Econ Ch 16

U.S. housing prices peaked in:

2006.

An increase in the money supply can typically affect the economy with a lag of _____ months.

6 to 18

An increase in the money supply typically affects the economy with a lag that varies in time from _____ months.

6 to 18

What kind of monetary policy rule did Milton Friedman advocate?

The money supply should increase by 3 percent every year.

Which shock can the Fed deal with most effectively?

a shock to AD

Suppose the Fed reacts to an economic shock and quickly restores the economy to its long-run potential growth rate. It is most likely that this shock was:

an aggregate demand shock.

How did the Fed encourage business confidence after the September 11 terrorist attacks?

by lending billions to banks

Suppose the central bank targets a low rate of unemployment. If a negative real shock occurs, the real growth rate will be:

higher if the central bank counters the shock than if it does not react.

If the Federal Reserve responds to a negative real shock with a decrease in money growth, the Federal Reserve's response will cause inflation to:

increase by less than it otherwise would have.

To offset the effect of negative growth in money velocity ( ), the central bank should:

increase the growth rate of the money supply.

An economy in which the central bank overstimulates aggregate demand will suffer from:

inflation

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising:

inflation

Monetary policy is:

less effective in dealing with real shocks than with aggregate demand shocks.

If the Fed adheres to a strict "money growth rule" of 3% (i.e., they keep at 3% no matter what), what happens if velocity growth ( ) drops?

Inflation, real growth, and nominal wage growth all decrease.

If the Federal Reserve offsets a negative shock to aggregate demand with increased money growth:

both inflation and real GDP growth will rise compared to if the Fed had not acted.

If the Fed overreacts to a negative spending shock by increasing money growth too much:

both real GDP growth and inflation will increase more than the Fed prefers.

In the AD-AS diagram, a "tight" monetary policy shifts the:

AD curve to the left.

When uncertainty causes a delay in investment activity, it leads to a:

bandwagon effect.

What reason do many people think explains why the Fed overstimulated the money supply in the 1970s?

because of the high unemployment associated with the oil crises

Which is regarded as a policy rule?

keeping the money supply growth rate consistent with a given inflation rate

The most appropriate monetary policy response to an asset price bubble for a central bank is to:

not react to asset price bubbles because monetary policy can affect only aggregate demand, not demand in a specific market.

_____ is a significant reduction in the rate of inflation, while _____ is a reduction in the level of prices.

Disinflation; deflation

The Fed responded to the 1997-2006 housing boom by:

conducting expansionary monetary policy.

If the Federal Reserve overstimulates the economy by increasing money growth too much, then inflation will:

create arbitrary redistributions of wealth.

Monetary policy is a _____ means of popping a bubble because monetary policy _____ push down the price of specific commodities.

crude; can't

In the long run, a negative real shock will cause output growth to:

decrease

To restore growth and reduce unemployment in response to a negative real shock, the Federal Reserve would:

increase the money growth rate, which will increase both the inflation rate and economic growth rate.

Suppose the government subsidizes the price of bananas, making it so low that you buy an enormous number of bananas and store them on your roof. If your roof caves in, it's

your fault.

What strict rule did Milton Friedman believe would provide for greater price stability?

Money supply should grow by 3% annually.

What is a possible reason for the Fed's inability to prevent a recession?

Much of the information about the economy is unknown when the Fed is making policy.

If the economy is hit by a negative real shock that reduces real GDP growth below its long-run potential rate, what is the appropriate monetary policy to move real GDP growth back to the long-run rate without raising inflation?

No monetary policy can achieve this goal.

If initially, = 5%, = 3%, = 2%, and = 6% and then because of economic uncertainty falls to 1%, what should the Fed do?

Publicly demonstrate a commitment to keep + at 8% by raising .

When the price level actually falls, what is the economy experiencing?

deflation

The Federal Reserve's influence over _____ is more powerful than its influence over _____.

expectations; the money supply

The collapse of a financial bubble in 2008 is best regarded as a:

negative shock to aggregate demand.

(Figure: Negative Supply Shock) Refer to the figure. This economy initially begins at point A and a negative supply shock takes it to point Y. If the Fed reacts by increasing money growth by 9%, this would take the economy to:

point V.

If the Fed wants to raise real GDP growth by raising money supply growth, which condition will make monetary policy more effective in raising real GDP growth?

prices continuing to remain very sticky

When a major negative aggregate demand shock hits the economy, a central bank can "maintain market confidence" by:

promising to increase the growth rate of money if the economy worsens further.

A negative real shock is often amplified, creating short-run aggregate supply and aggregate demand shocks due to:

sticky wages and prices.

Many economists have argued that the Federal Reserve should have taken actions to burst the U.S. housing bubble. However, bursting of the housing bubble by the Federal Reserve would have caused:

the AD curve to shift inward.

(Figure: Monetary Policy) Refer to the figure. Assume that the economy is initially at point Y in the graph. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend, then:

the Fed action would be partially effective and the economy would move to point Z.

Economist Milton Friedman called for a policy rule that keeps the growth rate of the money supply at 3% because:

the economy's long-run potential growth rate is 3%.