Chapter 27.3

Question 1

When there is an excess demand for money balances, monetary equilibrium is established by a process that involves
1) movement down the money demand function;
2) interest rates falling;
3) the price of bonds falling.
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 2 and 3

Answer 1

C

Question 2

Consider a money market in which there is an excess supply of money at the prevailing interest rate. The likely response is
A) the corresponding excess supply for bonds will cause the price of bonds to increase, and the interest rate to fall, until the quantity demanded of money equals the quantity supplied of money.
B) the corresponding excess demand for bonds will cause the price of bonds to increase, and the interest rate to fall, until the quantity demanded of money equals the quantity supplied of money.
C) the money supply curve will shift to the left until the demand for money equals the supply.
D) the money supply curve will shift to the right until the demand for money equals the supply.
E) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply.

Answer 2

B

Question 3

Consider a money market in which there is an excess demand for money at the prevailing interest rate. The likely response is ________ until the quantity demanded of money equals the quantity supplied of money.
A) the corresponding excess demand of bonds will cause the price of bonds to decrease and the interest rate to rise
B) the money supply curve will shift to the left
C) the money supply curve will shift to the right
D) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall
E) the corresponding excess supply of bonds will cause the price of bonds to decrease and the interest rate to rise

Answer 3

E

Question 4

When there is an excess supply of money, monetary equilibrium is restored through 
A) interest rates rising.
B) individuals attempting to sell bonds.
C) the price of bonds falling.
D) the price of bonds increasing.
E) the price level falling.

Answer 4

D

Question 5

Monetary equilibrium occurs when the
A) growth in the money supply is zero.
B) existing supply of money is willingly held by households and firms in the economy at the current rate of interest.
C) nominal rate of interest equals the real rate of interest.
D) the money supply is growing at a constant rate.
E) supply and demand for all goods in the economy are equal at the current rate of interest.

Answer 5

B

Question 6

If the economy is currently in monetary equilibrium, an increase in the money supply will
A) not change the equilibrium conditions.
B) cause a reduction in the demand for money, leading to a higher rate of interest.
C) cause an excess demand for money and a decrease in the rate of interest.
D) cause an increase in the demand for money, leading to a lower rate of interest.
E) lead to a movement down the money demand curve to a lower rate of interest.

Answer 6

E

Question 7

Refer to Figure 27-2. Starting at equilibrium E0, an increase in real GDP will lead to a
A) shift of the MS curve to the left and an increase in the interest rate.
B) shift of the MS curve to the right and a fall in the interest rate.
C) downward movement along the MD curve and a lower interest rate.
D) shift of the MD curve to the left and a fall in the interest rate.
E) shift of the MD curve to the right and an increase in the interest rate.

Answer 7

E

Question 8

Refer to Figure 27-2. Starting at equilibrium E0, an increase in the supply of money will result in the
A) shift of the MS curve to the left and an increase in the interest rate.
B) shift of the MS curve to the right and a fall in the interest rate.
C) downward movement along the MD curve and a higher interest rate.
D) shift of the MD curve to the left and a fall in the interest rate.
E) upward movement along the curve and a lower interest rate.

Answer 8

B

Question 9

Refer to Figure 27-2. If the interest rate is i2, the subsequent adjustment in the money market is as follows:
A) excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise.
B) MS curve will shift to the left as to maintain the interest rate at i2.
C) the interest rate will remain at i2, because the money market is in equilibrium at this interest rate.
D) excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall to i0.
E) excess supply of money leads to the sale of bonds, which in turn causes the interest rate to fall.

Answer 9

D

Question 10

Refer to Figure 27-2. If the interest rate is i1, the subsequent adjustment in the money market is as follows:
A) excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise.
B) the MS curve will shift to the left so as to maintain the interest rate at i2.
C) the interest rate will remain at i1 because the money market is in equilibrium at this interest rate.
D) excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall.
E) excess demand for money leads to a purchase of bonds, which in turn causes the interest rate to rise.

Answer 10

A

Question 11

Refer to Figure 27-2. Suppose the market interest rate is . The situation in this market is as follows:
A) firms and households are attempting to increase their money holdings by selling bonds.
B) firms and households are attempting to decrease their money holdings by selling bonds.
C) firms and households are attempting to increase their money holdings by buying bonds.
D) firms and households are attempting to decrease their money holdings by buying bonds.
E) the market is in equilibrium and no change will occur.

Answer 11

A

Question 12

Refer to Figure 27-2. Suppose the market interest rate is . The situation in this market is as follows:
A) firms and households are attempting to increase their money holdings by selling bonds.
B) firms and households are attempting to decrease their money holdings by selling bonds.
C) firms and households are attempting to increase their money holdings by buying bonds.
D) firms and households are attempting to decrease their money holdings by buying bonds.
E) the market is in equilibrium and no change will occur.

Answer 12

D

Question 13

When the price level increases, ceteris paribus, it causes households and firms to try to
A) reduce money balances, which drives interest rates down.
B) reduce money balances, which drives interest rates up.
C) reduce money balances, which drives national income up.
D) increase money balances, which drives interest rates down.
E) increase money balances, which drives interest rates up.

Answer 13

E

Question 14

If there are just two assets, bonds and money, then an equilibrium between the quantity demanded of money and the quantity supplied of money implies
A) an excess supply of bonds.
B) an excess demand for bonds.
C) equilibrium in the bond market.
D) an indeterminant equilibrium in the bond market.
E) nothing about conditions of demand for the other financial asset.

Answer 14

C

Question 15

How does monetary equilibrium re-establish itself when there is an excess supply of money balances? 
A) the interest rate rises 
B) individuals attempt to sell bonds 
C) the price of bonds falls 
D) the price of bonds increases 
E) the price level falls

Answer 15

D

Question 16

The linkage between changes in monetary equilibrium and changes in aggregate demand is called the
A) monetary transmission mechanism.
B) simple multiplier.
C) equilibrium mechanism.
D) transactions mechanism.
E) liquidity preference function.

Answer 16

A

Question 17

Other things being equal, a reduction in the money supply will lead to a
A) fall in the rate of interest and an increase in desired investment expenditure.
B) rise in the rate of interest and in increase in desired investment expenditure.
C) fall in the rate of interest and a decrease in desired investment expenditure.
D) rise in the rate of interest and a decrease in desired investment expenditure.
E) rise in the rate of interest and no change in desired investment expenditure.

Answer 17

D

Question 18

The economy’s investment demand function describes the
A) positive relationship between desired investment, the rate of interest, and aggregate expenditure.
B) positive relationship between desired investment and the rate of interest.
C) negative relationship between the demand for money and the interest rate.
D) negative relationship between desired investment and aggregate expenditure.
E) negative relationship between the interest rate and desired investment.

Answer 18

E

Question 19

Refer to Figure 27-3. The increase in the money supply from MS0 to MS1 shifts the monetary equilibrium from E0 to E1. The result is
A) a decrease in the interest rate and an increase in desired investment.
B) an increase in the interest rate and a decrease in desired investment.
C) sustained monetary disequilibrium.
D) a shift of the investment demand curve to the right.
E) a shift of the investment demand curve to the left.

Answer 19

A

Question 20

Refer to Figure 27-3. The increase in desired investment expenditure, as shown by the movement from point A to point B, occurs because of
A) a fiscal policy designed to encourage investment.
B) an increase in the money supply.
C) a change in sales, which increases inventory investment.
D) an improvement in business confidence.
E) a tax-rate induced change in desired investment.

Answer 20

B

Question 21

Refer to Figure 27-3. Part (i) of the figure shows the money market and the effect of an increase in the supply of money. The corresponding sequence of events in the bond market is as follows: The \_\_\_\_\_\_\_\_ of money at   leads firms and households to \_\_\_\_\_\_\_\_ bonds, which leads to a(n) \_\_\_\_\_\_\_\_ in the price of bonds and a decrease in the interest rate.
A) excess demand; buy; increase
B) excess demand; sell; decrease
C) excess supply; buy; decrease
D) excess supply; sell; decrease
E) excess supply; buy; increase

Answer 21

E

Question 22

The monetary transmission mechanism can be set in motion when a rise in the price level causes
A) an increased demand for money balances, leading people to sell bonds, which in turn raises the interest rate.
B) an increased demand for money balances, leading people to sell bonds, which in turn decreases the interest rate.
C) an increased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate.
D) a decreased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate.
E) a decreased demand for money balances, leading people to sell bonds, which in turn raises the interest rate.

Answer 22

A

Question 23

The monetary transmission mechanism describes the process by which changes in
A) personal consumption affect real GDP.
B) business investment influence real GDP.
C) monetary equilibrium influence real GDP through changes in desired investment.
D) monetary equilibrium influence the interest rate.
E) interest rate affect the demand for money.

Answer 23

C

Question 24

Which one of the following statements best describes the monetary transmission mechanism?
A) An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real GDP.
B) An increase in government spending causes the AE curve to shift upwards, leading to a higher GDP.
C) A decrease in imports causes the AE curve to shift upwards, leading to a higher interest rate.
D) An increase in the money supply leads to a lower interest rate, higher desired investment, an upward shift in the AE curve and a higher GDP.
E) A decrease in the money supply leads to a lower interest rate, higher desired investment, an upward shift in the AE curve and a higher GDP.

Answer 24

D

Question 25

Consider monetary equilibrium and the monetary transmission mechanism. An exogenous fall in the price level will lead to
A) an excess demand for money resulting in a rise in the rate of interest, which shifts the AE function downward and decreases the equilibrium level of income.
B) an excess supply of money resulting in a fall in the rate of interest, which shifts the AE function upward and increases the equilibrium level of income.
C) people being able to buy more with their increased wealth, which will shift the AE function downward and decrease the equilibrium level of income.
D) a movement to the right along the AE function.
E) a movement to the left along the AE function.

Answer 25

B

Question 26

An increase in the money supply sets the monetary transmission mechanism in motion which results in
A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.

Answer 26

C

Question 27

A decrease in the money supply sets the monetary transmission mechanism in motion which results in
A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.

Answer 27

E

Question 28

Consider the monetary transmission mechanism. A disturbance to monetary equilibrium which changes the interest rate will affect aggregate demand through
A) a shift of the investment demand function and a movement along the aggregate expenditure curve.
B) a movement along the investment demand function and a shift of the aggregate expenditure curve.
C) a shift of both the investment demand function and the aggregate expenditure curve.
D) movements along the investment demand function and the aggregate expenditure curve.
E) a movement along the aggregate expenditure curve.

Answer 28

B

Question 29

Consider monetary equilibrium and the monetary transmission mechanism. An exogenous rise in the price level, with no change in the supply of money, will
A) increase the demand for money and increase desired aggregate expenditure.
B) increase the demand for money and decrease desired aggregate expenditure.
C) decrease the demand for money and increase aggregate demand.
D) decrease the demand for money and decrease aggregate demand.
E) decrease aggregate demand but not affect the demand for money.

Answer 29

B

Question 30

Consider monetary equilibrium and the monetary transmission mechanism. An exogenous decrease in the price level, with no change in the supply of money, will
A) increase the demand for money and increase aggregate expenditure.
B) increase the demand for money and decrease aggregate expenditure.
C) decrease the demand for money and increase real GDP along the aggregate demand curve.
D) decrease the demand for money and decrease real GDP along the aggregate demand curve.
E) decrease the demand for money and leave aggregate demand unchanged.

Answer 30

C

Question 31

A decrease in the money supply is most likely to
A) raise interest rates, investment, and aggregate expenditures.
B) raise interest rates, lower investment, and lower aggregate expenditures.
C) lower interest rates, raise investment, and raise aggregate expenditures.
D) lower interest rates, investment, and aggregate expenditures.
E) raise interest rates and investment, and lower aggregate expenditures.

Answer 31

B

Question 32

If the Bank of Canada were to increase the money supply, other things being equal, we would expect the aggregate expenditure curve to shift
A) upward and the aggregate demand curve to shift to the right.
B) upward and the aggregate demand curve to shift to the left.
C) downward and the aggregate demand curve to shift to the right.
D) downward and the aggregate demand curve to shift to the left.
E) downward but the aggregate demand curve will remain unchanged.

Answer 32

A

Question 33

) If the Bank of Canada were to reduce the money supply, other things being equal, we would expect the aggregate expenditure curve to shift
A) upward and the aggregate demand curve to shift to the right.
B) upward and the aggregate demand curve to shift to the left.
C) downward and the aggregate demand curve to shift to the right.
D) downward and the aggregate demand curve to shift to the left.
E) downward but the aggregate demand curve will remain unchanged.

Answer 33

D

Question 34

If real GDP is greater than potential GDP, the output gap could be eliminated by 
1) an increase in government purchases;
2) an upward shift in the AE curve;
3) a reduction in the money supply.
A) 1 only
B) 2 only
C) 3 only
D) 1 or 2
E) 1 or 2 or 3

Answer 34

C

Question 35

Which of the following explanations for the negative slope of the AD curve is correct? A fall in the price level, with an unchanged money supply, causes the transactions demand for money to
A) decrease, shifting the MD curve downward, lowering the interest rate and increasing desired investment, causing the AE curve to shift upward.
B) decrease, shifting the MD curve upward, raising the interest rate and increasing desired investment, causing the AE curve to shift upward.
C) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift upward.
D) increase, shifting the MD curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward.
E) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift downward.

Answer 35

A

Question 36

The monetary transmission mechanism in an OPEN economy is more complicated than it is in a closed economy because the effects of domestic monetary contraction or expansion are
A) strengthened because domestic interest rates must be equal to those in the rest of the world.
B) weakened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world.
C) strengthened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world.
D) strengthened because changes in the domestic money supply cause changes in the exchange rate, which then reinforce the changes in desired investment.
E) weakened because changes in the domestic money supply cause changes in the exchange rate which then offset the changes in desired investment.

Answer 36

D

Question 37

Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to
A) an appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.

Answer 37

C

Question 38

Consider the monetary transmission mechanism in an open economy. Other things being equal, a decrease in the domestic money supply leads to
A) an appreciation of the domestic currency, thereby inhibiting net exports and reducing aggregate demand.
B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.

Answer 38

A

Question 39

Which of the following correctly describes the way in which a change in the money supply affects aggregate demand?
A) a shift of the ID curve and a movement along the aggregate demand curve
B) a movement along the ID curve and a shift of the aggregate demand curve
C) a shift of both the ID curve and the aggregate demand curve
D) movements along the ID curve and the aggregate demand curve
E) a movement along the aggregate demand curve

Answer 39

B

Question 40

Changes in the money supply in an open economy, as compared to a closed economy,
A) are likely to have a greater effect on AD because of the secondary effect that exchange rates have on exports.
B) are likely to have a smaller effect on AD because the secondary effect of exchange rates will offset the changes created by monetary disturbances.
C) are the same in either situation.
D) affect investment to a greater degree because foreign investors can create new investment in an open economy.
E) cannot be determined with the available information.

Answer 40

A

Question 41

Which of the following phenomena add a second channel to the monetary transmission mechanism?
A) inflation
B) diminishing marginal returns
C) rising productivity
D) open-market operations
E) international capital mobility

Answer 41

E

Question 42

Consider the monetary transmission mechanism. In an open economy, such as Canada’s, an increase in the money supply leads to a fall in the interest rate. This is followed by
A) an outflow of financial capital and an appreciation of the Canadian dollar.
B) an inflow of financial capital and a depreciation of the Canadian dollar.
C) an outflow of financial capital and a depreciation of the Canadian dollar.
D) an inflow of financial capital and an appreciation of the Canadian dollar.

Answer 42

C

Question 43

Consider the monetary transmission mechanism. In an open economy, such as Canada’s, a decrease in the money supply leads to a rise in the interest rate. This is followed by
A) an outflow of financial capital and an appreciation of the Canadian dollar.
B) an inflow of financial capital and a depreciation of the Canadian dollar.
C) an outflow of financial capital and a depreciation of the Canadian dollar.
D) an inflow of financial capital and an appreciation of the Canadian dollar.

Answer 43

D

Question 44

Other things being equal, a decrease in the money supply will lead to ________ in real interest rates and, in the short run, ________ in real GDP because ________.
A) an increase; an increase; more money is available for investing in bonds from abroad
B) an increase; a decrease; of the decrease in desired investment
C) a decrease; an increase; of the increase in desired investment
D) a decrease; a decrease; of the decrease in desired investment
E) a decrease; a decrease, of the decrease in net exports

Answer 44

B

Question 45

If the economy is experiencing an undesired inflationary gap, the Bank of Canada could
A) increase the supply of money, lowering interest rates, which would shift the AD curve inward.
B) decrease the demand for money, lowering interest rates, which would shift the AD curve outward.
C) decrease the supply of money, raising interest rates, which would shift the AD curve inward.
D) increase the supply of money, lowering interest rates, which would shift the AD curve outward.
E) shift the investment demand curve to the right by lowering interest rates, which would shift the AD curve outward.

Answer 45

C

Question 46

The monetary transmission mechanism provides a partial explanation for the downward slope of the AD curve. For a given vertical MS curve, the explanation for the negative relationship between the price level and aggregate demand is as follows: A rise in the price level shifts the curve
A) to the right, the interest rate rises and desired investment expenditure rises.
B) to the left, the interest rate falls, and desired investment expenditure rises.
C) to the right, the interest rate rises and desired investment expenditure falls.
D) to the left, the interest rate rises and desired investment expenditure falls.
E) to the right, the interest rate falls and desired investment expenditure falls.

Answer 46

C

Question 47

Which of the following is partly responsible for the negative slope of the aggregate demand (AD) curve?
A) open-market operations of the Bank of Canada
B) the monetary transmission mechanism
C) the multiplier effect
D) the speculative demand for money
E) the precautionary demand for money

Answer 47

B

Question 48

Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. The initial effect is
A) a shift of the AD curve to AD1 and an increase in real GDP to Y1.
B) a shift of the AS curve to AS1 and a decrease in real GDP to Y2.
C) a shift of the AD curve to AD1, and then a shift back to AD0 to restore equilibrium at E0.
D) a simultaneous shift of AD to AD1 and AS to AS1, resulting in a new equilibrium at E2.
E) no change in the short-run equilibrium or level of real GDP.

Answer 48

A

Question 49

Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the adjustment toward the new long-run equilibrium?
A) The AD curve shifts to AD1. The inflationary gap causes prices to rise, AS shifts to AS1 and equilibrium is restored at E3.
B) The AD curve shifts to AD1. The inflationary gap causes wages to rise, AS shifts to AS1 and equilibrium is restored at E2.
C) The AS curve shifts to AS1 which causes the AD curve to shift to AD1, resulting in a new equilibrium at E2.
D) The AD curve shifts to AD1. The increased money supply causes an increase in potential output and a new long-run equilibrium at E1.
E) The AD and AS curves shift to AD1 and AS1 simultaneously. The increased price level pushes them back to AD0 and AS0 and equilibrium is restored at E0.

Answer 49

B

Question 50

Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the long-run effect of this change?
A) a higher price level
B) a higher price level and higher real GDP
C) higher real GDP
D) lower real GDP
E) no change in price level or real GDP

Answer 50

A

Question 51

Refer to Figure 27-5. This economy begins in equilibrium with M0S ,  M0D and real GDP equal to potential GDP (with   AD0 and  AS0). At this initial equilibrium, the money supply is \_\_\_\_\_\_\_\_, the interest rate is \_\_\_\_\_\_\_\_, the price level is \_\_\_\_\_\_\_\_, and real GDP is \_\_\_\_\_\_\_\_.
A) $500 billion; 2%; 104; $800 billion
B) $500 billion; 2%; 102; $805 billion
C) $500 billion; 4%; 100; $800 billion
D) $540 billion; 3%; 100; $800 billion
E) $540 billion; 4%; 104; $805 billion

Answer 51

C

Question 52

Refer to Figure 27-5. This economy begins in equilibrium with M0S , M0D and real GDP equal to
potential GDP (with AD0 and AS0 ). Now suppose there is an increase in the money supply to $540 billion. The initial response in this economy is
A) an increase in the demand for money, causing a shift of the money demand curve to M1D , and a fall in interest rate to 3%.
B) an increase in the demand for money, causing a shift of the money demand curve to M1D , and a fall in the interest rate to 2%.
C) the AD and AS curves shift up simultaneously.
D) a movement down along the money demand curve to a lower interest rate at 2%.
E) an increase in the demand for money, causing a shift of the money demand curve to M2D and the interest rate remains at 4%.

Answer 52

D

Question 53

Refer to Figure 27-5. This economy begins in equilibrium with M0S , M0D and real GDP equal to potential GDP (with AD0 and AS0 ). Now suppose there is an increase in the money supply to $540 billion. After the initial effect on the interest rate, the next response in this economy is as follows:
A) the lower interest rate stimulates investment demand, which causes the AD curve to shift to AD1 . Real GDP rises to $805 billion and the price level rises to 102.
B) the lower interest rate stimulates an increase in the demand for money, which causes the MD curve to shift to MD1. The interest rate rises to 3%.
C) the lower interest rate causes wages and other factor prices to rise, which causes the AS curve to shift to AS1 . Real GDP falls to $795 billion and the price level rises to 102.
D) the higher interest rate causes wages and other factor prices to rise, which causes the AS curve to shift to AS1 . Real GDP falls to $795 billion and the price level rises to 102.

Answer 53

A

Question 54

Refer to Figure 27-5. This economy begins in equilibrium with M0S , M0D  and real GDP equal to potential GDP (with AD0   and AS0  ). Now suppose there is an increase in the money supply to $540 billion. The short-run effects of this increase lead to the opening of a(n) \_\_\_\_\_\_\_\_ gap of \_\_\_\_\_\_\_\_.
A) recessionary; $5 billion
B) recessionary; $10 billion
C) inflationary; $5 billion
D) inflationary; $10 billion
E) There is no output gap.

Answer 54

C