Monetary Policy-Ch. 14

In the 1896 election, Democratic candidate William Jennings Bryan's primary campaign issue was ________; in other words, ________.

"Free Silver"; bimetallism

The act of the central government borrowing by selling large numbers of bonds directly to the central bank is colloquially called:

"printing money."

Use the quantity equation to answer the following: If the central bank maintains money growth at 2%, velocity growth is 1%, and output is growing at 4%, the rate of inflation is ________; this is called ________.

-1%; deflation

If the tax rate on savings is 20%, the nominal interest rate is 4%, and the inflation rate is 3.2%, the after-tax real interest rate is:

0%

If the tax rate on savings is 20%, the nominal interest rate is 3%, and the inflation rate is 5%, the after-tax nominal interest rate is ________ and the after-tax real interest rate is ________.

2.4%; -2.6%

Hyperinflation is defined as inflation of:

50% per month or more.

Use the quantity equation to answer the following: Suppose the central bank wants to maintain a long-run inflation rate of 3%. If velocity growth is 1% and output is growing at 4%, what money growth rate should the central bank choose?

6%

A key implication of the Phillips curve is that central banks may have:

A) a difficult time increasing short-run output while maintaining low inflation. B) a difficult time reducing unemployment while maintaining low inflation. C) to accept higher inflation if they increase short-run output. D) All of the answers are correct. ***

Keynes suggested a solution to the liquidity trap:

A) expansionary fiscal policy. B) lower taxes. C) increased government spending. D) All of the answers are correct. ***

High inflation in Latin America in the 1980s is blamed on:

A) rising government deficit spending. B) falling tax revenues. C) increased programs to help the poor. D) All of the answers are correct. ***

The harmful effects of high rates of inflation include:

A) shoe leather costs. B) relative price volatility. C) income inequality. D) All of the answers are correct. ***

Long-run changes in velocity are determined by:

A) the increased use of ATMs. B) changes in transaction technologies. C) the increased use of on-line banking. D) All of the answers are correct.***

Fiscal policy is controlled by ________, and it is the cooperation between them that makes the ________ lag so long.

Congress and the President; inside

Which of the following explains why worldwide inflation rates have fallen over the past few decades?

I. an understanding of the long-run neutrality of money II. more conservative fiscal policy world wide III. a growing distaste for inflation

Velocity is written as:

V=total spending/M

According to the quantity equation of money, in the long run there is ________ relationship between money growth rate and inflation.

a one-for-one

A contributing factor to high inflation rates in the 1970s was that after oil prices rose, a(n) ________, and the Fed ________ by increasing money supply in an effort to ________. However, this increased inflation.

adverse supply shock occurred; accommodated the shock; prevent a recession

In the late 1970s, policy makers accommodated a(n) ________, allowing inflation to rise. In 1979, Chairman of the Fed Volcker decided to ________ and accepted ________.

adverse supply shock; reduce money growth; a deep recession

When the central bank accommodates a negative supply shock, it ________; however, its main goal is to ________.

allows inflation to rise; keep output from falling below its potential

In the 1880s and 1890s, there was a debate over whether to adopt bimetallism, which is defined as using ________. However, since there was a silver production boom going on during this period, had bimetallism been adopted, the growth of silver would have ________.

both gold and silver as money; increased inflation

Without time lags, correctly devised monetary policy should be able to ________ the effects of a negative expenditure shock by ________.

completely eliminate; lowering real interest rates

Uncertainty about inflation ________ borrowers and lenders (from)(to) enter(ing) the loan market because of the effects on the ________.

discourages; ex post real interest rate

When savings are taxed, if you see that inflation is too high it gives you a(n) ________, because the ________.

disincentive to save; real interest rate is negative

To escape the liquidity trap, John Maynard Keynes suggested ________, which would increase inflation along the ________.

expansionary fiscal policy; Phillips curve

In response to the subprime mortgage crisis, the President and Congress ________ while the Fed ________. The federal government's policy has a long ________ and the Fed's is very short.

gave taxpayers a tax rebate; cut interest rates; inside lag

During the 1880s and 1890s, farmers and their political allies wanted to ________, in order to ________ to reduce farmer debt burdens.

generate inflation; reduce the ex post real interest rate

In the long run, inflation is determined by the:

growth rate of money.

Velocity is defined as:

how quickly money moves through an economy.

High inflation ________, which ________, harming economic efficiency.

increases price variation; distorts household purchases and firm sales

The time between a shock and the policy response is called the:

inside lag.

The ________ is shorter for monetary policy and the ________ is shorter for fiscal policy.

inside lag; outside lag

During the deep Japanese recession in the 1990s and early 2000s, the Bank of Japan attempted to restart the economy with ________. However, because of a ________, the policy was ineffectual.

large expansionary open-market operations; liquidity trap

The phenomenon that in the long run monetary policy has NO impact on economic growth is called:

long-run neutrality.

Central banks often adopt ________ to keep ________.

low money growth rates; inflation low

In the long run, the majority of differences in inflation rates across countries is explained by ________, particularly in high-inflation countries.

money growth rates

Bimetallism is defined as a system in which:

money is backed by gold and silver.

The deflation that occurred in the early 1930s was caused by the decline in the ________ caused by bank panics.

money multiplier

The time between the policy response and the effects on the economy is called the ________ lag.

outside

Suppose inflation is close to zero and an adverse expenditure shock occurs. By the time monetary policy is effective, due to the _________, it is possible for the economy to enter a(n) ________.

outside lag; liquidity trap

The equation MV=PY is called the:

quantity equation of money.

Monetary policy's impact on ________ is ________ in the long run.

real variables; neutral

Inflation ________ the overall real return to savings.

reduces

Shoe leather costs ________ in times of high inflation because people ________.

rise; don't want to hold cash

Deflation is a period of ________ inflation.

sustained negative

The liquidity trap is a situation where:

the central bank loses its ability to manage the inflation rate.

With fiat money, money supply is controlled by:

the central bank.

The catalyst for the German hyperinflation in 1923 was:

the high war reparations paid to the victors of World War

In the equation V=(py/m), V is velocity, PY is ________, and M is ________.

total spending or nominal GDP; money supply