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Chapter 26: Problem 4

Assume the demand for money curve is fixed and the Fed decreases the money supply. The result is a temporary a. excess quantity of money demanded. b. excess quantity of money supplied. c. increase in the price of bonds. d. increase in the demand for bonds.

Short Answer

Expert verified
The correct answer is \(a\). When the Fed decreases the money supply and the demand for money curve is fixed, it results in a temporary excess quantity of money demanded.

Step by step solution

01

Understanding what happens when supply decreases

The basis of this question lies in understanding the basic principle of economics - the law of demand and supply. According to this principle, when supply decreases while demand stays the same, there is an excess demand for money in the economy. That is, people want more money than there is available.
02

Applying the Principle of Supply and Demand to the Options

With the background knowledge that a decrease in supply with constant demand leads to more demand than supply, the options can be evaluated. Since we have a situation of excess demand for money, we can directly conclude that option 'a', that is, there will be a temporary excess quantity of money demanded, is the correct answer.
03

Validate the Answer by Contradicting other Options

Further solidifying the choice, one can look into the other options. If there's a decrease in money supply, there won't be an excess supply of money (option 'b'). As for options 'c' and 'd', the price and demand for bonds are a separate concern which is affected by interest rates and not directly tied to the supply of money in this context. Hence, they can be eliminated. So, the correct answer is 'a'. When there is a decrease in supply of money with the demand for money kept the same, a temporary excess quantity of money is demanded.

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Most popular questions from this chapter

A decrease in the interest rate, other things being equal, causes a (an) a. upward movement along the demand curve for money. b. downward movement along the demand curve for money. c. rightward shift of the demand curve for money. d. leftward shift of the demand curve for money.

Using the aggregate supply and demand model, assume the economy is in equilibrium on the intermediate portion of the aggregate supply curve. A decrease in the money supply will decrease the price level and a. lower both the interest rate and real GDP. b. raise both the interest rate and real GDP. c. lower the interest rate and raise real GDP. d. raise the interest rate and lower real GDP.

Assume the demand for money curve is fixed and the Fed increases the money supply. The result is that the price of bonds a. rises. b. remains unchanged. c. falls. d. None of the above occurs.

The monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on the a. indirect impact of changes on the interest rate. b. indirect impact of changes on profit expectations. c. direct impact of changes in fiscal policy on aggregate demand. d. direct impact of changes in the money supply on aggregate demand.

Based on the equation of exchange, the money supply in the economy is calculated as a. \(M=V / P Q\) b. \(M=V(P Q)\) c. \(M V=P Q\) \(\mathrm{d} . M=P Q-V\)
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