Macro Econ Chapter 16

Consider the graphs, which show aggregate supply (AS) and the change in aggregate demand (AD) from AD1 to AD2 that will result from the monetary policies. Match each policy with the graph showing the corresponding shift.

AD2 is on the right - The central bank decreases the discount rate The central bank uses open market operations to conduct expansionary monetary policy The central bank increases the money supply The central bank buys bonds from private banks AD2 is on the left - The central bank sells bonds on the open market The central bank increases the required reserve ratio

Please complete the statements using the labels provided. Suppose that the Federal Reserve Bank wants to address high levels of unemployment in the economy. To do so, it would likely seek to increase ____________. If the Federal Reserve Bank is able to instigate the growth it desires, it will likely come at the cost of increasing __________. Suppose that the Federal Reserve Bank achieves the growth it wants, but also experiences the negative consequences. As a result, it will seek to decrease __________, at the risk of leading the economy into a __________.

Aggregate Demand Inflation Inflation Recession

The hypothetical economy represented by the graph is currently experiencing a recession. Suppose the central bank attempts to increase the growth rate of the money supply to return the economy to its long‑run equilibrium. It is able to move the economy to a new equilibrium but falls short of its goal. Move the aggregate demand curve to demonstrate this scenario.

Aggregate Demand Curve shifts to the right 1

The economy of Pandastan, a fictitious country, is depicted in the graph. Because of general pessimism, aggregate demand has moved from a long‑run equilibrium to the short‑run equilibrium shown. In the graph, depict what happens if Pandastan's central bank successfully increases the growth rate of the money supply to perfectly offset the decrease in aggregate demand.

Aggregate Demand shifts to the right

Determine whether each statement is true or false. Economists are rarely confused by the causes of aggregrate demand shocks. Credible inflation reduction by the Federal Reserve (the Fed) empirically increases unemployment. The Federal Reserve does not consider market confidence when creating monetary policy. The Federal Reserve can always achieve its stated monetary policy targets or goals. The Federal Reserve operates in real time, where data concerning the economy is not completely known.

False True False False True

Determine whether the following statements related to the Federal Reserve are true, false, or you don't have enough information to answer. a. Monetary policy always increases the stability of gross domestic product (GDP). b. Monetary policy is simple. c. An increase in the money supply increases short-run aggregate demand. d. The Federal Reserve was chartered by the U.S. Constitution. e. Monetary policy is ideally suited for affecting the prices of specific assets.

False False True False False

One of the most difficult policy decisions faced by the Federal Reserve Bank (the Fed) is how to use monetary policy in response to a real negative shock such as a severe drought. Please answer the questions and assume that the Federal Reserve Bank decides to address the negative real shock by focusing on inflation instead of recession. As a result of the real negative shock, the inflation rate in the economy will __________. To remedy this situation, the Federal Reserve will seek to __________ aggregate demand. The Fed is likely to __________ the money supply in order to impact aggregate demand. If the Fed takes this approach, the real growth rate will __________ from the point to which it was shifted by the real negative shock.

Increase Decrease Decrease Decrease

Which of the statements best describes the monetary rule, as proposed by the economist Milton Friedman?

Inflation is kept in check in the long run by keeping the growth of M1 and M2 on a steady path.

The current state of a hypothetical economy is depicted in the graph. In the graph, depict what happens if the economy's central bank successfully decreases the growth rate of the money supply to return the economy to its long-run equilibrium. Inflation rate

Shift the aggregate demand curve down

Which statement best describes the Federal Reserve timeframe for monetary policy implementation and observable policy effect?

Short implementation time with a long lag before observation of effectiveness

Which of the methods is not used by the Federal Reserve to maintain market confidence?

Undergoing congressional review to ensure that the Fed is using monetary policy properly