Econ ch 16

The Fed dealt with high inflation in the 1980s by

reducing the money supply and causing aggregate demand to fall

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.

When people believe that a central bank will stick with its policy, monetary policy is likely to have

high credibility

increasing M

increases inflation, dampens loss in real growth

Uncertainty always causes

investment decrease

Disinflation in the 1980s was a result of

leftward shifts in the aggregate demand curve due to money supply reductions

In response to a negative spending shock, a condition of lower market confidence makes monetary policy easing

less effective in raising real GDP growth.

Monetary policy is

less effective when dealing w real shocks than AD shocks

Monetary policy works best to counteract

negative aggregate demand shocks.

In a worst-case scenario, the Federal Reserve is least successful at counteracting a negative _____ shock.

real

Although the Federal Reserve may increase the monetary base, the larger monetary aggregates (M1 and M2) and thus aggregate demand won't increase very much in response if

Banks are slow to lend

What is the difference between disinflation and deflation

Disinflation is a slower increase in prices, whereas deflation is a decrease in prices.

Which BEST describes U.S. economic conditions in the 1980s

Disinflation occurred because of the deliberate actions of the Fed.

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

Why is monetary policy not fully effective in combating a negative supply shock

When countering a negative supply shock to reduce unemployment, Fed action will raise inflation.

If a real economic shock shifts the LRAS curve to the left, which of the following will NOT further reduce real GDP growth and inflation

a monetary policy rule that is credible

Under Paul Volcker, the Fed reduced the inflation rate in the early 1980s by more than 10 percentage points, causing

a severe recession to take place.

The BEST type of negative shock for the Federal Reserve to respond to is a negative shock to

ad

If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be

an increase in money supply growth.

A potential problem with expansionary monetary policy is that banks can

be unwilling to lend

In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of

both the real shock and the increased money supply growth

A negative shock to AD

creates less inflation than before, less M, less growth, and more unemployment

A decrease in the price level is called

deflation

A significant decrease in the rate of inflation is called

disinflation