Question

5) What would best be considered the ultimate consequences of a liquidity trap as described in Keynesian theory? a) Bonds would be hoarded instead of money leading to ever higher interest rates b) There would be a massive shortage of money and tremendous demand for bonds, regardless of how high interest rates are. o) There would be universal refusal of money leading to a reversion back to the barter system. d) Money would be hoarded instead of bonds regardless of how low interest rates are 6) What is the major difference between depository and nondepository financial intermediaries and how is this difference recorded on their balance sheets? a) Depository financial intermediaries must hold cash reserves against their liabilities resulting in an account that is recorded on their liability side of the balance sheet, while nondepository financial intermediaries do not have this requirement b) Nondepository financial intermediaries must hold cash reserves against their liabilities resulting in an account that is recorded on their liability side of the balance sheet, while depository financial intermediaries do not have this requirement c) Depository financial intermediaries must hold cash reserves against their assets resulting in an account that is recorded on their assets side of the balance sheet, while nondepository financial intermediaries do not have this requirement. d) Nondepository financial intermediaries must hold cash reserves against their assets resulting in an account that is recorded on their assets side of the balance sheet, while depository financial intermediaries do not have this requirement. 7) An exchange rate policy which pegs a country's currency is know as a(n) a) Managed floating exchange rate policy b) Cross-Currency exchange rate policy. c) Floating exchange rate policy d) Fixed exchange rate policy 8) When the slope of the LM curve is flatter, Monetary Policy is typically slope of the IS curve is steeper, Monetary Policy is typically When the a) less effective; more effective b) more effective; less effective c) less effective; less effective d) more effective; more effective 9) What would be the multiplier effect on output if investment spending were to decrease by $250 Billion and the marginal propensity to consume is 0.32

Answer 1

Answer:

5. Option D.

Explanation: A liquidity trap is a situation where the interest rate is low and the saving rate is high. It is a condition where people try to save more money. As the interest rate is low hoarding bonds will incur a loss to the general public hence the people try to depart from the bonds and save more and more of money. Therefore option D is the current answer.

6. Option D.

7. Option D.

Explanation: A fixed exchange rate policy is sometimes referred to as the pegged exchange rate policy. Under this policy, the country's exchange rate is either fixed or pegged against the value of another single currency or group of other currencies or any other measure of value. Hence option D is the right answer.

8. Option D.

Explanation: A monetary policy is more effective when the LM curve is steeper as this indicates demand for money to be perfectly interest-inelastic. So when the LM curve is flatter, the demand for money is perfectly interest-elastic. On the other hand, when the IS curve, is flat the monetary policy is more effective. The correct answer is option D.