Deck 18: Monetary Policy

Question 1

Expansionary monetary policy occurs when:

A) a central bank acts to decrease the money supply in an effort to stimulate the economy.
B) Congress and the president increase taxes in an effort to stimulate the economy.
C) Congress and the president decrease taxes in an effort to stimulate the economy.
D) a central bank acts to increase the money supply in an effort to stimulate the economy.
E) a central bank acts to increase government spending in an effort to stimulate the economy.

Answer 1

a central bank acts to increase the money supply in an effort to stimulate the economy.

Question 2

If the interest rate on a loan is higher than the expected return from an investment:

A) a rational firm will take out a loan for the investment.
B) the Federal Reserve will conduct contractionary monetary policy.
C) a rational firm will not take out a loan for the investment.
D) the Federal Reserve will conduct expansionary monetary policy.
E) the government will conduct expansionary fiscal policy.

Answer 2

a rational firm will not take out a loan for the investment.

Question 3

Expansionary monetary policy makes the aggregate demand curve:

A) shift to the left.
B) become flatter.
C) become steeper.
D) shift to the right.
E) stay static.

Answer 3

shift to the right.

Question 4

Refer to the following figure to answer the next two questions:

According to the figure,if the economy started at full-employment output,expansionary monetary policy would cause real gross domestic product (GDP) to ______________ in the short run.

A) increase from Y₁ to Y₂
B) increase from Y₁ to Y₃
C) decrease from Y₂ to Y₁
D) decrease from Y₃ to Y₂
E) increase from Y₂ to Y₃

Question 5

Which of the following figures illustrates the effects of expansionary monetary policy on the loanable funds market?

A)
B)
C)
D)
E)

Question 6

Which of the following aggregate demand-aggregate supply models illustrates the short-run effects of expansionary monetary policy?

A)
B)
C)
D)
E)

Question 7

Expansionary monetary policy ____________ interest rates,which can be shown in the ______________________.

A) raises; loanable funds market
B) raises; aggregate demand-aggregate supply model
C) lowers; aggregate demand-aggregate supply model
D) lowers; loanable funds market
E) raises; money market

Question 8

From 1982 to 2008,the economy experienced only two recessions,and they were neither lengthy nor severe.This time period is known as:

A) the Great Depression.
B) the Great Recession.
C) the great expansion.
D) the great moderation.
E) the great economy.

Question 9

The two types of monetary policy are:

A) monetary and fiscal.
B) expansionary and contractionary.
C) countercyclical and procyclical.
D) positive and negative.
E) pro and con.

Question 10

The Federal Reserve generally uses ___________________ to implement monetary policy.

A) reserve requirements
B) open market operations
C) fiscal policy
D) discount policies
E) government spending and taxes

Question 11

Expansionary monetary policy:

A) lowers interest rates, causing aggregate demand to shift to the right.
B) lowers interest rates, causing aggregate demand to shift to the left.
C) raises interest rates, causing aggregate demand to shift to the right.
D) raises interest rates, causing aggregate demand to shift to the left.
E) lowers interest rates, causing short-run aggregate supply to shift to the right.

Question 12

Holding all else constant,in the short run,an increase in the money supply can cause:

A) an increase in unemployment.
B) a lower rate of inflation.
C) a decrease in the price level.
D) a decrease in real gross domestic product (GDP).
E) an increase in real GDP.

Question 13

Central banks can use monetary policy to:

A) turn prices from inflexible to flexible.
B) force private banks to lend out reserves.
C) make it easier for people and businesses to borrow.
D) print money.
E) steer the economy out of overexpansion.

Question 14

In the short run,some prices are inflexible.Most often,the prices that are inflexible are:

A) output prices.
B) energy prices.
C) food prices.
D) product prices.
E) wages for workers.

Question 15

Refer to the following figure to answer the next two questions:

According to the figure,expansionary monetary policy will cause an economy that is initially at full-employment output to go from equilibrium ______ to equilibrium ______ in the short run.

A) A; C
B) A; B
C) A; D
D) C; B
E) C; D

Question 16

When the Fed buys bonds from financial institutions,new money moves directly:

A) out of the loanable funds market.
B) into the hands of consumers.
C) into the loanable funds market.
D) out of the hands of consumers.
E) into short-run aggregate supply.

Question 17

In the short run,expansionary monetary policy ___________ real gross domestic product (GDP),___________ unemployment,and ___________ the price level.

A) raises; lowers; raises
B) raises; raises; raises
C) lowers; lowers; raises
D) lowers; lowers; lowers
E) raises; lowers; lowers

Question 18

Central banks can use monetary policy to:

A) reduce interest rates.
B) decrease taxes.
C) increase government spending.
D) steer the economy out of every recession.
E) prevent recessions.

Question 19

__________________ is when a central bank acts to increase the money supply in an effort to stimulate the economy.

A) Expansionary monetary policy
B) Expansionary fiscal policy
C) Contractionary monetary policy
D) Contractionary fiscal policy
E) Countercyclical monetary policy

Question 20

Which of the following best describes how expansionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

A) Expansionary monetary policy directly pulls money out of the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
B) Expansionary monetary policy directly puts money into the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
C) Expansionary monetary policy directly puts money into the loanable funds market.This raises the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
D) Expansionary monetary policy directly puts money into the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the left.
E) Expansionary monetary policy directly pulls money out of the loanable funds market.This raises the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the left.

Question 21

_______________________ would be helped by unexpected inflation.

A) Someone who lent money out at a fixed interest rate
B) Someone who signed a two-year contract at a fixed wage
C) Someone who borrowed money at a fixed interest rate
D) A worker whose wage increases with expected inflation
E) Elderly individuals on a fixed income

Question 22

According to the Fisher equation,if a bank extends a loan for 3% and the inflation rate ends up being 2%:

A) the nominal interest rate is 1%.
B) the real interest rate is 1%.
C) the nominal interest rate is -1%.
D) the real interest rate is -1%.
E) the nominal interest rate is 5%.

Question 23

As the prices of goods and services decrease,the value of money:

A) stays the same.
B) increases.
C) decreases.
D) increases initially and then decreases.
E) decreases initially and then increases.

Question 24

If the interest rate on a loan is lower than the expected return from an investment:

A) a rational firm will take out a loan for the investment.
B) the Federal Reserve will conduct contractionary monetary policy.
C) a rational firm will not take out a loan for the investment.
D) the Federal Reserve will conduct expansionary monetary policy.
E) the government will conduct expansionary fiscal policy.

Question 25

Contractionary monetary policy:

A) lowers interest rates, causing aggregate demand to shift to the right.
B) lowers interest rates, causing aggregate demand to shift to the left.
C) raises interest rates, causing aggregate demand to shift to the right.
D) raises interest rates, causing aggregate demand to shift to the left.
E) lowers interest rates, causing short-run aggregate supply to shift to the right.

Question 26

The Federal Reserve actively worked to keep the federal funds rate at nearly _________ for several years following the Great Recession.

A) 2.5%
B) 25%
C) 7%
D) 0%
E) 5%

Question 27

What did the Federal Reserve do in response to the Great Recession?

A) It conducted open market purchases to drive up interest rates.
B) It conducted open market selling to drive up interest rates.
C) It conducted open market purchases to drive down interest rates.
D) It conducted open market selling to drive down interest rates.
E) It decreased the reserve requirements to drive up interest rates.

Question 28

Changes in the quantity of money lead to real changes in the economy.If this is the case,why would the central bank ever stop increasing the money supply?

A) Although there is a short-run incentive to increase the money supply, these effects wear off in the long run as prices adjust and then drive up the value of money.
B) The government has rules in place on the maximum amount the money supply can be increased in a given fiscal year.
C) Although there is a short-run incentive to increase the money supply, these effects wear off in the long run as prices adjust and then drive down the value of money.
D) Increasing the money supply is not a politically popular action and may lead to leaders of the central bank not getting reelected.
E) The short-run benefits are outweighed by the short-run costs of increases in the money supply.

Question 29

Contractionary monetary policy occurs when:

A) a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly.
B) Congress and the president increase taxes in an effort to control an economy that is expanding too quickly.
C) Congress and the president decrease taxes in an effort to stimulate the economy.
D) a central bank acts to increase the money supply in an effort to stimulate the economy.
E) a central bank acts to increase government spending in an effort to stimulate the economy.

Question 30

When the Fed sells bonds to financial institutions,new money moves directly:

A) out of the loanable funds market.
B) into the hands of consumers.
C) into the loanable funds market.
D) out of the hands of consumers.
E) into short-run aggregate supply.

Question 31

Contractionary monetary policy makes the aggregate demand curve:

A) shift to the left.
B) become flatter.
C) become steeper.
D) shift to the right.
E) remain static.

Question 32

According to the Fisher equation,if a bank extends a loan for 3% and the inflation rate ends up being 5%:

A) the nominal interest rate is 2%.
B) the real interest rate is 2%.
C) the nominal interest rate is -2%.
D) the real interest rate is -2%.
E) the nominal interest rate is 8%.

Question 33

_______________________ would be hurt by unexpected inflation.

A) Someone who borrowed money at a fixed interest rate
B) A firm who hired a worker on a two-year wage contract
C) A worker who signed a two-year wage contract
D) A worker whose wage increases with inflation
E) A firm that purchased inputs with a two-year contract

Question 34

_______________________ is when a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly.

A) Expansionary monetary policy
B) Expansionary fiscal policy
C) Contractionary monetary policy
D) Contractionary fiscal policy
E) Countercyclical monetary policy

Question 35

As the prices of goods and services increase,the value of money:

A) stays the same.
B) increases.
C) decreases.
D) increases initially and then decreases.
E) decreases initially and then increases.

Question 36

Injecting new money into the economy eventually causes:

A) a recession.
B) deflation.
C) stagflation.
D) unemployment.
E) inflation.

Question 37

_______________________ would be hurt by unexpected inflation.

A) Someone who lent money out at a fixed interest rate
B) A firm that hired a worker on a two-year wage contract
C) Someone who borrowed money at a fixed interest rate
D) A worker whose wage increases with inflation
E) A firm that purchased inputs with a two-year contract

Question 38

Holding all else constant,in the short run,a decrease in the money supply can cause:

A) a decrease in unemployment.
B) a high rate of inflation.
C) an increase in the price level.
D) a decrease in real gross domestic product (GDP).
E) an increase in real GDP.

Question 39

The Federal Reserve's response to the Great Recession was an attempt to:

A) increase aggregate demand.
B) decrease aggregate demand.
C) decrease the price level.
D) increase short-run aggregate supply.
E) decrease short-run aggregate supply.

Question 40

Expansionary monetary policy can have immediate real short-run effects; initially,no prices have adjusted.But as prices adjust in the long run:

A) the real impact of monetary policy is multiplied.
B) the real impact of monetary policy is negative.
C) the real impact of monetary policy is cut in half.
D) the real impact of monetary policy dissipates completely.
E) the real impact of monetary policy is unknown.

Question 41

Refer to the following figure to answer the next two questions:

According to the figure,if the economy started at full-employment output,contractionary monetary policy would cause real gross domestic product (GDP) to __________ in the short run.

A) increase from Y1 to Y₂
B) increase from Y₁ to Y₃
C) decrease from Y₂ to Y₁
D) decrease from Y₃ to Y₂
E) increase from Y₂ to Y₃

Question 42

Which of the following best explains how the money supply changed during the early part of the Great Depression?

A) In the early part of the Great Depression, the money supply increased due to uncertainty and unemployment.
B) In the early part of the Great Depression, the money supply decreased due to individuals withdrawing funds and holding more currency.
C) In the early part of the Great Depression, the money supply increased due to individuals withdrawing funds and holding more currency.
D) In the early part of the Great Depression, the money supply increased due to huge bond-buying programs by the Federal Reserve.
E) In the early part of the Great Depression, the money supply decreased due to huge bond-buying programs by the Federal Reserve.

Question 43

During a financial crisis hit hard by bank failures,the money supply:

A) decreases because people start putting money into savings accounts.
B) increases because people start putting money into savings accounts.
C) increases because people start withdrawing their money from banks.
D) decreases because people start withdrawing their money from banks.
E) increases because people spend more instead of saving more.

Question 44

What will economists today likely state should have been done to limit the severity of the Great Depression?

A) The Fed should have done more to decrease the money supply at the onset.
B) The Fed should have done more to decrease the inflation at the onset.
C) The Fed should have reacted more quickly to decrease the money supply.
D) The Fed should have waited longer before trying to raise the money supply.
E) The Fed should have done more to offset the decline in the money supply at the onset.

Question 45

In the short run,contractionary monetary policy _________ real gross domestic product (GDP),_________ unemployment,and _________ the price level.

A) raises; lowers; raises
B) raises; raises; raises
C) lowers; lowers; raises
D) lowers; raises; lowers
E) raises; lowers; lowers

Question 46

By shifting aggregate demand,monetary policy can affect __________ and __________.

A) real gross domestic product (GDP); unemployment
B) real GDP; interest rates
C) interest rates; unemployment
D) money supply; real GDP
E) money supply; unemployment

Question 47

Which of the following explains why resource prices are often the slowest prices to adjust?

A) Resource prices are not affected by inflation.
B) Resource prices are often set by lengthy contracts.
C) Resource prices are often set by governments.
D) Resource prices are not reported in the consumer price index (CPI).
E) Resource prices are all tied to inflation.

Question 48

Which of the following explains why the money supply is not completely controlled by the Federal Reserve?

A) The actions of private individuals and banks can increase or decrease the money supply via the money multiplier.
B) The president can issue an executive order that can increase or decrease the money supply.
C) The treasury has say over when the Federal Reserve can increase or decrease the money supply.
D) The actions of private individuals and banks can increase or decrease the money supply via the spending multiplier.
E) Congress has authority to veto any monetary policy enacted by the Federal Reserve.

Question 49

Which of the following best describes how contractionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

A) Contractionary monetary policy directly pulls money out of the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
B) Contractionary monetary policy directly puts money into the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
C) Contractionary monetary policy directly puts money into the loanable funds market.This raises the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the right.
D) Contractionary monetary policy directly puts money into the loanable funds market.This lowers the interest rate, which provides a larger incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the left.
E) Contractionary monetary policy directly pulls money out of the loanable funds market.This raises the interest rate, which provides a lesser incentive for firms to invest.Investment is a component of aggregate demand, so this shifts aggregate demand to the left.

Question 50

Which of the following figures illustrates the effects of contractionary monetary policy on the loanable funds market?

A)
B)
C)
D)
E)

Question 51

Printing more paper money doesn't affect the economy's long-run productivity or its ability to produce; these outcomes are determined by:

A) resources only.
B) technology only.
C) institutions only.
D) resources, technology, and institutions.
E) resources and technology only.

Question 52

Monetary neutrality is:

A) when a central bank acts to increase the money supply.
B) when a central bank acts to decrease the money supply.
C) the short-run inverse relationship between inflation and unemployment rates.
D) the combination of high unemployment and high inflation.
E) the idea that the money supply does not affect real economic variables.

Question 53

Which of the following aggregate demand-aggregate supply models illustrates the short-run effects of contractionary monetary policy?

A)
B)
C)
D)
E)

Question 54

Refer to the following figure to answer the next two questions:

According to the figure,contractionary monetary policy will cause an economy that is initially at full-employment output to go from equilibrium __________ to equilibrium __________ in the short run.

A) A; C
B) A; B
C) A; D
D) C; B
E) C; D

Question 55

The idea that the money supply does not affect real economic variables is called:

A) adaptive expectations theory.
B) monetary neutrality.
C) the Phillips curve.
D) contractionary monetary policy.
E) expansionary monetary policy.

Question 56

Contractionary monetary policy _________ interest rates,which can be shown in the _____________________.

A) raises; loanable funds market
B) raises; aggregate demand-aggregate supply model
C) lowers; aggregate demand-aggregate supply model
D) lowers; loanable funds market
E) raises; money market

Question 57

An active monetary policy that attempts to smooth out the business cycle would involve conducting __________ monetary policy during recessions and __________ monetary policy during expansions.

A) contractionary; contractionary
B) expansionary; expansionary
C) contractionary; expansionary
D) expansionary; contractionary
E) countercyclical; expansionary

Question 58

Which of the following statements regarding the relationship between input prices and output prices is true?

A) Input prices adjust slower than output prices.
B) Output prices adjust slower than input prices
C) Input prices and output prices adjust at the same rate.
D) Input prices adjust before output prices.
E) Input prices and output prices adjust at random times.

Question 59

Expectations:

A) have no effect on monetary policy.
B) have no effect on consumers' spending habits.
C) play a role in fiscal policy but not in monetary policy.
D) can dampen the effects of monetary policy.
E) are easily studied in economics.

Question 60

According to the theory of monetary neutrality,in the long run:

A) monetary policy is always more effective than fiscal policy.
B) fiscal policy is always more effective than monetary policy.
C) expansionary monetary policy is more effective than contractionary monetary policy.
D) contractionary monetary policy is more effective than expansionary monetary policy.
E) there is a lack of real economic effects from monetary policy.

Question 61

A cost-of-living adjustment clause:

A) is required in all government employee contracts.
B) forces an employer to increase wages at the same rate of inflation.
C) states that no raise can be less than the rate of inflation.
D) is not allowed for private employees.
E) forces an employer to increase wages at a rate higher than inflation.

Question 62

The widespread problems in financial markets during the Great Recession negatively affected key institutions in the macroeconomy.In addition,the financial regulations that were put in place restricted banks' ability to lend at levels equal to those in effect prior to 2008.This resulted in:

A) a shift leftward of the aggregate demand curve.
B) a shift leftward of the long-run aggregate supply curve.
C) a shift rightward of the long-run aggregate supply curve.
D) a shift rightward of the aggregate demand curve.
E) a shift rightward of the short-run aggregate supply curve.

Question 63

When both long-run and short-run aggregate supply shift leftward:

A) monetary policy is more likely to restore the economy to its pre-recession conditions.
B) inflation is not a concern.
C) the natural rate of unemployment decreases.
D) monetary policy can have no effect on the economy even in the short run.
E) monetary policy is much less likely to restore the economy to its pre-recession conditions.

Question 64

Refer to the following figure to answer the next two questions:

According to the figure,contractionary monetary policy starting at full-employment equilibrium will go from point _________ to point _________ in the short run and then to point _________ in the long run.

A) A; D; A
B) C; B; A
C) A; D; C
D) C; D; C
E) C; D; A

Question 65

Which of the following statements best describes monetary policy during the Great Recession?

A) During the wake of the Great Recession, there were significant expansionary monetary policy interventions.
B) During the wake of the Great Recession, there were significant contractionary monetary policy interventions.
C) During the wake of the Great Recession, there was a lack of monetary policy interventions.
D) Monetary policy during the Great Recession was completely unexpected.
E) Monetary policy during the Great Recession had no impact in the short run.

Question 66

Refer to the following figure to answer the next three questions:

According to the figure,if the policy is fully expected,expansionary monetary policy will cause an economy initially in full-employment equilibrium to see real gross domestic product (GDP):

A) increase from Y₂ to Y₃.
B) first increase from Y₂ to Y₃ but then decrease back to Y₂.
C) stay at Y₂.
D) decrease from Y₂ to Y₁.
E) increase from Y₁ to Y₂.

Question 67

One explanation as to why monetary policy did not have the intended effects on the economy during the Great Recession is that:

A) part of the recession was caused by a rightward shift in aggregate supply.
B) monetary policy is ineffective in the short run.
C) the monetary policy conducted during the Great Recession was mostly unexpected.
D) part of the recession was caused by a leftward shift in aggregate supply.
E) focus was on fiscal policy during the Great Recession.

Question 68

Unexpected inflation harms workers and other resource suppliers who have _________ prices in the _________ run.

A) flexible; short
B) fixed; short
C) fixed; long
D) Flexible; short
E) flexible; medium

Question 69

Monetary policy has real effects only when:

A) all prices are flexible.
B) inflation is expected.
C) some prices are sticky.
D) the economy is at full-employment output.
E) conducted by Congress.

Question 70

Refer to the following figure to answer the next three questions:

According to the figure,if the policy is fully expected,expansionary monetary policy will cause an economy initially in full-employment equilibrium to move from:

A) point A to B.
B) point A to B and back to A.
C) point A to B to C.
D) point A to C and back to A.
E) point A to C.

Question 71

Economists who discount the short-run expansionary effects of monetary policy focus on the problems of:

A) inflation.
B) government intervention.
C) fiscal policy.
D) unemployment.
E) disinflation.

Question 72

When an employer is forced to increase wages at the same rate of inflation:

A) the worker is receiving a cost-of-living adjustment.
B) the economy is experiencing stagflation.
C) the economy is experiencing hyperinflation.
D) the economy is experiencing disinflation.
E) the effects of expansionary monetary policy are amplified.

Question 73

If inflation is expected:

A) the effects of monetary policy will be amplified.
B) prices become sticky.
C) the effects of monetary policy will be delayed.
D) prices are not sticky.
E) the effects of fiscal policy will be amplified.

Question 74

When inflation is expected,the real effect on the economy is:

A) amplified.
B) positive.
C) negative.
D) limited.
E) delayed.

Question 75

Which of the following explains expansionary monetary policy in the long run?

A) Expansionary monetary policy shifts aggregate demand to the left, moving the economy from long-run equilibrium to a short-run equilibrium with a lower price level and a lower level of real gross domestic product (GDP).In the long run, as resource prices fall, the short-run aggregate supply curve shifts to the right, bringing the economy back to a long-run equilibrium where no real changes to GDP have occurred.
B) Expansionary monetary policy shifts aggregate demand to the right, moving the economy from long-run equilibrium to a short-run equilibrium with a higher price level and a higher level of real GDP.In the long run, as resource prices rise, the aggregate demand curve shifts back to the left, bringing the economy back to a long-run equilibrium where no real changes to GDP have occurred.
C) Expansionary monetary policy shifts aggregate demand to the right, moving the economy from long-run equilibrium to a short-run equilibrium with a higher price level and a higher level of real GDP.In the long run, as resource prices rise, the short-run aggregate supply curve shifts to the left, bringing the economy back to a long-run equilibrium where no real changes to GDP have occurred.
D) Expansionary monetary policy shifts aggregate demand to the right, moving the economy from long-run equilibrium to a short-run equilibrium with a higher price level and a higher level of real GDP.In the long run, as resource prices fall, the short-run aggregate supply curve shifts to the right as well, causing the economy to expand.
E) Expansionary monetary policy shifts aggregate demand to the left, moving the economy from long-run equilibrium to a short-run equilibrium with a lower price level and a lower level of real GDP.In the long run, as resource prices rise, the short-run aggregate supply curve shifts to the left, causing the economy to contract.

Question 76

Refer to the following figure to answer the next two questions:

According to the figure,expansionary monetary policy starting at full-employment equilibrium will go from point _________ to point _________ in the short run and then to point _________ in the long run.

A) A; B; A
B) A; D; A
C) A; D; C
D) A; B; C
E) C; B; A

Question 77

When supply shifts cause a downturn in the economy:

A) monetary policy is more likely to restore the economy to its pre-recession conditions.
B) inflation is not a concern.
C) the natural rate of unemployment decreases.
D) monetary policy can have no effect on the economy even in the short run.
E) monetary policy is much less likely to restore the economy to its pre-recession conditions.

Question 78

To avoid the negative effects of unexpected inflation,workers have an incentive to:

A) lock in their current wages for years.
B) stay unemployed during years of inflation.
C) never negotiate wage contracts.
D) change jobs regularly.
E) expect a certain level of inflation and to negotiate their contracts accordingly.

Question 79

Refer to the following figure to answer the next three questions:

According to the figure,if the policy is fully expected,expansionary monetary policy will cause an economy initially in full-employment equilibrium to see its price level:

A) increase from P₁ to P₃.
B) increase from P₁ to P₂.
C) initially increase from P₁ to P₂ and over time increase to P₃.
D) decrease from P₃ to P₂.
E) decrease from P₃ to P₁.

Question 80

Which of the following explains contractionary monetary policy in the long run?

A) Contractionary monetary policy shifts aggregate demand to the left, moving the economy from long-run equilibrium to a short-run equilibrium with a lower price level and a lower level of real gross domestic product (GDP).In the long run, as resource prices fall, the short-run aggregate supply curve shifts to the right, bringing the economy back to a long-run equilibrium, where no real changes to GDP have occurred.
B) Contractionary monetary policy shifts aggregate demand to the right, moving the economy from long-run equilibrium to a short-run equilibrium with a higher price level and a higher level of real GDP.In the long run, as resource prices rise, the aggregate demand curve shifts back to the left, bringing the economy back to a long-run equilibrium, where no real changes to GDP have occurred.
C) Contractionary monetary policy shifts aggregate demand to the right, moving the economy from long-run equilibrium to a short-run equilibrium with a higher price level and a higher level of real GDP.In the long run, as resource prices rise, the short-run aggregate supply curve shifts to the left, bringing the economy back to a long-run equilibrium, where no real changes to GDP have occurred.
D) Contractionary monetary policy shifts aggregate demand to the right, moving the economy from long-run equilibrium to a short-run equilibrium with a higher price level and a higher level of real GDP.In the long run, as resource prices fall, the short-run aggregate supply curve shifts to the right as well, causing the economy to expand.
E) Contractionary monetary policy shifts aggregate demand to the left, moving the economy from long-run equilibrium to a short-run equilibrium with a lower price level and a lower level of real GDP.In the long run, as resource prices rise, the short-run aggregate supply curve shifts to the left, causing the economy to contract.