =M s
120 ( 0.28−i ) =3 0
i=3 %
' '
3(b). ( M s ) = ( M d ) =120( 0.28−1 %)=$ 32.4
4. LM relation is based on the equation M =Y ∙ L(i). In equilibrium, the real
P
money supply equals the real money demand, which depends on real income Y
and the interest rate i. It assumes that the central banks choose an interest rate
and adjust the money supply so as to achieve it. Therefore, the LM relation is a
simple horizontal line.

5. Policy mix is the combination of the use of monetary and fiscal policies.
Regarding the fiscal policy, a decrease in income tax tends to increase
consumption relative to investment. However, concerning the monetary policy,
a decrease in the interest rate affects investment more than consumption.
Although both expansionary policies above rise the output, they have different
effects on the composition of output.

6(a).

When the government spending decreases, the IS curve shifts leftwards from IS
to IS’. The output falls from Y to Y’ while the interest rate remains unchanged.
Due to the fact that investment depends positively on production Y and inversely
on interest rate i, investment falls as output falls.
6(b). Y =Z
Y =C + I + G
Y =c 0+ c 1(Y −T )+❑❑ b0 +b 1 Y −b2 í+G
Y −c 1 Y −b1 Y =c 0−c1 T +b 0−b 2 í+G
Y (1−c 1−b1 )=c 0−c 1 T + b0−b2 í+G
1
Y= (c −c T +b 0−b 2 í+ G)
1−c1 −b1 0 1
6(c). I =b 0+ b1 Y −b2 í
b1
¿ b0 + (c −c T +b 0−b2 í+ G)−b2 í
1−c1 −b1 0 1

d1
6(d). M =d 1 Y −d 2 í= (c −c T +b0 −b2 í+G)−d2 í
P 1−c 1−b 1 0 1
Change in real money supply
d ( M / P)
¿
dG
d1
¿
1−c 1−b 1

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