Chapter 15
horizontal; money
If the money market is in the liquidity trap, it is operating in the __________ segment of the __________ demand curve.
affect aggregate demand directly.
Monetarists believe that changes in the supply of money
changes in the money supply to achieve particular economic goals.
Monetary policy refers to
increase; raise
Refer to Exhibit 15-2. A(n)__________ in the money supply from S1 to S2 would have a tendency to __________ the amount of investment, assuming investment is sensitive to changes in the interest rate.
increase; lower
Refer to Exhibit 15-2. A(n)__________ in the money supply from S1 to S2 would have a tendency to __________ the opportunity cost of holding money.
surplus of money between points B and A.
Refer to Exhibit 15-2. If the interest rate is i1 and the relevant money supply curve is S2, then there is a
shortage of money between points C and D.
Refer to Exhibit 15-2. If the interest rate is i2 and the relevant money supply curve is S1, then there is a
B and C.
Refer to Exhibit 15-l. A Keynesian monetary policy to eliminate a recessionary gap can be portrayed as a move between points
D and point A.
Refer to Exhibit 15-l. A Keynesian monetary policy to eliminate an inflationary gap can be portrayed as a movement between point
B to point A.
Refer to Exhibit 15-l. A monetarist would claim that in a recessionary gap, the economy would move on its own from point
lower than it was when you bought it.
Suppose that one year ago you purchased a $100 bond with an interest payment of $5 per year and, at the time, the interest rate was 5 percent. One year later the interest rate has increased to 6.5 percent, and you still hold the bond. If you were to sell your bond now, the price that you could sell it for would be
expansionary fiscal policy.
Suppose the money market is in the liquidity trap and that the economy is experiencing a recessionary gap. A Keynesian economist would most likely advocate
money; bonds; higher
Suppose the money market is in the liquidity trap and the Fed increases the supply of money. Individuals would rather hold __________ than __________ because they expect that bond prices can go no __________.
people will end up willingly holding more money.
Suppose the money market is in the liquidity trap and the Fed increases the supply of money. We expect that
constant at zero.
Under a constant growth rate of money rule of 5 percent in an economy in which Real GDP grows at an average rate of 5 percent and velocity is constant, the inflation rate is
The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and shifts the AD curve rightward.
Which best describes the Keynesian transmission mechanism when the money supply increases?
c and d
Which of the following may block the Keynesian transmission mechanism?
The interest rate falls, but investment does not respond; there is no change in total expenditures and no shift in the AD curve.
Which scenario best explains the Keynesian transmission mechanism when the investment demand curve is vertical?
The interest rate and investment are not affected; there is no shift in the AD curve.
Which scenario best explains the Keynesian transmission mechanism when the money supply increases while the money market is in a liquidity trap?
demand; left
A decrease in the money supply will shift the aggregate __________ curve to the __________.
money market travel to affect the market for goods and services.
A general definition of the "transmission mechanism" is: the routes or channels that ripple effects created in the
nonactivist.
A person who opposes the deliberate use of fiscal and monetary policies is called a(n)
investment is insensitive to changes in interest rates.
The Keynesian transmission mechanism might get blocked if
inverse; the interest rate
The demand-for-money curve illustrates the __________ relationship between the quantity demanded of money and __________.
possibility that interest rates drop so low that people willingly hold all the additions to the money supply, rather than use it to buy bonds.
The liquidity trap refers to the
independent of the interest rate.
The quantity supplied of money is assumed (in the textbook) to be
lower; rise; raises
According to the Keynesian transmission mechanism, an increase in the money supply will __________ the interest rate, causing a __________ in investment, which then __________ Real GDP.
a leftward shift in the aggregate demand curve.
According to the monetarist transmission mechanism, a decrease in the supply of money will result in
the frequent use of fiscal or monetary policy is called for to smooth out the business cycle.
Activists believe that
5.0 percent
An individual buys a bond for $1,000 and sells it one year later for $1,050. What is the annual interest rate return that this individual has received on this bond?
demanded of money rises.
As the interest rate falls, the quantity
direct and short.
Compared to the Keynesian transmission mechanism, the monetarist transmission mechanism is
bond prices are so high that they have nowhere to go but down; given this, it is better not to be holding bonds.
If a liquidity trap exists, people are likely to be thinking that
decrease.
If market interest rates increase, the prices of existing bonds will
increases; decreases
If the interest rate increases, the opportunity cost of holding money __________, and the quantity demanded of money __________.
demanded; supplied; shortage
If the interest rate is below the equilibrium interest rate, then the quantity __________ of money exceeds the quantity __________ of money, and there is a __________ of money.
do not want to hold bonds because their price is likely to decrease.
If the money market is in the liquidity trap, then people