Econ Chapter 26

Assume that velocity is constant in the long run. Which of the following equations correctly describes the quantity equation in terms of percentage rate of change means "change in."

% M - % Y = % P

If velocity is constant in the long run, which of the following results flow from the quantity theory of money?

A change in the money supply changes nominal GDP by an equal percentage.

credit easing

A strategy that involves the extension of central bank lending to influence more broadly the proper functioning of credit markets and to improve liquidity.

The first official statement of goals for macroeconomic performance in the United States came with the passage of the

Employment Act of 1946.

The Fed increases the money supply by selling bonds.

False

The Fed is structured as an agency of the executive branch, with the Chairman of the Fed answering directly to the President.

False

When the Fed buys government bonds, bank reserves fall.

False

In the short-run velocity is not constant. Which of the following variables will be affected by a change in money supply? I. real GDP II. nominal GDP III. the price level

I, II, and III

Which of the following are monetary policy goals? I. maintain high interest rates II. keep unemployment rates low III. reduce the size of the banking sector IV. prevent high rates of inflation

II and IV

Suppose the public holds $200 billion in M2 and the velocity of the M2 money supply is 5. What is the value of GDP?

$1,000.

Which of the following predictions can be made using the growth rates associated with the quantity equation, assuming velocity is stable?

If the money supply grows at a faster rate than real GDP, there will be inflation.

When the Fed buys bonds in the open market, we can expect the

exchange rate and interest rates to fall.

When the Fed sells bonds in the open market, we can expect the

exchange rate and interest rates to rise.

By shifting the demand curve from D1 to D2, the Fed is exercising ______ monetary policy to _______ interest rates.

expansionary; lower

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will _______ investment and _______ interest rates.

increase; decrease

A liquidity trap is said to exist when a change in monetary policy has no effect on

interest rates.

If the economy is at point c,

it is in a recessionary gap.

Which of the following result from a change in the money supply brought about by an open market purchase?

lower interest rate, lower exchange rate, increased demand for investment and net exports

The shift in the demand for bonds from D1 to D2, in Panel (b) will result in a _______ interest rate and _______ investment.

lower; lower

The monetary policy tool that involves the buying and selling of government bonds is

open-market operations.

When the Fed sells bonds in the open market, in the product market (the aggregate demand-aggregate supply model),

real GDP and the price level will fall.

In Panel (b), assume that the price of bonds rises from P1 to P2. Now, in Panel (c), the higher price of bonds will _______ the demand for and _______ the supply of dollars and cause the exchange rate to ______.

reduce; increase; fall

The major tools of monetary policy available to the Federal Reserve System are

reserve requirements, open-market operations, and the discount rate.

Contractionary monetary policy by the Fed could include

selling government securities in the open market.

By shifting the supply curve from S1 to S2, the Fed ______ bonds in the open market which _______ the money supply.

selling; decreases

According to the text, in many respects, the single most powerful economic policymaker in the United States is

the Federal Reserve.

The time it takes for the Fed or government policymakers to enact policies to correct unemployment or inflation problems is a source of which lag?

the implementation lag

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called

the implementation lag.

If the Fed's primary goal is price stability which macroeconomic variable should it target?

the price level itself or a particular rate of change in the price level

Which of the following is perhaps the greatest obstacle facing the Fed in discharging monetary policy?

the problem of monetary policy lags

The delay between the time at which an event occurs and the time at which policymakers become aware of it is called

the recognition lag. Previous Next

On October 12, 1987, the Dow Jones Industrial Average plunged 508 points, wiping out more than $500 billion in a few hours. How did the Fed respond to this drastic fall in the stock market index?

In an attempt to ward off a recession, the Fed announced that it will provide adequate liquidity, by buying federal securities.

quantity theory of money

In the long run, the price level moves in proportion with changes in the money supply, at least for high-inflation countries.

Suppose the Fed takes action that shifts the demand curve from S to S1, as illustrated in Panel(b). As a result, the interest rate ________ and investment _______.

Increase; decreases

rational expectations hypothesis

Individuals form expectations about the future based on the information available to them, and they act on those expectations.

What is velocity of money?

It is the number of times the money supply is spent to obtain the goods and services that make up GDP during a particular time period.

quantitative easing

Policy in which a bank convinces the public that it will keep interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation.

liquidity trap

Situation that exists when a change in monetary policy has no effect on interest rates.

recognition lag

The delay between the time a macroeconomic problem arises and the time at which policy makers become aware of it.

Impact lag

The delay between the time a policy is enacted and the time that policy has its impact on the economy.

implementation lag

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted.

equation of exchange

The money supply (M) times its velocity (V) equals nominal GDP.

velocity

The number of times the money supply is spent to obtain the goods and services that make up GDP during a particular time period.

The Fed can raise the target for the federal funds rate by selling government bonds in the open market.

True

The impact lag is the time between putting a policy in place and when its effects are felt in the economy.

True

When the Fed buys bonds in the open market, it pursues an expansionary monetary policy.

True

Suppose money supply (M) = $500, real GDP (Y) = $1,000, and nominal GDP = $5,000. Calculate the value of velocity and the price level.

V = 10; P = 5

Assume that the economy is at point b. A decrease in the money supply would cause

a shift of the aggregate demand curve from AD2 to AD1.

Which of the following is a tool used by the Fed in the conduct of monetary policy?

buying and selling federal government bonds.

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will _______ interest rates and _______ the bond prices.

decrease; increase

The rational expectations argument relies on

wages and prices being sufficiently flexible so that the change in expectations about future economic activity and the price level will allow the short-run aggregate supply curve to shift quickly to restore long-run equilibrium.

Suppose the economy is operating at "a" and that individuals have rational expectations. They calculate that expansionary monetary policy

will raise the price level to Pd; and they adjust their expectations and wage demands shifting the short-run aggregate supply curve to AS2.

If the velocity of money is constant, then a 2% increase in the money supply

would change nominal GDP by an equal percentage.

If the demand curve for money were horizontal at some interest rate, an increase in the money supply

would not change the interest rate.