Exam 15: Monetary Policy

Describe the Keynesian transmission mechanism for a decrease in the money supply. Assuming that no liquidity trap exists, that investment is interest-sensitive, and that the economy is in the horizontal portion of the AS curve, what happens to Real GDP and the price level? How can you tell if this is a direct transmission mechanism or an indirect one?

Interest rates and the price of old or existing bonds are

Under a constant growth rate of money rule of 2 percent in an economy in which Real GDP grows at an average rate of 1 percent and velocity is constant, the inflation rate is

Equilibrium in the money market exists when

Activists believe that

The demand for money rises. According to the Keynesian transmission mechanism, the interest rate __________, investment spending __________ (assuming it is interest-sensitive), the AD curve shifts to the __________ and if the AS curve is horizontal, Real GDP __________.

The rules-based monetary policy that some nonactivists have proposed to maintain price stability reads this way:

From the Patterns of Sustainable Specialization and Trade (PSST) perspective, expansionary monetary and fiscal policies that are designed to boost aggregate demand

Exhibit 15-1 -Refer to Exhibit 15-l. One argument against the use of activist monetary policy claims that it can destabilize the economy. For example, suppose we are in a recessionary gap. Expansionary monetary policy is implemented, but there are so many lags that by the time it has its effect, self-regulation has already closed the gap by itself. The end result is a movement from point

One argument in favor of activist monetary policy is that the economy does not always equilibrate quickly enough at Natural Real GDP.

Suppose the money market is in the liquidity trap and the Fed increases the supply of money. Individuals would rather hold __________ than __________ because they expect that bond prices can go no __________.

Which of the following statements is likely to be made by an economist who does not believe in activist monetary policy? (1) The more closely monetary policy can he designed to meet the particulars of a given economic environment, the better. (2) Because of long and uncertain time lags, activist monetary policy may be destabilizing rather than stabilizing. (3) There is sufficient flexibility in wages and prices in modern economies to allow the economy to equilibrate in reasonable speed at the natural level of Real GDP, (4) The "same-for-all-seasons" monetary policy is the way to proceed. (5) There is evidence that monetary policy in the mid-1970s caused a recession.

The economy is in a recessionary gap and there is complete crowding out. Furthermore, there is no evidence that the economy is in a liquidity trap or that investment is interest-insensitive. This makes the case for the use of __________ policy stronger than it might be otherwise.

As the opportunity cost of holding money decreases, the quantity demanded of money

Which scenario best explains the Keynesian transmission mechanism when the investment demand curve is vertical?

Keynesians are more likely to propose

Activists believe that

Exhibit 15-2 -Refer to Exhibit 15-2. A(n)__________ in the money supply from S₁ to S₂ would have a tendency to __________ the opportunity cost of holding money.

Under a gold standard, if the market price of gold is below the official price of gold (set by the monetary authority) members of the public would likely buy gold _______________ and sell it __________________, causing the market price of gold to ____________________.

The Taylor Rule provides policymakers with a target for