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Exam 27: Monetary Policy

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Question 131

Multiple Choice

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Janet Yellen is:

A) chair of the Board of Governors of the Federal Reserve System.
B) an AIG executive who received large bonuses.
C) a Supreme Court justice who ruled that budget deficits are unconstitutional.
D) a financial adviser on CNBC.

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Question 132

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An increase in the supply of money will lead to a(n) _____ in equilibrium real GDP and a _____ equilibrium interest rate.

A) increase; higher
B) increase; lower
C) decrease; higher
D) decrease; lower

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Question 133

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One advantage of inflation targeting over the Taylor rule is that with inflation targeting, because the public knows the target in advance, uncertainty is reduced.

In the long run, a change in monetary policy will affect only the aggregate price level.

Expansionary monetary policy will _____ interest rates and _____ savings in the short run.

If the price level doubled and someone wanted to maintain the same level of purchasing power, the nominal quantity of money demanded must:

In the short run changes in the money supply change the interest rate, but in the long run changes in the money supply have no effect on interest rates.

In the long run, if the money supply rises by 10%, then the price level may rise by more than 10%.

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 MS₂ and the central bank sells Treasury bills, then in the short run the interest rate will:

Firms and businesses hold some of their assets in the form of money because:

The difference between the interest rate on assets that are not money and the interest rate on assets that are money is:

If an economy is operating below its potential output level, holding everything else constant, one would expect:

Expansionary monetary policy may decrease investment spending.

A change in _____ does NOT shift the money demand curve.

Generally, the more liquid an asset is, the:

If the economy is operating at potential output, how does a contractionary monetary policy affect short-run and long-run prices and real output?

What is the goal of contractionary monetary policy, and how does it work in the short run?

The Federal Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to _____ Treasury bills to _____ money _____.

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

Use the following to answer questions Figure: Output Gap -(Figure: Output Gap) Look at the figure Output Gap. If the economy is at Y₂ because of contractionary 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.