Macroeconomics Chapter 15

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 3%, the opportunity cost of holding cash in a checking account is:

2%.

If a central bank announces an inflation target:

A) it may have to sacrifice some control over interest rates.

(Figure: The Money Supply and Aggregate Demand) Refer to the figure The Money Supply and Aggregate Demand. Panel (a) illustrates what happens when the Federal Reserve decides to _______ the money supply and _______ interest rates.

C) increase; lower

The money supply curve is:

vertical

Since the Federal Reserve has the power to determine the supply of money, the money supply curve in the liquidity preference model is a(n):

vertical line.

(Figure: Changes in the Money Supply) Refer to the information in the figure Changes in the Money Supply. If the supply of money shifts from S1 to S2, the Federal Reserve must have _______ bonds in the open market.

bought

To lower the short-term interest rate, the Federal Reserve can:

buy bonds.

When the Fed uses quantitative easing, it is:

buying longer-term government debt.

21. Monetary policy affects GDP and the price level by:

changing aggregate demand.

To fight inflation, the Federal Reserve should conduct _____ monetary policy to ______ interest rates, which will shift the aggregate demand curve to the _____.

contractionary; raise; left

The main objective of contractionary monetary policy is to:

decrease aggregate demand.

(Figure: Short-Run Determination of the Interest Rate) If the money supply is at MS1 and the central bank buys bonds, then in the short run the interest rate will:

decrease to r2.

(Figure: The Money Supply and Aggregate Demand) Refer to the figure The Money Supply and Aggregate Demand. Panel (b) illustrates what happens when the Federal Reserve decides to _______ the money supply and _______ interest rates.

decrease; raise

Improvements in information technology have:

decreased the demand for money.

Recent increase in the use of digital cash has:

decreased the demand for money.

Contractionary monetary policy:

decreases aggregate demand.

Contractionary monetary policy involves:

decreasing the money supply, increasing interest rates, and decreasing aggregate demand.

Figure: Equilibrium in the Money Market) Refer to the information in the figure Equilibrium in the Money Market. If the interest rate is above the equilibrium rate, there will be an _______ money and the interest rate will _______.

excess supply of; fall

Economists argue that money is neutral:

in the long run, but money does have an impact on the price level.

If the Federal Reserve wants to lower the interest rate, it will:

increase the money supply.

(Figure: Short-Run Determination of the Interest Rate) If the money supply is at MS2 and the central bank sells bonds, then in the short run the interest rate will:

increase to r1.

To close a recessionary gap using monetary policy, the Federal Reserve should ________ the money supply to ________ investment and consumer spending and shift the aggregate demand curve to the ________.

increase; increase; right

In the long run, an increase in the quantity of money:

increases prices but not long-run output

An increase in the aggregate price level:

increases the demand for money.

Expansionary monetary policy:

increases the money supply, decreases interest rates, and increases consumption and investment.

According to the loanable funds model, in the short run expansionary monetary policy:

increases the supply of loanable funds.

(Figure: Changes in the Money Supply) Refer to the information in the figure Changes in the Money Supply. Federal Reserve policy to increase the supply of money and hence to lower the interest rate from 6% to 4%, is accomplished by action that _______ the _______ government bonds.

increases; demand for

If the Federal Open Market Committee conducts an open market purchase, one can expect that:

interest rates in the money market will fall.

The short-term interest rate is the interest rate on financial assets that mature within:

less than a year

Monetary neutrality implies that in the long run:

monetary policy does not affect the level of economic activity.

Interest rates can be determined in models of:

money demand and supply and in the demand and supply of loanable funds.

The amount of money that people demand is:

negatively related to the interest rate.

If an economy is operating at an output level below its potential output level, holding everything else constant, one would expect:

nominal wages to fall.

Now that fast food places such as McDonald's are accepting credit card payments:

the demand for money has decreased.

If aggregate output decreases in an economy whose central bank is not changing its monetary policy, one would expect:

the demand for money to fall.

(Figure: Short-Run Determination of the Interest Rate) If the money supply is at MS2 and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r1. In the long run:

the demand for money will decrease, and the interest rate will decrease to r2.

(Figure: Short-Run Determination of the Interest Rate) If the money supply is at MS1 and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r2. In the long run:

the demand for money will increase, and the interest rate will increase to r1

The theory of money that the interest rate is determined by the supply and demand for money is known as:

the liquidity preference model of the interest rate.

If the aggregate price level doubles:

the money demand at any given interest rate will also double.

If an economy is in long-run equilibrium at its potential output level, this also means

the money market is in equilibrium.

If the money supply increases by 10%, in the long run:

the price level increases by 10%

Suppose a new regulation lowers the interest rates banks can offer on checking account funds. This will result in:

a shift leftward of the money demand curve.

(Figure: Short-Run Determination of the Interest Rate) If the money supply is at MS2 and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r1. In the long run:

prices will decrease and decrease the demand for money.

(Figure: Short-Run Determination of the Interest Rate) If the money supply is at MS1 and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r2. In the long run:

prices will increase and increase the demand for money.

The Taylor rule for monetary policy:

provides guidance for setting a federal funds rate target.

(Figure: Equilibrium in the Money Market) Refer to the information in the figure Equilibrium in the Money Market. Equilibrium in this money market will occur at interest rate _______ and quantity of money _______.

r1; Q1

A sale of bonds by the Federal Reserve:

raises interest rates and reduces the money supply.

If inflation increases from 2% to 5%, the money demand curve will:

shift to the right.

The loanable funds model focuses on the:

supply of funds from lenders and the demand from borrowers.

(Figure: Short-Run Determination of the Interest Rate) Refer to the information in the figure. If the money supply is at MS2 and the central bank sells bonds, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

supply of loanable funds from S2 to S1, which raises the interest rate.