Chapter 15 MACRO

Refer to Figure 15-7. Suppose the Fed lowers its target for the federal funds rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

A to B. [price level and real GDP go UP]

Refer to Figure 15-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B. [price level goes DOWN and real GDP increase (down and to the right)]

Refer to Figure 15-7. Suppose the economy is in a recession and no policy is pursued. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

A to E.

Refer to Figure 15-7. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from

C to B.

Refer to Figure 15-7. Suppose the Fed sells Treasury Bills in pursuit of confectionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

C to B. [price level and real GDP go DOWN]

If the Fed pursues expansionary monetary policy then

The money supply will increase, interest rates will fall and GDP will rise.

Refer to Figure 15-10. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market sale of Treasury bills [B is placed below and left of A on graph]

Refer to Figure 15-2. In the figure above, the movement from point A to point B in the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve

Suppose the Fed increases the money supply. Which of the following is true?

at the original interest rate, the quantity of money demanded is less than the quantity of money supplied

When the Fed embarked on a policy known as quantitative easing, they

bought longer-term securities than are usually bought in open market operations.

Refer to Figure 15-3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will

buy Treasury bills.

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should

increase.

An increase in the interest rate should ________ the demand for dollars and the value of the dollar, and net exports should ________.

increase; decrease

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.

increase; more

An increase in the interest rate

increases the opportunity cost of holding money

The federal funds rate is

interest rate banks charge each other for overnight loans

The situation in which short term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as

liquidity trap

Refer to Figure 15-8. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to

lower interest rates

Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often

lowers interest rates during recessions.

An increase in real GDP can shift

money demand to the right and increase the equilibrium interest rate.

When the Federal Reserve increase the money supply, at the previous equilibrium interest rate households and firms will now have

more money than they want to hold

When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have

more money than they want to hold.

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded.

When the Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics.

Which of the following are goals of monetary policy?

price stability, economic growth, and high employment

The Federal Reserve System's four monetary policy goals are

price stability, high employment, stability of financial markets and institutions, economic growth.

When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to

sell Treasury bills.

The Fed can increase the federal funds rate by

selling Treasury bills, which decreases bank reserves.

The money market model is concerned with _____ and the loanable funds market is concerned with _____.

short-term nominal interest rates; long-term real interest rates

If the Fed raises its target for the federal fund rate, this indicates that

the Fed is pursuing a contractionary monetary policy.

Suppose that the economy is producing above potential GDP and the Fed implements the correct change in monetary policy, but not until after the economy has passed the peak of the boom. Then

the Fed's contractionary policy will result in too large of a decrease in GDP

If the Fed lowers its target for the federal funds rate, this indicates that

the fed is pursuing an expansionary monetary policy

When the Fed increases the money supply

the interest rate falls and this stimulates investment spending

An increase in the price level causes

the money demand curve to shift to the right

The federal reserves two main monetary policy targets are

the money supply and interest rate

The Fed's two main monetary policy targets are

the money supply and the interest rate.

Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if

the price level increased

Refer to Figure 15-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

C to B.

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives.

Which of the following will lead to a decrease in the equilibrium interest rate in the economy?

a decrease in GDP

Which of the following would cause the money demand curve to shift to the left?

a decrease in real GDP

Contractionary monetary policy on the part of the Fed results in

a decrease in the money supply, an increase in interest rates, and a decrease in GDP

Contractionary monetary policy causes

aggregate demand to fall and the price level to fall

Refer to Figure 15-5. In the figure above, the movement from point A to point B in the money market would be caused by

an increase in the price level

Refer to Figure 15-9. In the figure above suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market purchase of Treasury bills [A is placed below and left of B on graph]

Refer to Figure 15-9. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market purchase of Treasury bills [A is placed below and left of B on graph]

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

decrease

An increase in the money supply will

decrease the interest rate

An increase in the demand for Treasury bills will

decrease the interest rate on Treasury bills.

An increase in the demand for treasury bills will

decrease the interest rate on Treasury bills.

An increase in interest rates

decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports.

The interest rate that banks charge other banks for overnight loans is the

discount rate

When the price of a financial asset ________ its interest rate will ________.

falls; rise

expansionary monetary policy refers to the _____ to increase real GDP

fed reserves increasing the money supply and decreasing interest rates

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the

federal funds rate

Suppose that households become mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand an money supply model and assuming everything else is held constant, the equilibrium interest rate should

increase

Lowering the interest rate will

increase investment projects by firms

With the federal funds rate near zero and he economy still struggling, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as

quantitative easing.

With the federal funds rate near zero and the economy still struggling, in response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as

quantitative easing.

Refer to Figure 15-6. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to

raise interest rates

Refer to Figure 15-1. In the figure, the money demand curve would move from MD1 to MD2 if

real GDP increased.

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

use open market operations to buy Treasury bills

If the Fed's policy is contractionary, it will

use open market operations to sell Treasury bills.