Exam 14: Monetary Policy

-The figure above shows the demand for money in Kiteland. a) If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve. b) Suppose Kitelandʹs real GDP increases so that the demand for money changes by 100 billion yaks. The Kiteland Central Bank takes no actions. Show the effects of this event on your figure. What happens to the interest rate? What happens to the quantity of money in the economy? c) If the Central Bank wants to prevent the interest rate from changing, what must it do to the quantity of money? Draw the new supply of money curve. d) In order to change the quantity of money to keep the interest rate constant, suppose the Kiteland Central Bank uses open market operations. Does it make an open market purchase or an open market sale? Explain your answer.

The Fed lowers the federal funds rate. A mechanism through which aggregate demand increases is that the lower federal funds rate

ʺAs the Fed Chases Inflation, Critics Shout, ʹFaster!ʹ ʺFor weeks, the Fed has broadcast its intention to raise interest rates glacially.ʺ The Fed was moving slowly, according to an economist because ʺ... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check.ʺ The Fed, recognizing that the economy was improving stated it planned to ʺrespond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.ʺ Other economists disagree with the Fedʹs restrained policy as a ʺmistake.ʺ Www.nytimes, 7/1/2004 Economists estimate that if the Fedʹs policy was enacted in July 2004, the impact on the economy

In the short run,__________ in the federal funds rate__________ the price level and __________real GDP.

When would the Fed want to carry out a monetary policy that decreases aggregate demand?

-In the above figure, suppose the economy was initially in an equilibrium at point D. Where would the economy move if the Fed makes an open market purchase of government securities?

When the Fed lowers the federal funds rate,

The current chairman of the Federal Reserve is

When the Federal Reserve increases the Federal funds rate,

-Which aggregate supply-aggregate demand diagram above shows the effect on real GDP and the price level of monetary policy when it is used to fight a recession?

In order to combat a recession, the Fed will__________ the federal funds rate thereby ___________the quantity of money.

When the output gap is positive, it represents___________ gap, and when it is negative, it represents___________ gap.

Which of the following increases the quantity of money?

In an effort to address the troubled economy, ...ʺFor the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn.ʺ Rates have not been this low ʺ... since 2003, when the economy was growing at a snailʹs pace. The Fedʹs rate cuts will__________bank reserves and __________.

-In the above figure, if the economy is initially at point D, then if the Fed lowers the federal funds rate

Usually, the Federal Reserve changes its target for the federal funds rate in units of

If the Fed raises the federal funds rate so that the exchange rate rises, then imports __________and exports____________ .

Suppose that initially real GDP equals potential GDP. Then an increase in aggregate demand occurs. According to the Taylor rule, the Fed should____________ the federal funds rate by ____________government securities in the open market.

Businesses become convinced that future profits from investment will be less than initially believed. This conviction leads to a change in aggregate ____________and so the Fed should ____________the federal funds rate if it wants to try to offset this change.

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals? I. government expenditures on goods and services and taxes II. the government budget deficit or surplus III. changes in the federal funds rate