Exam 2 ECO 4223-003 FA

An increase in the reserve ratio (R/D) _____ the M1 money multiplier. An increase in the currency to deposit ratio (C/D) _____ the M1 money multiplier.

decreases; decreases

When inflation expectations decrease, the expectations-augmented Phillips curve shifts _____

down

In response to nominal shocks, a price level target is _____ to a nominal spending target; in response to real shocks, a price level target is _____ to a nominal spending target.

equivalent; inferior

Unlike the gold standard, there is _____ mechanism to govern the supply of money in a fiat money regime.

no automatic

How a central bank conducts monetary policy will depend _____.

on both the information available to policymakers and the incentives policymakers face

A real shock refers to an unanticipated change in _____.

potential output

Before expectations adjust, a reduction in nominal spending _____ real output. After expectations adjust, real output _____.

reduces; returns to where it was prior to the shock

Suppose a central bank is committed to hitting a price level target. An unanticipated increase in nominal spending will cause the price level to _____ (relative to its previous trajectory). The central bank will respond by _____ (relative to its previous trajectory) in order to hit its price level target.

rise; decreasing the money supply

In the 1970s, the United States experienced _____.

stagflation

A nominal shock refers to an unanticipated change in _____.

the product of the money supply and the velocity of money

The Federal Reserve consists of the Board of Governors and the _____ regional Reserve Banks. Typically, _____ regional Reserve Bank presidents serve as voting members on the Federal Open Market Committee.

12; 4

Use the rule of 70 to calculate approximately how long it will take prices to double in a country with an inflation rate of 3 percent per month.

23.3 months

From September 2008 to September 2014, the monetary base grew roughly _____ percent.

374.3

Use the rule of 70 to calculate the approximate inflation rate in a country that has seen its price level double in 12.1 years.

5.8 percent per year

A country experiences hyperinflation when the price level grows more than _____.

50 percent per month

Use the rule of 70 to calculate the approximate inflation rate in a country that has seen its price level quadruple in 15.9 years.

8.8 percent per year

According to Abrams (2006), political monetary (or, business) cycle political monetary cycle exists in the United States, but only when the President and the _____ share party allegiance.

Federal Reserve Chair

Consider the following statements: I. An inflation target anchors expectations about the future purchasing power of the dollar better than a price level target. II. Following a negative shock to nominal spending, a central bank committed to achieving its price level target will promote a fast recovery more effectively than a central bank committed to achieving its inflation target. III. A price level target makes up for past mistakes, whereas an inflation target lets bygones-be-bygones.

Statements II and III are true.

The monetary base (M0) consists of _____.

currency and reserves

The M2 monetary aggregate consists of _____.

currency, checkable deposits, savings deposits, MMMFs, and small-time deposits

Suppose a central bank is committed to hitting a price level target. An unanticipated increase in potential output will cause the price level to _____ (relative to its previous trajectory). The central bank will respond by _____ (relative to its previous trajectory) in order to hit its price level target.

fall; increasing the money supply (relative to its previous trajectory)

When inflation is higher than expected, borrowers and employers typically _____.

gain at the expense of lenders and employees

In the model of fiat money developed in lecture 7, the supply of money is just the total stock of money issued by the central bank because fiat monies _____.

have no non-monetary uses

Inflation, as measured by the Personal Consumption Expenditures Price Index (PCEPI), was _____ on average in the decade before the Great Recession (2007-2009) than it was in the decade after.

higher

The (naïve) Phillips curve was thought to represent a menu of policy options, whereby policymakers could achieve a lower unemployment rate so long as they were willing to put up with _____, and vice-versa

higher inflation

Notably absent from the (naïve) Phillips curve was a reasonable assumption about ______.

inflation expectations

In the 1960s and early 1970s, most economists believed there was a stable, exploitable tradeoff between ______ and ______.

inflation; unemployment

In the model of fiat money developed in lecture 7, the demand for money is the demand to hold _____.

irredeemable paper banknotes

Businesses tend to overproduce when the purchasing power of money is _____ expected.

less than

The long run Phillips curve is conventionally drawn as a _____ line that intersects the axis at _____.

vertical; the natural rate of unemployment, U*