chapter 16
Arguments supporting the Federal Reserve's credit policy include all of the following except
it increased incentives to screen and monitor in order to limit asymmetric information problems
When the money supply increases, aggregate demand rises.
true
If the Fed increases the discount rate, relative to the federal funds rate, then this
would increase the cost of funds for institutions borrowing from the Fed
If the economy is operating beyond full employment, contractionary monetary policy will shift the aggregate demand curve to the ________ and the price level will ________.
left; decrease
When the Fed makes an open market purchase, the supply curve for bonds in the private market shifts to the ________ and the price of bonds ________.
left; increases
A monetary policy action that could eliminate an inflationary gap in the short run is
an open market sale of government securities
The bond demand curve is downward sloping because
lower bond prices translate into higher interest rates and returns.
When the Fed sells bonds, it must offer them at a ______________ price. When the Fed buys bonds, it must pay a ______________ price.
lower; higher
In an open economy, the net export effec
may offset an expansionary fiscal policy but enhance an expansionary monetary policy
In an open economy, the net export effect
may offset an expansionary fiscal policy but enhance an expansionary monetary policy.
Suppose that the economy currently is in long-run equilibrium. Explain the short- and long-run adjustments that will take place in an aggregate demand-aggregate supply diagram if the Fed expands the quantity of money in circulation.
Aggregate demand curve shifts to the right; in the short-run both price level and real GDP increase. Over the long run the short-run aggregate supply curve shifts upward to the left and a new long-run equilibrium is reached at the initial equilibrium GDP but at a higher price level.
Since the financial meltdown of the late 2000s, the Fed has launched a credit policy which consists of
All of the above
The equation of exchange
All of the above
The Fed's credit policy since 2008 has
All of the above
An increase in the money supply will
All of the above.
Which of the following is a true statement?
Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand.
Which of the following is not a reason people choose to hold money balances?
Money holdings are good assets during periods of inflation.
Federal Reserve may take a certain policy action to prevent the dollar's appreciation from affecting equilibrium real GDP in the short run. Which one of the following is not a likely policy action that the Fed will take?
Increasing government spending
Use to the graph to help determine the monetary aggregate (M1 or M2) monetarists will employ in order to correctly forecast inflation and/or nominal GDP growth.
M2, since according to the graph income velocity based on M2 is practically constant.
Use the graph to help determine which of the following statements regarding the monetary policies of the Fed and the ECB are true:
The ECB followed a very passive monetary policy for a long period (from June 2003 to December 2005).
Quantity theory of money and prices
The hypothesis that changes in the money supply lead to equiproportional changes in the price level
The ______________ effect of an increase in the money supply arises because people desire to spend more on real goods and services when they have excess money balances.
direct
An expansionary monetary policy decreases the rate of interest, which in turn increases planned investment.
discount rate
If the Federal Reserve implements an expansionary monetary policy that reduces the market interest rate, this will tend to ________ foreign investment in U.S. financial assets and ________ U.S. net exports.
discourage; increase
The demand for money curve shows the relationship between the interest rate and the quantity of money demanded, and is
downward sloping
The net export effect of contractionary monetary policy predicts that a country's
exports decrease as the money supply contracts
The market price of existing bonds is directly related to the rate of interest.
false
The supply curve of bonds is drawn vertically because
the Fed's decision to buy or sell bonds is independent of bond prices
What type of relationship exists between the growth of the money supply and changes in the inflation rate?
A direct relationship
There is _______________ relationship between the prevailing rate of interest in the economy and the market price of existing bonds (and all fixed-income assets).
an inverse
If Fed implements the short run monetary policy option instead of simply waiting for the long-run adjustments to take place, then it
benefits the society as the inflationary pressures are removed quickly
The Fed's "quantitative easing" can be best described as a
credit policy action
Increases in output and increases in the inflation rate have been linked to
increases in the money supply
Traditional Keynesian analysis suggests that increases in the money supply shift the aggregate demand curve through increasing
investment
The demand for money
is a downward sloping function of the interest rate
If the total money supply is $45 billion, real GDP is $60 billion, and the price level is 3, the income velocity of money is
4
Contractionary monetary policy causes the
interest rate to increase
As a result of monetary policy of the Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this outcome?
A Fed sale of bonds to brokers and banks
Use the graph to help determine which of the following statements are true:
There exists a positive relationship between the growth rate of M2 and inflation, although not a very strong one. This relationship starts breaking down in the early 1990's.
Use to the graph to help determine which of the following statements regarding the growth rate of M1 and inflation are true.
There exists a relationship between the growth of M1 and inflation, but not a very tight one. This implies that there may be additional variables other than M1 that may affect inflation.
A member of Congress, who has never had an economics course, has just been placed on a Money and Banking Committee. The official needs a briefing prior to the first meeting concerning the role of the money supply in the economy. Which of the following statements should you insist that the official remember when entering the first committee meeting?
There is a direct, albeit loose, relationship between the growth of the money supply and the price level; and a direct relationship between the growth of the money supply and GDP growth.
According to the quantity theory of money and prices, a 66% change in the money supply, holding other variables constant, leads to
a 6% change in the price level
The indirect effect of an increase in the money supply works through
a decrease in the interest rate increasing investment and consumption
A Federal Reserve open market sale generates ___________________ in the price of existing bonds and ____________ in the market interest rate. An open market purchase brings about ___________________ in the price of existing bonds and _______________ in the market rate of interest.
a decrease; an increase; an increase; a decrease
When the money supply increases, interest rates also increase.
false
With contractionary monetary policy, the net export effect results in a depreciation of the dollar, where the international price of the dollar falls.
false
The state of the economy depicted at the right can be best described as
having a recessionary gap
According to the equation of exchange, if velocity is constant and output is fixed at the full employment level, then any percentage increase in the money supply will
lead to an equal percentage increase in the price level.
The Fed's credit policy since 2008 has
led to a reduction in the money multiplier
In order to induce private banks to maintain substantial reserve deposits with the Federal Reserve banks, since 2008 the Fed has
paid banks an interest rate that is higher than the federal funds rate on their reserves
Many economists believe that the growth of the money supply is
positively related to the growth of real GDP
Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments. It sells bonds in the open market, increases the discount rate, and increases the reserve ratio. The net export effect resulting from these monetary policy actions will
raise the interest rate, increase the inflows of international capital, increase the value of the dollar, decrease exports, and as a consequence real GDP will decline even further
According to the Keynesian theory, an increase in the money supply decreases the interest rate and increases investment spending. The result of this is that
real GDP increases by a larger amount than the change in investment
If the economy is operating at less than full employment, expansionary monetary policy will shift the aggregate demand curve to the ________ and the price level will ________.
right; increase
Contractionary monetary policy by the Fed can be hampered by
the ability of U.S. citizens and businesses to obtain dollars from foreign sources
Suppose you go shopping for a gift for a friend and also find a sweater that you want for yourself. You pay cash for the gift and write a check for the sweater. Your purchases are made with money holdings represented by
the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater.
Holding money as a medium of exchange to make payments is known as
transactions demand
An expansionary monetary policy decreases the rate of interest, which in turn increases planned investment.
true
Federal Reserve policymaking which involves direct lending to financial and nonfinancial firms is called credit policy.
true
