Which of the following are the result of a restrictive monetary policy? Check all that apply. A firm's cost of debt increases. The risk-free rate and credit risk premium decrease. A firm's cost of equity decreases A firm's cost of equity increases The following graphs represent (1) The Market for Loanable Funds, (2) The Business Investment Schedule, (3) The Household Consumption Schedule, and (4) The Aggregate Supply and Aggregate Demand Model within the U.S. economy, The aggregate supply and aggregate demand model (4) examines the relationship between changes in national income (real gross domestic product) and changes in the price level (inflation). The aggregate demand curve shows the relationship between the price level and the total amount of money spent on those goods and services. It is downward sloping because people tend to purchase more goods and services as prices decrease and less goods and services when prices increase. The components that make up the aggregate demand curve are consumption Spending (C), Investment (I), Government Expenditures (G), and Net Exports (NX). The agregate supply curve shows the relationship between the price level and the total amount of output firms will produce and sell. It is upward sloping because businesses tend to produce more goods and services when prices increase, and less goods and services when prices decrease. Use the graphs to show what happens in the given scenario and to help answer the questions that follow. (Note: You will not be graded on any changes you make to the graph.) (1) (2) Market for Loanable Funds Business Investment Schedule Supply U.S. INTEREST RATE 5. INTEREST RATE 1 Business Investment Schedule Demand QUANTITY OF LOANABLE FUNDS IN THE UNITED STATES LEVEL OF BUSINESS INVESTMENT IN THE UNITED STATES (3) (4) 2 Household Consumption Schedule Aggregate Supply and Aggregate Demand AS US INTEREST RATE PRICE LEVEL Household Consumption Schedule AD LEVEL OF HOUSEHOLD CONSUMPTION IN THE US REAL GROSS DOMESTIC PRODUCT Suppose the FOMC's policy directive instructs the Trading Desk at the New York Fed to increase the federal funds rate because the U.S. economy is booming, has a low unemployment rate, and a high inflation rate that the FOMC wants to reduce. If the FOMC wants to increase the federal funds rate, then the Trading Desk traders will government securities This results in an in the Joanable funds in the banking system Consequently, there will be ain) in interest rates As a result, consumers will purchase and save and businesses will invest the ination rate Consequently, the aggregate demand curve will shift to the night, which shows that the unemployment rate has and the economy has been successfully stabilized 3. Restrictive monetary policy Which of the following are the result of a restrictive monetary policy? Check all that apply. A firm's cost of debt increases The risk-free rate and credit risk premium decrease. A firm's cost of equity decreases. A firm's cost of equity increases The following graphs represent (1) The Market for Loanable Funds, (2) The Business Investment Schedule, (3) The Household Consumption Schedule, and (4) The Aggregate Supply and Aggregate Demand Model within the U.S. economy, The aggregate supply and aggregate demand model (4) examines the relationship between changes in national income (real gross domestic product) and changes in the price level (inflation). The aggregate demand curve shows the relationship between the price level and the total amount of money spent on those goods and services. It is downward sloping because people tend to purchase more goods and services as prices decrease, and less goods and services when prices increase. The components that make up the aggregate demand curve are consumption Spending (C). Investment (I), Government Expenditures (G), and Net Exports (NX). The aggregate supply curve shows the relationship between the price level and the total amount of output firms will produce and set. It is upward sloping because businesses tend to produce more goods and services when prices increase, and less goods and services when prices decrease Use the graphs to show what happens in the given scenario and to help answer the questions that follow. (Note: You will not be graded on any changes you make to the graph.) (1) (2) 2 Market for Loanable Funds Business Investment Schedule Supply U.S. INTEREST RATE US. INTEREST RATE 1 Demand Business Investment Schedule QUANTITY OF LOANABLE FUNDS IN THE UNITED STATES LEVEL OF BUSINESS INVESTMENT IN THE UNITED STATES (3) (4) ? Household Consumption Schedule Aggregate Supply and Aggregate Demand AS US. INTEREST RATE PRICE LEVEL Household Consumption Schedule AD LEVEL OF HOUSEHOLD CONSUMPTION IN THE US. REAL GROSS DOMESTIC PRODUCT Suppose the FOMC's policy directive Instructs the Trading Desk at the New York Fed to increase the federal funds rate because the U.S. economy is booming, has a low unemployment rate, and a high inflation rate that the FOMC wants to reduce. If the FOMC wants to increase the federal funds rate, then the Trading Desk traders will government securities This results in an) in the toanable funds in the banking system, Consequently, there will be an). in interest rates As a result, consumers will purchase and save and businesses will invest the inflation rate Consequently, the aggregate demand curve will shift to the right, which shows that the unemployment rate has and the economy has been successfully stabilized has
