chapter 16

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Arguments supporting the Federal​ Reserve's credit policy include all of the following except

it increased incentives to screen and monitor in order to limit asymmetric information problems

When the money supply​ increases, aggregate demand rises.

true

If the Fed increases the discount​ rate, relative to the federal funds​ rate, then this

would increase the cost of funds for institutions borrowing from the Fed

If the economy is operating beyond full​ employment, contractionary monetary policy will shift the aggregate demand curve to the​ ________ and the price level will​ ________.

​left; decrease

When the Fed makes an open market​ purchase, the supply curve for bonds in the private market shifts to the​ ________ and the price of bonds​ ________.

​left; increases

A monetary policy action that could eliminate an inflationary gap in the short run is

an open market sale of government securities

The bond demand curve is downward sloping because

lower bond prices translate into higher interest rates and returns.

When the Fed sells​ bonds, it must offer them at a ______________ price. When the Fed buys​ bonds, it must pay a ______________ price.

lower; higher

In an open​ economy, the net export effec

may offset an expansionary fiscal policy but enhance an expansionary monetary policy

In an open​ economy, the net export effect

may offset an expansionary fiscal policy but enhance an expansionary monetary policy.

Suppose that the economy currently is in​ long-run equilibrium. Explain the​ short- and​ long-run adjustments that will take place in an aggregate​ demand-aggregate supply diagram if the Fed expands the quantity of money in circulation.

Aggregate demand curve shifts to the​ right; in the​ short-run both price level and real GDP increase. Over the long run the​ short-run aggregate supply curve shifts upward to the left and a new​ long-run equilibrium is reached at the initial equilibrium GDP but at a higher price level.

Since the financial meltdown of the late​ 2000s, the Fed has launched a credit policy which consists of

All of the above

The equation of exchange

All of the above

The​ Fed's credit policy since 2008 has

All of the above

An increase in the money supply will

All of the above.

Which of the following is a true​ statement?

Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand.

Which of the following is not a reason people choose to hold money​ balances?

Money holdings are good assets during periods of inflation.

Federal Reserve may take a certain policy action to prevent the​ dollar's appreciation from affecting equilibrium real GDP in the short run. Which one of the following is not a likely policy action that the Fed will​ take?

Increasing government spending

Use to the graph to help determine the monetary aggregate​ (M1 or​ M2) monetarists will employ in order to correctly forecast inflation​ and/or nominal GDP growth.

M2, since according to the graph income velocity based on M2 is practically constant.

Use the graph to help determine which of the following statements regarding the monetary policies of the Fed and the ECB are​ true:

The ECB followed a very passive monetary policy for a long period​ (from June 2003 to December​ 2005).

Quantity theory of money and prices

The hypothesis that changes in the money supply lead to equiproportional changes in the price level

The ______________ effect of an increase in the money supply arises because people desire to spend more on real goods and services when they have excess money balances.

direct

An expansionary monetary policy decreases the rate of​ interest, which in turn increases planned investment.

discount rate

If the Federal Reserve implements an expansionary monetary policy that reduces the market interest​ rate, this will tend to​ ________ foreign investment in U.S. financial assets and​ ________ U.S. net exports.

discourage; increase

The demand for money curve shows the relationship between the interest rate and the quantity of money​ demanded, and is

downward sloping

The net export effect of contractionary monetary policy predicts that a​ country's

exports decrease as the money supply contracts

The market price of existing bonds is directly related to the rate of interest.

false

The supply curve of bonds is drawn vertically because

the​ Fed's decision to buy or sell bonds is independent of bond prices

What type of relationship exists between the growth of the money supply and changes in the inflation​ rate?

A direct relationship

There is _______________ relationship between the prevailing rate of interest in the economy and the market price of existing bonds​ (and all​ fixed-income assets).

an inverse

If Fed implements the short run monetary policy option instead of simply waiting for the​ long-run adjustments to take​ place, then it

benefits the society as the inflationary pressures are removed quickly

The​ Fed's "quantitative​ easing" can be best described as a

credit policy action

Increases in output and increases in the inflation rate have been linked to

increases in the money supply

Traditional Keynesian analysis suggests that increases in the money supply shift the aggregate demand curve through increasing

investment

The demand for money

is a downward sloping function of the interest rate

If the total money supply is​ $45 billion, real GDP is​ $60 billion, and the price level is​ 3, the income velocity of money is

4

Contractionary monetary policy causes the

interest rate to increase

As a result of monetary policy of the​ Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this​ outcome?

A Fed sale of bonds to brokers and banks

Use the graph to help determine which of the following statements are​ true:

There exists a positive relationship between the growth rate of M2 and​ inflation, although not a very strong one. This relationship starts breaking down in the early​ 1990's.

Use to the graph to help determine which of the following statements regarding the growth rate of M1 and inflation are true.

There exists a relationship between the growth of M1 and​ inflation, but not a very tight one. This implies that there may be additional variables other than M1 that may affect inflation.

A member of​ Congress, who has never had an economics​ course, has just been placed on a Money and Banking Committee. The official needs a briefing prior to the first meeting concerning the role of the money supply in the economy. Which of the following statements should you insist that the official remember when entering the first committee​ meeting?

There is a​ direct, albeit​ loose, relationship between the growth of the money supply and the price​ level; and a direct relationship between the growth of the money supply and GDP growth.

According to the quantity theory of money and​ prices, a 66​% change in the money​ supply, holding other variables​ constant, leads to

a 6​% change in the price level

The indirect effect of an increase in the money supply works through

a decrease in the interest rate increasing investment and consumption

A Federal Reserve open market sale generates ___________________ in the price of existing bonds and ____________ in the market interest rate. An open market purchase brings about ___________________ in the price of existing bonds and _______________ in the market rate of interest.

a decrease; an increase; an increase; a decrease

When the money supply​ increases, interest rates also increase.

false

With contractionary monetary​ policy, the net export effect results in a depreciation of the​ dollar, where the international price of the dollar falls.

false

The state of the economy depicted at the right can be best described as

having a recessionary gap

According to the equation of​ exchange, if velocity is constant and output is fixed at the full employment​ level, then any percentage increase in the money supply will

lead to an equal percentage increase in the price level.

The​ Fed's credit policy since 2008 has

led to a reduction in the money multiplier

In order to induce private banks to maintain substantial reserve deposits with the Federal Reserve​ banks, since 2008 the Fed has

paid banks an interest rate that is higher than the federal funds rate on their reserves

Many economists believe that the growth of the money supply is

positively related to the growth of real GDP

Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments. It sells bonds in the open​ market, increases the discount​ rate, and increases the reserve ratio. The net export effect resulting from these monetary policy actions will

raise the interest​ rate, increase the inflows of international​ capital, increase the value of the​ dollar, decrease​ exports, and as a consequence real GDP will decline even further

According to the Keynesian​ theory, an increase in the money supply decreases the interest rate and increases investment spending. The result of this is that

real GDP increases by a larger amount than the change in investment

If the economy is operating at less than full​ employment, expansionary monetary policy will shift the aggregate demand curve to the​ ________ and the price level will​ ________.

right; increase

Contractionary monetary policy by the Fed can be hampered by

the ability of U.S. citizens and businesses to obtain dollars from foreign sources

Suppose you go shopping for a gift for a friend and also find a sweater that you want for yourself. You pay cash for the gift and write a check for the sweater. Your purchases are made with money holdings represented by

the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater.

Holding money as a medium of exchange to make payments is known as

transactions demand

An expansionary monetary policy decreases the rate of​ interest, which in turn increases planned investment.

true

Federal Reserve policymaking which involves direct lending to financial and nonfinancial firms is called credit policy.

true


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