Exam 15: Monetary Policy

In the long run, a change in monetary policy will affect only the aggregate price level.

If the economy is in a recessionary gap, the Federal Reserve should conduct _____ monetary policy by _____ the money supply.

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, the quantity of money demanded is _____ than quantity of money supplied.

Suppose that the economy enters a recession and real GDP falls. All else equal, we would expect:

People incur a cost for holding money instead of nonmonetary assets such as Treasury bills.

Use the following to answer questions: Figure: Monetary Policy II -(Figure: Monetary Policy II) Refer to Figure: Monetary Policy II. To eliminate the inflationary gap from the short-run equilibrium at Y₂, monetary policy should be:

In the long run, changes in the money supply:

Consider an economy that is facing a recessionary gap. The Federal Reserve decides to use expansionary monetary policy to close that gap. As a result of this policy, in the short run the money supply will _____, the interest rate will _____, investment and consumption spending will _____, and real GDP will _____.

Use the following to answer questions: Figure: Equilibrium in the Money Market -(Figure: Equilibrium in the Money Market) Refer to Figure: Equilibrium in the Money Market. If the rate of interest is below equilibrium, there will be an excess _____ money and the interest rate will _____.

If the economy is at potential output and the Fed decreases the money supply, in the short run the aggregate demand will likely:

Use the following to answer questions: Figure: A Money Market -(Figure: A Money Market) Refer to Figure: A Money Market. The equilibrium interest rate is:

Long-term interest rates and short-term interest rates:

Short-term interest rates apply to financial assets due within:

To lower the short-term interest rate, the Federal Reserve can:

Use the following to answer questions: Figure: Equilibrium in the Money Market -(Figure: Equilibrium in the Money Market) Refer to Figure: Equilibrium in the Money Market. If the interest rate is above equilibrium, there will be an excess _____ money and the interest rate will _____.

If the money supply decreases by 5%, in the long run:

Use the following to answer questions: Figure: Money Market I -(Figure: Money Market I) Refer to Figure: Money Market I. If the money market is initially in equilibrium at point E and the central bank buys Treasury bills, then the interest rate will:

If the economy is at potential output and the Fed increases the money supply, in the long run the price level will likely increase.

Suppose that a typical basket of goods is now more expensive than it used to be. All else equal, we would expect:

Suppose that the Federal Reserve has set a target for the federal funds rate. If initially the equilibrium interest rate happens to be higher than the target interest rate, then the Federal Reserve should _____ Treasury bills in the open market, _____ the money supply, shift the supply of money curve to the _____, and _____ the interest rate to the target rate.