Describe questions and their correct answers with logical explanation. 

1. One of the key proposals of nonactivists with respect to monetary policy is that the 
a. U.S. return to the gold standard. 
b. Fed attempt to fine-tune the economy by making frequent changes in the direction of monetary policy. 
c. Fed should increase the money supply at a predetermined rate regardless of the current state of the economy. 
d. none of the above 

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2. True or False? The monetarist view of how a change in the money supply affects the economy, i.e. the transmission mechanism, is more direct than the Keynesian transmission mechanism. a. True b. False 

3. Which of the following may break the link between the goods and services market and the investment goods market in the Keynesian transmission mechanism? 
a. A stable velocity of money. 
b. Investment spending that is interest-insensitive. 
c. A large marginal propensity to consume. 
d. Investment spending that is interest-sensitive. 

4. Which of the following is the best statement of the Keynesian view of how the money market and the goods market are linked? 
a. An increase in the money supply causes a reduction in the equilibrium interest rate, increased investment spending, and a rightward shift in the AD curve. 
b. An increase in the money supply causes the interest rate to fall, which discourages investment spending, and a leftward shift in the AD curve. 
c. A decrease in the money supply will cause the SRAS and the LRAS curves to shift to the right causing an increase in the inflation rate. 
d. none of the above 

5. If the nation’s money supply increased substantially, assuming no change in the demand for money, we would expect which of the following to occur? 
a. Bond prices would fall and interest rates would rise. 
b. Both bond prices and interest rates would rise. 
c. Both bond prices and interest rates would fall. 
d. Bond prices would rise and interest rates would fall. 

6. The term liquidity trap refers to the 
a. steep, almost vertical, portion of the demand for money curve. 
b. tendency for some consumers to become overwhelmed by credit card debt as a result of promotions by banks that depict credits cards as a painless way to make purchases. 
c. tendency for highway accidents to occur because cars tend to hydroplane when the roadway is wet. 
d. theoretical possibility that the demand curve for money might become horizontal at very low rates of interest with the result that the Fed would be unable to stimulate AD by increasing the supply of money.

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