Exam 15: Monetary Policy

Use the following to answer questions: Figure: Monetary Policy I -(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₁ and the central bank chooses to buy Treasury bills, _____ shift to _____ a(n) _____ gap.

The theory of monetary neutrality implies that monetary policy is effective in the short run but not in the long run.

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r₂. In the long run prices will _____ thereby ___________the demand for money.

Use the following to answer questions: Figure: Output Gap -(Figure: Output Gap) Refer to Figure: Output Gap. If the economy is at Y₁ as a result of expansionary monetary policy and no further policy is implemented, in the long run nominal wages will _____ and shift the short-run aggregate supply curve to the _____, which will _____ real output.

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₂ and the central bank sells Treasury bills, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

If inflation increases from 2% to 5%, the money demand curve will:

According to the liquidity preference model, a(n) _____ in the money supply shifts the money supply curve to the _____ and increases the equilibrium interest rate.

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 3%, the opportunity cost of holding cash in a checking account is:

In September 2007, reversing its course, the Federal Reserve began a series of:

Contractionary monetary policy causes a short-run _____ in interest rates in the short run and _____ in interest rates in the long run.

If the economy is at potential output and the Fed decreases the money supply, in the short run the likely result will be a(n) _____ in investment and a(n) _____ in consumption.

Economists argue that money is neutral in:

If long-term interest rates are 8% and short-term rates are 3%, the market expects:

The loanable funds model focuses on interest rates in the short run.

Suppose that the Federal Reserve is conducting an expansionary monetary policy. It will _____ Treasury bills on the open market, so that the money supply will _____, interest rates will _____, planned investment spending will _____, and the AD curve will shift to the _____.

Use the following to answer questions: Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. If the economy is in an inflationary gap, the Federal Reserve will _____ Treasury bills, which will _____ the money supply and _____ interest rates. This is shown in panel _____.

When nominal wages decrease, the short-run aggregate supply curve shifts to the left.

If the economy is at potential output and the Fed decreases the money supply, run the price level will likely decrease in the short run.

If the Federal Reserve uses expansionary monetary policy there is a _____ short-run effect on _____, but_____.

In a graph of a money demand curve, the _____ is plotted on the vertical axis.