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Exam 27: Monetary Policy

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Question 171

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If the economy is at potential output and the Fed decreases the money supply, in the long run real GDP will likely decrease.

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Question 172

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In 2007, the Fed raised its target federal funds rate to prevent unemployment and a recession.

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Question 173

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In the long run a change in the money supply will affect: I. the interest rate. II) real GDP. III) prices.

If the economy is at potential output and the Fed decreases the money supply, in the SHORT run the likely result will be a(n) _____ in investment and a(n) _____ in consumption.

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will _____ Treasury bills in the open market, _____ the supply of money, and _____ the interest rate to the target rate.

Explain what is meant by money neutrality. Use an example of expansionary monetary policy, both in the short run and the long run.

If the economy is at potential output and the Fed increases the money supply, in the short run real GDP will likely remain the same.

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____.

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 _____.

Interest rates can be determined in models of:

Use the following to answer questions Figure: Monetary Policy I -(Figure: Monetary Policy I) Look at the figure Monetary Policy I. If the economy is initially in equilibrium at E₂ and the central bank chooses to sell Treasury bills_____ shift to _____ a(n) _____ gap.

If the interest rate is below equilibrium, then the quantity of money demanded is more than the quantity of money supplied, and the quantity of interest-bearing financial assets demanded is also more than the quantity supplied.

If the interest rate is too low, it is possible that:

A contractionary monetary policy is appropriate during an expansion.

U.S. banks did not offer interest on checking accounts until the beginning of the 1980s. Then banking regulations changed, allowing banks to pay interest on checking account funds. As a result, the _____ money _____ and shifted the money demand curve to the _____.

If the economy is at potential output and the Fed increases the money supply, in the short run interest rates will likely increase.

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 economy is in an inflationary gap, the Federal Reserve will _____ Treasury bills, which will _____ the money supply and _____ interest rates. This is shown in panel _____.

Janet Yellen is the chair of the Board of Governors of the Federal Reserve.

Use the following to answer questions Figure: A Money Market -(Figure: A Money Market) Look at the figure A Money Market. If the interest rate is r₃, the interest rate will _____ because there is a _____ of money in the market.

How would a significant fall in the interest rate on short-term certificates of deposit (CDs) affect the money demand curve?