ECN CH15

The following factors shift the money demand curve:

- Changes in aggregate price level - Changes in real GDP - Changes in technology - Changes in institutions

Other things equal, if the amount of money demanded is greater than the amount of money supplied, then the interest rate may fall. A) True B) False

False

The federal funds rate usually rises when the output gap is _________ and falls when the output gap is _________. - negative; negative - negative; positive - positive; positive - positive; negative

positive; negative

An increase in the money supply _______ the interest rate and _________ aggregate demand - reduces; increase - reduces; decrease - increases; decrease - increases; increase

reduces; increases

If the economy is at potential output and the Fed increases the money supply, in the long run real GDP will likely: - decrease - increase - remain the same - fluctuate randomly

remain the same

Monetary neutrality:

Changes in the money supply have no real effect on the economy.

Expansionary monetary policy works by decreasing consumption, allowing other sectors of the economy to spend more. A) True B) False

False

The demand for money is higher in Japan than in the United States because: A) telecommunications and information technology is more advanced in the United States than in Japan. B) Japanese consumers use credit cards more than people in the United States. C) Japanese interest rates are very high in comparison to interest rates in the United States. D) Japanese interest rates are very low in comparison to interest rates in the United States.

Japanese interest rates are very low in comparison to interest rates in the United States.

In the long run, money supply does not effect interest rate T or F

T

The chairmanship of the Federal Reserve is arguably the most powerful position in the U.S. government T of F

T

Between 1970 and the present, research comparing similar wealthy countries found that increases in the money supply: - and increases in the price level were roughly proportional - had little effect on prices - caused large decreases in real GDP - caused large increase in real GDP

and increases in the price level were roughly proportional

The liquidity preference model of the interest rate

asserts that the interest rate is determined by the supply and demand for money.

Taylor Rule is ___________- looking

backward

If interest rates rise, there will be a(n): - decrease in aggregate demand - increase in aggregate demand - increase in the money supply - increase in aggregate supply

decrease in aggregate demand

A decrease in the demand for money would result from a(n): - increase in income - decrease in real GDP - increase in nominal GDP - increase in the price level

decrease in real GDP

To close an inflationary 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 - decrease; decrease; left - increase; increase; left - decrease; decrease; right

decrease; decrease; left

Contractionary monetary policy: A) is appropriate during a recessionary gap. B) decreases aggregate demand. C) increases aggregate demand. D) helps solve the problem of unemployment.

decreases aggregate demand.

An open- market purchase of Treasury bills drives the interest rate ________.

down

A increase in the money supply, leads to a _____ in the interest rate

fall

Inflation targeting is __________-looking

forward

The federal funds rate tends to be high when inflation is _______ and low when inflation is ______. high; high high; low low; high low; low

high; low

In the long run, an increase in the quantity of money: A) increases real output. B) increases prices but not long-run output. C) increases real interest rates. D) has no impact on the economy.

increases prices but not long-run output.

Expansionary monetary policy: A) increases the money supply, interest rates, consumption, and investment. B) decreases the money supply, interest rates, consumption, and investment. C) increases the money supply, decreases interest rates, and increases consumption and investment. D) decreases the money supply, increases interest rates, and decreases consumption and investment.

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

According to the concept of monetary neutrality, _______ in the money supply _______ real GDP __________ the price level - increases; do not change; but do raise - increases; raise; but do not change - increases; raise; but do not raise - decreases; lower; but do not lower

increases; do not change; but do raise

If the Federal Open Market Committee conducts an open market purchase, one can expect that: A) interest rates in the money market will fall. B) interest rates in the money market will remain unchanged. C) interest rates in the money market will rise. D) the money supply will decrease.

interest rates in the money market will fall.

Long-term interest rates:

interest rates on financial assets that mature a number of years in the future.

A fall in money demand shifts the money demand curve to the ________

left

An increase in the money supply _______ the interest rate in the short run

lowers

Expansionary monetary policy:

monetary policy that increases aggregate demand

Contractionary monetary policy:

monetary policy that reduces aggregate demand

In the short run, the interest rate is determined in the _______ market - stock - money - loanable funds - commodity

money

If an economy is operating at an output level below its potential output level, holding everything else constant, one would expect: A) nominal wages to rise. B) nominal wages to stay the same. C) nominal wages to fall. D) price levels to increase.

nominal wages to fall.

A rise in money demand shifts the money demand curve to the __________.

right

Suppose that the economy is operating at potential output and the money supply increases. Aggregate output will _____ potential output, nominal wages will _________, and the SRAS will shift _________. - rise above; fall; leftward - fall below; rise; leftward - rise above; rise; leftward - rise above; rise; rightward

rise above; rise; leftward

Taylor rule for monetary policy:

set the federal funds rate according to the level of the inflation rate and either the output gap or the unemployment rate.

If Congress places a $5 tax on each ATM transaction, there will likely be a: - movement up a stationary money demand curve - shift to the left of the money demand curve - movement down a stationary money demand curve - shift to the right of the money demand curve

shift to the right of the money demand curve

The money supply curve

shows how the nominal quantity of money supplied varies with the interest rate.

The Federal Open Market Committee sets the target interest rate for the next: - six weeks - six months - three months - three weeks

six weeks

According to the liquidity preference model, the equilibrium interest rate is determined by the: - International Monetary Fund - supply of and demand for loanable funds - supply of and demand for money - level of investment spending and saving

supply of and demand for money

Target federal funds rate:

the Federal Reserve's desired federal funds rate

If the Federal Reserve sets the federal funds rate on the basis of inflation and the output gap, then the Federal Reserve is following: A) inflation targeting. B) the Taylor rule. C) money illusion. D) the quantity theory.

the Taylor rule.

Inflation targeting:

the central bank setting an explicit target for the inflation rate and using monetary policy to hit that target.

The zero lower bound for interest rates is: A) the fact that interest rates can't go below zero. B) a theory that says that interest rates should have no bounds or limits. C) a law that prohibits credit unions from paying interest on checkable deposits. D) only a theory that never actually occurs in the real world.

the fact that interest rates can't go below zero.

Short-term interest rates:

the interest rates on financial assets that mature within six months or less.

The money demand curve shows

the relationship between the quantity of money demanded and the interest rate.

People forgo interest and hold money: - because banks are too risky - because there are no substitutions for money - because they are required to - to reduce their transaction costs

to reduce their transaction costs

An open- market sale of Treasury bills drives the interest rate _________.

up

In the liquidity preference model, the money supply is represented by a(n): - downward- sloping curve with a slope of 1/k - vertical line - upward- sloping curve with a slope of 1/ V - horizontal line

vertical line

When Federal Reserve officials say they are targeting federal funds rate, how are they doing this? A) via open market operations B) via changes in the discount rate C) via changes in deposit insurance maximums D) via government spending

via open market operations