Exam 17: Monetary Policy

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium.For Year 2,graph aggregate demand,long-run aggregate supply,and short-run aggregate supply such that the condition of the economy will induce the Federal Reserve to conduct a contractionary monetary policy.Briefly explain the condition of the economy and what the Federal Reserve is attempting to do.

The goals of monetary policy tend to be interrelated.For example,when the Fed pursues the goal of ________,it also can achieve the goal of ________ simultaneously.

Although the Federal Reserve had traditionally made discount loans only to commercial banks,in response to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well.

Rising nominal GDP will increase the demand for money and short-term interest rates.

One of the monetary policy goals of the Federal Reserve is price stability.

Suppose the equilibrium real federal funds rate is 2 percent,the target rate of inflation is 2 percent,the current inflation rate is 4 percent,and real GDP is 2 percent above potential real GDP.If the weights for the inflation gap and the output gap are both 1/2,then according to the Taylor rule the federal funds target rate equals

In June 2017,the Federal Open Market Committee raised the target for the federal funds rate to a range of 1.00 to 1.25 percent.To keep the federal funds rate in this target band,the Fed set the interest rate it pays on reverse repurchase agreements to

If the Fed raises its target for the federal fund rate,this indicates that

In March 2008,the Fed announced that primary dealers would be eligible to receive discount loans.

Changes in interest rates affect all four components of aggregate demand.

Figure 17-7 -Refer to Figure 17-7.Suppose the economy is in short-run equilibrium above potential GDP,the unemployment rate is very low,and wages and prices are rising.Using the basic AD-AS model in the figure above,the correct Fed policy for this situation would be depicted as a movement from

Why doesn't the Fed have both a money supply target and an interest rate target?

Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.

When housing prices ________ as they did beginning in 2006 following the housing market bubble,most banks and other lenders tightened the requirement for borrowers,making it ________ for potential home buyers to obtain mortgages.

Inflation targeting has typically been accompanied by lower inflation.

Table 17-8 Year Potential Real GDP Real GDP Price Level 2018 \ 18.5 trillion \ 18.5 trillion 142 2019 19.0 trillion 19.4 trillion 150 -Refer to Table 17-8.The hypothetical information in the table shows what the values for real GDP and the price level would have been in 2019 if the Federal Reserve did not use monetary policy: a.If the Fed wanted to keep real GDP at its potential level in 2019,should it have used an expansionary policy or a contractionary policy? Should the trading desk have bought T-bills or sold them? b.Suppose the Fed's policy was successful in keeping real GDP at its potential level in 2019.State whether each of the following would be higher or lower than if the Fed had taken no action: (i) Real GDP (ii) Full-employment real GDP (iii) The inflation rate (iv) The unemployment rate c.Draw an aggregate demand and aggregate supply graph to illustrate your answer.Be sure that your graph contains LRAS curves for 2018 and 2019; SRAS curves 2018 and 2019; AD curve for 2018 and 2019,with and without monetary policy actions; and equilibrium real GDP and the price level in 2019 with and without policy.

Inflation rates during the years 1979-1981 were the highest the United States has ever experienced during peacetime.

Figure 17-7 -Refer to Figure 17-7.Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

An increase in the interest rate causes

When the Federal Reserve increases the money supply,at the previous equilibrium interest rate households and firms will now have