BR17B: Bridge: Monetary Policy
Question 1
Which of the following is an example of expansionary monetary policy?
A. Congress passing a new government stimulus package.
B. The Fed raising the discount rate for member banks.
C. The Fed increasing the money supply to push interest rates lower.
D. The president signing an executive order to raise the minimum wage of government employees.
Hint
An expansionary monetary policy stimulates output by increasing aggregate demand.Answer
C. The Fed increasing the money supply to push interest rates lower. The Federal Reserve is the body that conducts monetary policy. Lower interest rates encourage spending, stimulating increased output.Question 2
If the economy is experiencing high rates of inflation due to a new housing bubble, what effects would an expansionary monetary policy have on the economy?
A. It would push inflation still higher and increase unemployment.
B. It would reduce both inflation and unemployment.
C. It would push inflation still higher and reduce unemployment.
D. It would reduce inflation and increase unemployment.
Hint
Through an expansionary monetary policy, the central bank increases the money supply and lowers interest rates, thereby increasing aggregate demand.Answer
C. It would push inflation still higher and reduce unemployment. An expansionary monetary policy will shift the aggregate demand curve to the right, putting upward pressure on the price level and lowering unemployment. If inflation is already high, it will push inflation still higher.Question 3
Suppose that the economy is currently below its long-run equilibrium output. Which of the following is an example of monetary policy that can move the economy back toward full employment equilibrium?
A. Decreasing income taxes to encourage more spending and investment.
B. Reducing the money supply to push interest rates higher, encouraging more saving.
C. Increasing the money supply to reduce interest rates, encouraging more spending and investment.
D. Raising income taxes to help pay off government debt.
Hint
Monetary policy encompasses actions taken by the Federal Reserve to manage the money supply and adjust interest rates.Fiscal policy refers to changes in taxes and spending at the federal level to influence the economy.
Answer
C. Increasing the money supply to reduce interest rates, encouraging more spending and investment. An expansionary monetary policy, by lowering interest rates, stimulates investment and consumption expenditure. By increasing aggregate demand, such a policy can help move the economy back toward full employment output.Question 4
In which situation would contractionary monetary policy be most appropriate?
A. Businesses worry that shoppers are being very cautious about their spending because they are concerned about job security.
B. A crisis overseas has led to a spike in oil prices, causing the prices of gasoline and other goods to increase.
C. Consumer confidence is very strong, leading to a record holiday shopping season, despite fewer discounts being offered.
D. The economy has been in a long recession, but signs of improvement are starting to appear.
Hint
The Federal Reserve implements contractionary monetary policy to combat inflation.Answer
C. Consumer confidence is very strong, leading to a record holiday shopping season, despite fewer discounts being offered. Higher consumer spending, encouraged by high consumer confidence and demonstrated by record holiday shopping, typically presages higher inflation. To prevent an inflationary rise in prices, the Federal Reserve may raise interest rates to discourage spending.Question 5
Which of the following scenarios would make monetary policy the most difficult to address?
A. A booming housing market that causes inflation to rise.
B. A rise in unemployment that causes consumers to spend less.
C. A reduction in business confidence that leads to a reduction in investment.
D. A worldwide spike in oil prices, resulting in higher production costs.