Econowaugh AP: 2012 Macro Multiple Choice (Monetary Policy)

2012 Macro Multiple Choice (Monetary Policy)

Monetary Policy Cheat Sheet here.

Answer - (D)

Transactions Demand

On a daily basis people need money on hand for the things that they routinely buy. You have to get a haircut or stop by the store on the way home from work to pick up some milk. You have transactions that you need to conduct, and therefore you have a demand for money. The transactions demand for money is using money as a medium of exchange. Notice in the graph below that the Transactions Demand for Money (DMT) is denoted as a vertical line when graphed against the interest rate. The demand for money as a medium of exchange is independent of the interest rate, because when you are on your way home from work and need to pick up milk, the interest rate does not affect how much milk you buy.

Answer - (C)

If interest rates increase, then citizens will get more money to have their cash in the bank. They will be paid more to keep their cash in the bank. In essence their opportunity cost of holding cash in their pockets has increased. They will hold less cash in their pockets if banks pay them to deposit it in the bank. How many more times can I say it????

Answer - (D)

From the cheat sheet -

Answer - (C)

Let me say tis another way - a decrease in inflationary expectations = reducing the price level, thus reducing AD or RGDP.

So, what will reduce AD/RGDP

(A) decrease in MPS = increase in MPC, therefore people spend more and increase AD

(B) decrease in imports means an increase in exports = AD increases

(C) decrease in MS means an decrease in investment = AD decrease

(D) increase in deficit means increase in government spending = AD increase

(E) increase in the price of raw materials is an increase in AS = Cost push inflation

Answer - (E)

Answer - (C)

Economies operating below full-employment means that the economy is in recession. The FED would want to have an expansionary policy.

Answer - (B)

Answer - (C)

From the cheat sheet.

Answer - (A)

If investment is more responsive it means that as the money supply is increased and nominal interest rates fall, then investment will be stimulated to higher levels and therefore RGDP increases more.