Exam 15: Monetary Policy

Suppose the economy is in long-run equilibrium at full employment levels of real GDP. In the long run, if the money supply increases, we would expect _____ in the price level and _____ in real GDP.

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

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the central bank buys Treasury bills, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

If the actual interest rate is 6% and the target rate is 4%, the Fed should sell Treasury bills.

Suppose the Federal Reserve buys Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates.

In the long run, the interest rate is determined in the _____ market.

Use the following to answer questions : Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Look at the figure The Money Supply and Aggregate Demand. If the Federal Reserve intended to encourage investment and expand the economy, it would _____ Treasury bills, _____ the money supply, and _____ interest rates. This is shown in panel _____.

The money demand curve is _____ because a lower interest rate _____ the opportunity cost of holding money.

Quantitative easing occurs when instead of purchasing only short-term government debt, the Fed buys long-term government debt as well.

The Fed prints money only when it is conducting monetary policy.

Use the following to answer questions : Figure: Output Gap -(Figure: Output Gap) Look at the 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.

A 20% increase in the aggregate price level will increase the quantity of money demanded by:

Given an inflationary gap, the Federal Reserve will use monetary policy to _____ real GDP and _____ the interest rate.

One advantage of inflation targeting over the Taylor rule is that the central bank's policy can be evaluated by seeing how close to the target actual inflation rates are.

Given an inflationary gap, the Federal Reserve will use monetary policy to _____ interest rates and _____ aggregate demand.

Monetary policy that lowers the interest rate is called _____ because it _____.

Use the following to answer questions : Figure: Economic Adjustments -(Figure: Economic Adjustments) Look at the figure Economic Adjustments. Assume that the economy is at point c. The effect of an increase in the money supply is represented by a shift of the _____ curve to _____.

If the interest rate is below the equilibrium rate, the:

Use the following to answer questions : Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Look at the figure The Money Supply and Aggregate Demand. Panel (a) illustrates what happens when the Federal Reserve decides to _____ the money supply and _____ interest rates.

Other things equal, rising interest rates lead to a _____ in investment spending and a _____ in _____ spending.