chapter 13

In the classiscal monetary transmission mechanism any change in ___ will bring about ___

M, a direct proportionate change in P.

the fed uses its tools to counteract:

booms and recessions

a higher interest rate ____ consumption, investment, and _____ , which ___ aggregate demand.

decrease, 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

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 of the fed policy. They argue that:

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

in a liquid 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 Feds will:

raise interest rates

negative demand shocks to the economy can come from:

reductions in the consumer demand.

when the feds sell bonds, it is

tight money policy

the quantity theory equation of exchange states:

M*V=P*Q

Quantitative easing refers to the process whereby the Fed:

buys securities to stimulate the economy.

which economist believes that change in the money supply lead only to price change?

classical economists

when current real output exceeds potential real output, the feds 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.

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:

the Taylor rule

fed chairman ben Bernanke was not happy about bailing out institutions that had gotten themselves into 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:

world wide savings glut.