Monetary Policy
Multiple Choice Questions
After watching the Monetary Policy video lecture, consider the question(s) below. Then “submit” your response.
Question
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Question
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Question
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Question
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Question
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Question
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After watching the Monetary Policy video lecture, consider the question(s) below. Then “submit” your response.
Question
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Question
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Question
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Short Answer/Discussion Questions
After watching the Monetary Policy video lecture, consider the question(s) below. Then “submit” your response.
Question
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Suggested solution: The quantity theory of money suggests that if money supply increases in an economy, more money will chase the same amount of goods and services. This will force prices to increase. (Answers may vary.)
Question
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Suggested solution: Lowering interest rates in a period of weak aggregate demand stimulates higher levels of economic activity, and hence, a higher demand. Lower interest rates translate into lower borrowing costs and increased incentives for businesses to invest. Lower interest rates also make financing of consumer purchases easier which also increases demand. Lastly, by reducing savings returns, lower interest rates incent consumers to save less and purchase more. (Answers may vary.)
Question
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Suggested solution: A supply shock is a reduction in resources available to an economy caused by external events such as an oil embargo. Such a shock will lead to increased prices for a key resource (oil price inflation), and declining amounts of the commodity, which will reduce output, leading to fewer jobs. The typical monetary policy response to increased inflation is higher interest rates. This action will lead to a further reduction in the level of economic activity and will increase unemployment. Hence, in situations of such shocks, trying to fix one problem (inflation) by using monetary policy makes an already bad situation (jobs) worse. (Answers may vary.)