Econ Test 3

The housing bubble occurred from

2004 to 2006.

In the equation of exchange, if M = $1.5 trillion, V = 7, and P = 1.05, then

Q = $10 trillion.

Which statement correctly describes the sequence that explains how a contractionary monetary policy impacts an economy?

The policy raises interest rates; higher interest rates reduce spending; and lower spending reduces aggregate demand, which impacts output and the price level.

Which of these is considered a supply shock?

an increase in input costs

Quantitative easing refers to the process whereby the Federal Reserve

buys longer-term securities and assets to stimulate the economy.

A negative supply shock causes output to _____ and the price level to _____.

decrease; increase

When interest rates rise, exports _____ and imports _____.

fall; rise

With a negative supply shock, the Federal Reserve has to decide whether to

increase inflation and decrease unemployment, or decrease inflation and increase unemployment.

If monetary policy is tight

the value of the dollar will rise.

Which statement was NOT a criticism of the Federal Reserve's response to the 2007-2009 financial crisis in the United States?

It took minimal rather than drastic action.

Countries that adopt the dollar as their official currency maintain the ability to conduct independent monetary policy.

True

Assume output stays fixed at full employment output. According to the equation of exchange, if velocity increases and the government wants stable prices, the government should

decrease the money supply.

In a money market with a liquidity trap, an increase in the money supply will

fail to decrease the nominal interest rate

When the interest rate falls, American bonds become _____ attractive to foreign investors, often leading to a(n) _____ in the value of the U.S. dollar in foreign exchange markets.

less , decrease

Negative demand shocks to the economy can come from

reductions in consumer demand.

Monetarist theory states that in the long run, aggregate supply is vertical and fixed at full employment, and changes in the money supply result directly in changes in the price level.

True

If the Federal Reserve pursues an expansionary monetary policy

U.S. exports to other countries will rise.

According to monetarist theory

a decrease in the money supply will increase interest rates as portfolios rebalance, leading to a drop in investment and/or consumption spending.

Suppose the economy is in full employment equilibrium. Then a positive supply shock, caused by a fall in oil prices, hits the economy. A contractionary monetary policy will

move the economy back to full employment output but at a much lower price level.

The short-run aggregate supply curve is _____ and the long-run aggregate supply curve is _____.

upward sloping; vertical