LC30: LearningCurve - Ch. 30: Monetary Policy

A basis point is equal to _____ percent.

0.01

If the interest rate on Ed's checking account is 2 percent and the interest rate on the certificate of deposit (CD) that he is considering is 5 percent, then the opportunity cost of holding money is _____ percent.

3

If the price level increases by 5 percent, then the demand for money will increase by:

5 percent.

_____ reduces aggregate demand.

Contractionary monetary policy

_____ increases aggregate demand.

Expansionary monetary policy

The target federal funds rate is the:

Federal Reserve's desired federal funds rate.

_____ is based on a forecast of future inflation.

Inflation targeting

_____ are interest rates on financial assets that mature a number of years in the future.

Long-term interest rates

The _____ for monetary policy suggests that the federal funds rate should be set on the basis of inflation and the output gap.

Taylor Rule

For which situation would the Federal Reserve MOST likely pursue expansionary monetary policy?

The Federal Reserve fears deflation.

Which is caused by a decrease in the interest rate?

a movement down along the money demand curve

Which event or scenario would shift the money demand curve to the right?

an increase in real GDP

A _____ equals 0.01 percentage points.

basis point

If interest rates fall:

bond prices will rise.

According to the Taylor Rule for monetary policy, _____ should be taken into account when setting the target for the federal funds rate.

both the size of the output gap and the size of the inflation rate

In order to increase the money supply, the Federal Reserve:

buys Treasury bills.

Usually contractionary monetary policy will:

decrease investment.

A goal of contractionary monetary policy is to:

decrease real GDP.

If the Federal Reserve pursues an expansionary monetary policy, then interest rates MOST likely will:

decrease.

Suppose that the economy is in a recession and the inflation rate decreases from 5 percent to 1 percent. In this case, the demand for money MOST likely will:

decrease.

If the Federal Reserve increases interest rates with a contractionary monetary policy, then planned investment spending will _____, and aggregate expenditures will _____.

decrease; decrease

If the economy is in long-run equilibrium at potential output and the money supply _____, then in the long run, prices will decrease, and output will _____.

decreases; remain the same

Contractionary monetary policy involves:

decreasing the money supply.

According to the concept of monetary neutrality, changes in the money supply have no real effects on the economy:

in the long run.

All of the following are goals of contractionary monetary policy EXCEPT to:

increase real GDP.

If banks begin to charge $10 for each automated teller machine (ATM) transaction, then the demand for money MOST likely would:

increase.

If inflation increases from 2 percent to 4 percent, then the demand for money MOST likely will:

increase.

If the Federal Reserve decreases the money supply, then interest rates MOST likely will:

increase.

If the Federal Reserve pursues a contractionary monetary policy, then interest rates MOST likely will:

increase.

If the Federal Reserve decreases interest rates with an expansionary monetary policy, then planned investment spending will _____ and aggregate expenditures will _____.

increase; increase

If the Federal Reserve _____ the reserve requirement, then the money supply will MOST likely _____.

increases; decrease

Contractionary monetary policy involves all of the following EXCEPT:

increasing real GDP.

Expansionary monetary policy involves:

increasing the money supply.

The Taylor Rule for monetary policy suggests that the federal funds rate should be set on the basis of the _____ rate and the output gap.

inflation

In the figure, if the economy is originally in equilibrium at Point A at potential output, then an increase in the money supply in the short run will create a(n) _____ gap. https://learningcurve.macmillantech.com/question_pics/KrugLearnCur_31UN02.jpg

inflationary

The _____ rate is the opportunity cost of holding money.

interest

The money demand curve shows the relationship between the quantity of money demanded and the _____ rate.

interest

A hypothetical economy experiences an increase in the aggregate output level. If the central bank does not engage in monetary policy, then MOST likely, the:

interest rate in this economy will increase.

One advantage of inflation targeting is that it:

is transparent.

Long-term interest rates:

largely reflect the average expectation in the market about what's going to happen to short-term interest rates in the future.

In the figure, if the interest rate is rh, then the demand for money is _____ the supply of money. https://learningcurve.macmillantech.com/question_pics/KrugLearnCur_31UN01.jpg

less than

According to the _____, the interest rate is determined by the demand for and supply of money.

liquidity preference model

Owing to risk factors:

long-term interest rates are, on average, higher than short-term interest rates.

According to the concept of _____, changes in the money supply have no real effects on the economy in the long run.

monetary neutrality

The main tool of stabilization policy is:

monetary policy.

The _____ curve shows the relationship between the quantity of money demanded and the interest rate.

money demand

In the figure, if the economy is originally in short-run equilibrium at Point D, then the economy will: https://learningcurve.macmillantech.com/question_pics/KrugLearnCur_31UN02.jpg

move to long-run equilibrium at Point C.

A rise in interest rate is MOST likely to cause a:

movement up the money demand curve.

The money supply curve shifts to the left. This shift could be caused by the Federal Open Market Committee's (FOMC):

open-market sale of Treasury bills.

The Federal Open Market Committee sets a target interest rate, and can achieve that interest rate through:

open-market sales, if the federal funds rate is initially less than the target rate.

The interest rate is the _____ of holding money.

opportunity cost

The Taylor Rule for monetary policy suggests that the federal funds rate should be set on the basis of inflation and the:

output gap.

In the figure, the equilibrium interest rate is: https://learningcurve.macmillantech.com/question_pics/KrugLearnCur_31UN01.jpg

re.

The Taylor Rule states that the target federal funds rate should _____ when there is a positive output gap and _____ when there is low and negative inflation.

rise; fall

A decrease in aggregate price level will:

shift the money demand curve to the left.

An increase in the aggregate price level will:

shift the money demand curve to the right.

The money supply curve _____. This shift could be caused by the Federal Open Market Committee's (FOMC's) open-market purchase of Treasury bills.

shifts to the right

Interest that is foregone is:

the opportunity cost of holding money.

In the liquidity preference model, the money supply curve is:

vertical.

Short-term interest rates are the interest rates on assets that mature within less than a:

year.