Macro Quiz 13

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

M a direct proportionate change in P

The quantity theory equation of exchange states:

M × V = P × Q.

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:

Taylor Rule

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.

One of the key factors leading to the last economic crisis was:

a worldwide savings glut.

The Fed uses its tools to counteract:

booms and recessions

Quantitative easing refers to the process whereby the Fed:

buys securities to stimulate the economy.

Which economists believe that changes in the money supply lead only to price changes?

classical economists

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

decreases; exports; decreases

The twin goals of monetary policy are:

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

Loosening monetary policy causes interest rates to ____ and consumption and investment to ____.

fall; increase

When current real output exceeds potential real output, the Fed will _____ interest rates in an effort to fight _____.

increase; inflation

Money illusion:

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

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

long/short

Some analysts blame the last economic crisis on Fed policy. They argue that:

low interest rates encouraged excessive mortgage borrowing, leading to the housing bubble.

In a liquidity trap:

monetary policy is ineffective in changing income and output.

Monetarists believe that in the short run a change in the money supply can affect _______________________, while in the long run, a change in the money supply will affect _____________.

output and price level, the price level only

If the economy is facing inflationary pressures, the Fed will:

raise interest rates

Negative demand shocks to the economy can come from:

reductions in consumer demand.

When the Fed sells bonds, it is:

tight money policy.