Suppose the economy was in equilibrium, and the national government increased spending by 200 billion. Monetarist theory would predict that the nation's:
a. Money supply will rise by 200 billion.
b. Monetary base will rise by 200 billion.
c. Money supply will rise by an amount greater than zero but less than 200 billion.
d. Monetary base will remain unchanged.
Question 2
What would the Bank of England (England's Central Bank) do to raise the value of the British pound in terms of the euro?
a. It would simply announce its desired exchange rate for the British Pound, and the market forces of supply and demand would do the rest. No further action would be necessary.
b. It has no influence over the pound exchange rate.
c. It would buy British pounds and supply euros in the foreign exchange market.
d. It would buy euros and supply British pounds in the foreign exchange market.
e. It would sell dollars and buy euros.
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Comparison of reactions at equilibrium and steady state
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