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Exam 15: Monetary Policy

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Question 101

Multiple Choice

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Economists argue that money is neutral:

A) in both the short and the long run.
B) in the short run only.
C) in the long run, but money does affect the price level.
D) in the long run, but money does not affect the price level.

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Question 102

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Expansionary monetary policy increases all of the following EXCEPT:

A) aggregate demand.
B) GDP and the price level.
C) consumption spending.
D) interest rates.

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Question 103

Multiple Choice

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If the Federal Open Market Committee conducts an open market purchase:

As the opportunity cost of holding money changes from 5% to 3%, the quantity of money demanded increases.

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.

An increase in the money supply causes _____ in output in the short run and _____ in output in the long run.

If the actual interest rate is below the target rate, the Fed should sell Treasury bills.

The federal funds rate is the interest rate on _____, and it is controlled by the _____.

If the Federal Reserve wants to close an inflationary gap, it will _____ the money supply and _____ the interest rate, thus _____ investment spending and GDP. The AD curve will shift to the _____.

The zero lower bound for interest rates is the target that the Taylor rule sets.

Use the following to answer questions: Figure: A Money Market -(Figure: A Money Market) Look at the figure A Money Market. The equilibrium interest rate is:

The main objective of contractionary monetary policy is to:

The theory of monetary neutrality implies that monetary policy is effective in the short run but not in 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:

Long-term interest rates apply to financial assets that mature a number of years in the future.

If the inflation rate is 3% this year, the demand for money will increase by 6% this year.

If the AD curve shifts to the right, in the short run there will be a(n) _____ in aggregate output and a(n) _____ in the price level.

According to the Taylor rule, the target federal funds rate should be positively related to the inflation rate and inversely related to the unemployment rate.

Suppose the annual inflation rate is at 7% and 3% of the labor force is unemployed. If you were on the Federal Open Market Committee, what action would you prescribe? How would this affect the economy, the inflation rate, and the unemployment rate?

According to the liquidity preference model, a _____ in the money supply shifts the money supply curve to the _____ and increases the equilibrium interest rate.