Exam 26: Monetary Policy

The Taylor rule accurately predicted the changes in the federal funds target during the period

In the following table, fill in the columns for your return on investment if the price of your house increased or decreased by 20 percent, based on the down payments specified in the first column. Return on Your Investment From

If the amount you owe on your house is greater than the price of the house, you have

An increase in the interest rate

Monetary policy could be procyclical if the Federal Reserve

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

Contractionary monetary policy causes

Table 26-6 -Refer to Table 26-6. Suppose the table above illustrates the values of real and potential GDP and the price level, if the Fed does not vote to change their current policy to be more contractionary or expansionary. If the Fed wants to keep real GDP at its potential level in 2015, should the Fed use a contractionary or expansionary policy? Should it raise or lower its interest rate target? How should it conduct open market operations to achieve its goal?

An increase in the price level causes

Figure 26-9 -Refer to Figure 26-9. In the figure above suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve's open market purchase of Treasury securities.

Figure 26-3 -Refer to Figure 26-3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will

Table 26-8 -Monetarists think that the Fed should use ________ as a target when conducting monetary policy.

Which of the following is true?

Suppose the equilibrium real federal funds rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 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

Figure 26-1 -Refer to Figure 26-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if

Present two arguments as to why the Fed should adopt inflation targeting as a framework for monetary policy.

Lowering the interest rate will

The Fed can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates.

Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $800 billion. Suppose the Federal Reserve increases the money supply to $850 billion. At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $850 billion of the money supply. What causes households and firms to want to hold the additional $50 billion of the money supply?