Monetary Policy Questions and Answers

The following questions refer to the attached supply of money graph.

1. What does this model show?
An increase in interest rates
An increase in the money supply
A decline in investment spending
The Fed raising the discount rate

2. Which of the following actions of the Fed could cause the indicated result?
Buying government securities on the open market
Increasing the reserve requirement
Increasing the discount rate
Increasing the federal funds rate

3. If the reserve requirement before the shift was 10% and the Fed adjusted the reserve requirement to cause the shift, which of the following is a possible new value of the reserve requirement?
12.50%
10.25%
10%
9.75%

4. Which of the following is a result of the indicated shift?
A rightward shift of the aggregate demand curve
A leftward shift of the demand for investments curve
A decrease in the supply of money
A decline in Real GDP

5. Which of the following can be determined at the intersection of the Money Demand and Money Supply curves?
The rate of open market transactions
The equilibrium interest rate
The liquidity preference of financial institutions
The total government surplus of welfare

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Solution Summary

This solution answers five graph-based questions about monetary policy.