Unit 8 Concept Checks
As the interest rate rises, people hold ________ money because the opportunity cost of holding money has ________.
Less; risen
An intended goal of contractionary monetary policy is:
a decrease in the level of aggregate output.
With regard to the money demand curve, an increase in the interest rate causes
a movement upward along the curve.
With regard to the demand curve for money, an increase in real GDP causes
a shift of the curve to the right.
With regard to the demand curve for money, an increase in the price level causes
a shift of the curve to the right.
If wages and prices adjust slowly, we would expect expansionary monetary policy to be more likely to:
affect the unemployment rate.
Most of the pressure for a monetary growth rule has disappeared because, since 1980, the relationship between movements in the money supply and movements in real GDP and the price level has :
become much weaker.
Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by workers and firms:
being fooled by unexpected changes in monetary policy.
The federal funds rate is determined:
by the supply and demand for bank reserves.
If the Federal Reserve targets the interest rate and the money demand curve shifts to the left, then the Fed
can maintain the interest rate target, but at a lower quantity of the money supply.
From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely
decrease interest rates.
An increase in the money supply will
decrease the interest rate.
An open market purchase of Treasury securities by the Fed would cause the equilibrium interest rate to
decrease.
When the money supply increases, the interest rate ____________, planned investment __________ and the aggregate demand curve will shift to the __________.
decreases; increases; right
If the short-run equilibrium in an economy lies below potential GDP, the Fed should adopt _____________ to close the ___________ gap.
easy; contractionary
If workers and firms have rational expectations, they understand that ________ monetary policy will raise the inflation rate. If this is the case, then actual inflation will be ________ expected inflation.
expansionary; equal to
When the price of a financial asset ________ its interest rate will ________.
falls; rise
The interest rate that banks charge other banks for overnight loans is the
federal funds rate.
Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
higher; higher
An increase in money demand, while the money supply remains unchanged, would cause the equilibrium interest rate to
increase.
An open market sale of Treasury securities by the Fed would cause the equilibrium interest rate to
increase.
An increase in nominal aggregate output, ceteris paribus, will cause the demand for money to ________ and the interest rate to ________.
increase; increase
An increase in the interest rate __________ the opportunity cost of holding money.
increases
When the AD curve is relatively flat, the Fed
is willing to accept large changes in output to keep the price level stable.
A lower interest rate should lead to a ________ exchange rate and ________ net exports.
lower; higher
Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
lower; lower
Inflation targeting refers to conducting ________ policy so as to commit the central bank to achieving a ________.
monetary; publicly announced level of inflation
If the Fed buys Treasury bills, this will shift the
money supply curve to the right.
When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have
more money than they want to hold.
The price of bonds and the interest rate are
negatively related
With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would
not change.
At higher interest rates the
quantity of money demanded is lower.
Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long-run rate of growth of
real GDP.
When the interest rate falls, bond values
rise.
When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to
sell Treasury bills.
The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________.
targets; goals
A monetary policy target is a variable that
the Fed can affect directly.
The monetary policy target the Federal Reserve focuses primarily on today is
the interest rate.
The Fed's two main monetary policy targets are
the money supply and the interest rate.
The theory that the demand for money is related to the interest rate refers to:
the speculative demand for money.
The transactions demand for money is
unrelated to the interest rate.
If firms and workers have rational expectations, including knowledge of the policy being used by the Federal Reserve, the short-run Phillips curve will be
vertical.
According to economists Robert Lucas and Thomas Sargent, when are the gains to accurately forecasting inflation highest?
when inflation is high and unstable