Chapter 13 Macro

inflation

An increase in the money supply will increase spending in the short-run but leads only to ___ in the long-run.

wages, prices, interest rates

Classical economists must assume that ___, ___, and ___ are flexible in long-run.

long-run

Do classical economists focus on *long-run* or *short-run* adjustments in economic activity? (pick one)

buying risky assets, making massive loans

How did the Fed respond to the Crisis of 2008? (2)

supply

Monetary policy is not effective in combating *supply/demand* shocks.

False

T/F: Change in money supply will not always translate directly to a change in prices.

True

T/F: Classical economists believe increasing the money supply will result in inflation immediately, so fiscal policies are ineffective.

True

T/F: Classical economists believe that expansionary monetary policy only creates inflation.

True

T/F: Interest rates affect the manner in which we borrow and consume and save and invest.

True

T/F: Keynesians believe fiscal policy is effective during economic downturns.

True

T/F: Monetary policy is less effective when people are uncertain what the Fed will do.

True (they have delayed reactions)

T/F: Wages and prices are sticky in the short-run.

economic growth with low unemployment, stable prices with moderate long-term interest rates

What are the twin goals of monetary policy?

price stability

What's the Fed's focus in the long run?

quantity theory of money

___- a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.

liquidity trap

___- occurs when interest rates are so low that monetary policy becomes ineffective.

monetary policy

___- policies aimed at controlling the money supply to target interest rates in an economy.

austerity measures

___- policies meant to save money.

permanent income hypothesis

___- suggests that consumption depends on income and wealth.

crowding out effect

___- the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

money illusion

___- the perception that wealth rises when the money supply grows.

European Stability Mechanism

___- was set up to facilitate loans to Eurozone members.