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