Modern Macroeconomics and Monetary Policy

If the Federal Reserve sells bonds, the short-run effects will be

a decrease in the money supply and higher real interest rates.

An increase in the required reserve ratio would be

a restrictive policy because it lowers the amount of excess reserves in the banking system

During 2001-2004, the Fed injected additional reserves into the banking system, which reduced the federal funds rate and other short-term interest rates. Other things constant, what is the most likely short-run impact of this policy?

an increase in aggregate demand and real GDP

In the short run, which of the following is the most likely effect of an unanticipated move to expansionary monetary policy?

an increase in real output

If the Federal Reserve increases its bond purchases, the short-run effects will be

an increase in the money supply and lower real interest rates.

In an economy in which real output grows at an average rate of 3 percent per year, a 7 percent average rate of growth in the money supply would result in

an inflation rate of 4 percent, if velocity were constant.

If the Fed fears an economic downturn, it would be most likely to

buy additional bonds in order to reduce the federal funds rate.

If the Fed wanted to institute a more expansionary monetary policy, which of the following would it be most likely to do?

buy government bonds from the public

A decrease in the nominal interest rate would

encourage people to hold larger money balances.

An increase in the nominal interest rate would

encourage people to hold smaller money balances.

Cross country data illustrates that rapid expansion in the supply of money over a lengthy period of time (for example, a decade) leads to

high rates of inflation.

The short run sequence of events following an unanticipated shift to a more restrictive monetary policy would be

higher interest rates, decrease in aggregate demand, and a reduction in output.

If there is a recession, the Fed would most likely

increase bank reserves by buying government securities.

An unanticipated shift to a more restrictive monetary policy by the Fed will

increase real interest rates and, thereby, reduce investment, current consumption, and aggregate demand.

If the Fed unexpectedly increases the money supply, real GDP

increases because the resulting decrease in the interest rate leads to an increase in investment.

In the long run, the primary effect of rapid monetary growth is

inflation.

According to monetarists, which of the following would be most important for the control of inflation?

keeping the growth rate of the money supply low and steady

In an economy in which velocity is constant and real output grows at an average rate of 3 percent per year, a 5 percent average rate of growth in the money supply would result in a

low (approximately 2 percent) rate of inflation.

The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be

lower interest rates, increase in aggregate demand, and an expansion in output.

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run an unanticipated increase in the money supply will

lower real interest rates, raise prices, and increase real GDP.

An increase in the money supply

lowers the interest rate, causing an increase in investment and an increase in GDP.

If there is a "long and variable time lag" between when a change in monetary policy is instituted and when it impacts aggregate demand and output, this will

make it more difficult for the Fed to properly time changes in monetary policy.

A decrease in the money supply

raises the interest rate, causing a decrease in investment and a decrease in GDP.

An unexpected increase in the supply of money will

reduce the real rate of interest and, thereby, trigger an increase in current spending by households and businesses.

In the situation shown, how could the Fed return the economy to potential output?

sell U.S. government bonds to banks

If the Fed anticipates that the conditions illustrated by AD1 and SRAS will be present in the near future, it should

shift to a more expansionary policy.

The demand curve for money

shows the amount of money that households and businesses wish to hold at various rates of interest.

The cost of holding money balances increases when

the nominal interest rate increases.

An analysis of countries experiencing rapid inflation indicates that inflation is generally

the result of rapid growth in the money supply.

There is excess money demand at an interest rate of

2 percent.

Which of the following options would be most likely to cause an increase in short-term real interest rates?

The Federal Reserve sells bonds in the open market.

The velocity of money is the

The average number of times a dollar is used to buy goods and services included in GDP.

Suppose the economy was currently operating at SRAS and AD2. To combat inflation, the Fed institutes restrictive monetary policy. Suppose that by the time the policy impacts the economy, AD has already moved to AD1. Which of the following would be true?

The policy would cause the economy to fall further into a recession than it would have if the Fed had not undertaken the policy.

Which of the following will increase interest rates in the short run?

The sale of bonds by the Federal Reserve in the open market.