Econ Exam 3 Chapter 13

A monetary rule would make it difficult to:

respond to unforeseen events.

In the classical monetary transmission mechanism any change in _______ will bring about ________.

M a direct proportionate change in P

What occurs during a negative demand shock?

Output and price level decrease.

Fed Chairman Ben Bernanke was not happy about bailing out institutions that had gotten themselves in trouble by taking on too much risk. Why did the Fed do it?

The Fed feared that failures of very large institutions threatened the stability of the entire financial system.

According to the monetarist theory:

a decrease in the money supply will increase interest rates as portfolios rebalance, leading to a drop in investment and/or consumption spending.

A negative supply shock causes output to _________ and the price level to _______.

decrease; increase

A higher interest rate __________ consumption, investment, and _____________, which ___________ aggregate demand

decreases; exports; decreases

An increase in the interest rate causes the aggregate _________ curve to shift _____.

demand; leftward

The twin goals of monetary policy are:

economic growth with low unemployment and stable prices with moderate long-term interest rates.

Suppose a news article reports, "Dismal jobs report suggests the Fed will lower interest rates." If the Fed does lower interest rates, the dollar will ____________ against foreign currencies, and U.S. goods will become ________________ for foreigners.

fall; cheaper

With a negative supply shock, the Federal Reserve has to decide whether to:

increase inflation and decrease unemployment or decrease inflation and increase unemployment.

The Fed will keep the inflation rate constant, regardless of evolving economic conditions, if it is using: _____ occurs when a central bank sets a target inflation rate and adjusts monetary policy to keep inflation in that range.

inflation targeting.

Generally, economists believe that monetary policy should focus on price stability in the _____ run and output or income in the _____ run.

long; short

A reduction in the interest rate causes consumption and investment to ____, which shifts the aggregate demand curve ____.

rise; rightward

If the unemployment rate is 4.5% and the inflation rate is 6%, the Fed will most likely:

sell bonds.

If the Fed sets the federal funds rate equal to 2 plus the inflation rate plus one-half of the inflation gap plus one-half of the output gap, it is following:

the Taylor rule.

The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called:

the liquidity trap.

If the Fed pursues an expansionary monetary policy:

U.S. exports to other countries will rise.

The idea that a change in the money supply would affect prices but not real GDP is associated with the:

classical monetary transmission mechanism.

To counteract a positive demand shock, the Fed uses ______________ monetary policy, which __________________________.

contractionary; reduces both output and the price level

In times of economic downturn the Fed will engage in ____ monetary policy by ____ bonds.

expansionary; buying

To say that the Fed is transparent means that the Fed:

is open regarding its monetary policy.

Money illusion:

is the misperception that one is wealthier; it occurs when the money supply grows.

Keynesian theory:

states that open market operations and an increase in the money supply lead people to buy bonds, causing bond prices to rise and interest rates to fall, and increase the investment component of aggregate demand.