Quiz 15: Monetary Policy

The Federal Reserve can influence financial crises because it: A) determines tax rates. B) determines government spending. C) conducts monetary policy. D) is responsive to the people who elected its members to office.

Janet Yellen is: A) chair of the Board of Governors of the Federal Reserve System. B) an AIG executive who received large bonuses. C) a Supreme Court justice who ruled that budget deficits are unconstitutional. D) a financial adviser on CNBC.

In 2014, Ben Bernanke was succeeded as chair of the Board of Governors of the Federal Reserve by: A) Janet Yellen. B) Paul Ryan. C) Joe Biden. D) Nancy Pelosi.

The chair of the Board of Governors during the 2008 financial crisis was: A) Barack Obama. B) Ben Bernanke. C) J. P. Morgan. D) John McCain.

Generally, the more liquid an asset is, the: A) lower its purchasing power. B) lower its rate of return. C) higher its capacity to store value over time. D) higher its rate of return.

The short-term interest rate applies to financial assets that mature: A) in less than a year. B) within a year or more. C) within 2 years. D) within 5 years.

If during 2016 the interest rate on one-month Treasury bills was 2.5% and during 2017 it was 2%, the opportunity cost of holding money, assuming the inflation rate remained constant,: A) decreased. B) became negative. C) increased. D) did not change.

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 3%, the opportunity cost of holding cash in a checking account is: A) zero. B) 0.02%. C) 1%. D) 2%.

People forgo interest and hold money: A) because they are required to. B) to reduce their transaction costs. C) because there are no substitutes for money. D) because banks are too risky.

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 2%, the opportunity cost of holding the checking account as money is: A) zero. B) 0.02%. C) 1%. D) 2%.

The opportunity cost of holding money is: A) zero. B) the interest rate when someone uses a credit card. C) the difference between interest rates on monetary assets and on nonmonetary assets. D) the discount rate.

We hold money to: A) earn interest. B) reduce transaction costs. C) increase transaction costs. D) protect our purchasing power.

Short-term interest rates apply to financial assets due within: A) 24 hours. B) three months. C) six months. D) one year.

The interest earnings one gives up to hold more liquid assets are a(n): A) opportunity cost. B) transaction cost. C) asset of the company. D) liability of the company.

An individual who decides to hold money instead of other assets: A) is giving up the interest that other assets could have earned. B) is likely to be subject to money illusion. C) is not affected by unanticipated inflation. D) can maintain a higher standard of living.

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____. A) falls; falls; falls B) falls; falls; rises C) rises; falls; falls D) rises; falls; rises

In a graph of a money demand curve, the _____ is plotted on the vertical axis. A) interest rate on liquid assets such as short-term CDs B) interest rate on 30-year Treasury bills C) rate of inflation D) rate of return in the stock market

The money demand curve is _____ because the opportunity cost of holding money is _____ related to the interest rate. A) downward sloping; inversely B) downward sloping; directly C) upward sloping; inversely D) upward sloping; directly

The amount of money that people demand is: A) positively related to the interest rate. B) independent the interest rate. C) negatively related to the interest rate. D) positively or negatively related to the interest rate depending on the state of the economy.

The money demand curve is _____ because a lower interest rate _____ the opportunity cost of holding money. A) upward sloping; increases B) downward sloping; increases C) upward sloping; decreases D) downward sloping; decreases

The slope of the demand curve for money is: A) vertical. B) horizontal. C) positive. D) negative.

A decrease in the demand for money would result from a(n): A) increase in income. B) decrease in real GDP. C) increase in the price level. D) increase in nominal GDP.

A decrease in the demand for money would result from a(n): A) increase in income. B) increase in real GDP. C) decrease in the price level. D) increase in nominal GDP.

An increase in the demand for money would result from a(n): A) decrease in nominal GDP. B) decrease in real GDP. C) decrease in the price level. D) increase in the price level.

An increase in the aggregate price level _____ the demand for money. A) increases B) decreases C) does not affect D) left-shifts

A 20% increase in the aggregate price level will increase the quantity of money demanded by: A) 20%. B) the money multiplier. C) 10%. D) half of the money multiplier.

An increase in interest rates causes the demand for money to: A) increase. B) decrease. C) stay the same. D) shift to the right.

U.S. banks did not offer interest on checking accounts until the beginning of the 1980s. As a result, before the early 1980s: A) the opportunity costs of keeping funds in checking accounts was zero. B) the opportunity costs of keeping funds in checking accounts was lower. C) the opportunity costs of keeping funds in checking accounts was higher. D) people kept money under their mattress.

If inflation increases from 2% to 5%, the money demand curve will: A) remain constant. B) remain constant, but the quantity of money demanded will decrease. C) shift to the left. D) shift to the right.

If Congress imposes a $5 tax on each ATM transaction, the demand for money will likely: A) increase. B) decrease. C) fluctuate randomly. D) be unaffected.

If Congress places a $5 tax on each ATM transaction, there will likely be a: A) movement up a stationary money demand curve. B) movement down a stationary money demand curve. C) shift to the left of the money demand curve. D) shift to the right of the money demand curve.

A 30% increase in the aggregate price level will: A) increase money demand by 30%. B) increase money demand by the money multiplier. C) decrease money demand by 30%. D) not affect the demand for money.

An increase in real aggregate spending will shift the money: A) demand curve rightward. B) demand curve leftward. C) supply curve rightward. D) supply curve leftward.

Improvements in information technology have: A) shifted the demand for cash to the right. B) decreased the demand for money. C) not affected the demand for money. D) increased the demand for money.

The fact that many stores in the United States have found it economical to accept credit cards has: A) increased the demand for money. B) decreased the demand for money. C) increased the demand for credit card transactions but has not affected the demand for money. D) decreased the demand for credit card transactions but has not affected the demand for money.

The introduction of ATMs: A) increased the demand for cash because it made cash easier to get. B) decreased the demand for cash because it reduced the cost of moving from other assets into cash. C) did not change the demand for cash because it is proportional to the price level. D) did not change the demand for cash, as ATMs do not affect public spending habits.

Which one event does NOT decrease the demand for money? A) an increase in the aggregate price level B) the emergence of ATMs C) the ability of the stores to process credit cards D) a fall in real GDP

Now that fast food places such as McDonald's are accepting credit card payments, the: A) demand for money has increased. B) demand for money has decreased. C) demand for money has not been affected. D) supply of money has increased, as some cash is unused.

U.S. banks did not offer interest on checking accounts until the beginning of the 1980s. Then banking regulations changed, allowing banks to pay interest on checking account funds. As a result, the _____ money _____ and shifted the money demand curve to the _____. A) supply of; fell; left B) demand for; fell; left C) demand for; rose; right D) supply of; rose; right

If the aggregate price level doubles: A) the money supply will also double. B) neither money demand nor the money supply will rise. C) both money demand and the money supply will rise proportionally. D) money demand at any given interest rate will also double.

Suppose that a typical basket of goods is now more expensive than it used to be. All else equal, we would expect: A) the demand for money to shift inward. B) a downward movement along a fixed money demand curve. C) the demand for money to shift outward. D) an upward movement along a fixed money demand curve.

Suppose that the economy enters a recession and real GDP falls. All else equal, we would expect: A) the money demand curve to shift inward. B) the money demand curve to shift outward. C) a downward movement along a fixed money demand curve. D) an upward movement along a fixed money demand curve.

Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect: A) the money demand curve to shift outward. B) the money demand curve to shift inward. C) a downward movement along a fixed money demand curve. D) an upward movement along a fixed money demand curve.

The demand for money is higher in Japan than in the United States because: A) Japanese banks pay interest on checking accounts. B) most stores in Japan do not accept credit cards. C) the ATMs are open all night. D) the average price level is lower in Japan.

The demand for money is higher in Japan than in the United States because: A) telecommunications and information technology is more advanced in the United States than in Japan. B) Japanese consumers use credit cards more than people in the United States. C) Japanese interest rates are higher than those in the United States. D) Japanese interest rates are lower than those in the United States.

Which reason is NOT one for which the Japanese tend to keep large amounts of cash? A) Banks have invested heavily in credit card technology. B) Japan has a low crime rate. C) Interest rates in Japan have been below 1% since the 1990s. D) Japan's retail sector is dominated by mom-and-pop stores that don't accept credit cards.

A high demand for money (as in Japan) would result from: A) a decrease in nominal GDP and a high crime rate. B) a decrease in real GDP and a preference from businesses to accept only debit cards. C) a decrease in the price level. D) low crime rates and widespread lack of capacity to accept noncash payments.

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

The quantity demanded of money is negatively related to _____, and the demand for money is positively related to _____. A) the interest rate; real GDP B) the interest rate; unemployment C) real GDP; the interest rate D) real GDP; the money supply

A change in _____ does NOT shift the money demand curve. A) the interest rate B) the price level C) banking technology D) real GDP

The demand curve for money will shift to the right because of a: A) fall in the interest rate. B) rise in real GDP. C) rise in the interest rate. D) fall in real GDP.

The factors that could cause money demand to shift do NOT include: A) real aggregate spending. B) institutional constraints in the banking system. C) technology of transactions. D) interest rates.

Changes in _____ will NOT shift the money demand curve. A) inflation B) the real GDP C) the aggregate price level D) the interest rate

The federal funds rate is the interest rate on _____, and it is influenced by the _____. A) loans from the Federal Reserve to banks; Federal Open Market Committee B) reserves that banks lend to each other; Federal Open Market Committee C) loans from the Federal Reserve to banks; president and Congress D) reserves that banks lend to each other; president and Congress

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, the quantity of money demanded is _____ than quantity of money supplied. A) less than B) greater than C) equal to D) It is impossible to predict which is greater, money demanded or money supplied.

In the liquidity preference model, the money supply is represented by a(n): A) vertical line. B) upward-sloping curve with a slope of 1/V. C) horizontal line. D) downward-sloping curve with a slope of 1/k.

According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _____, and this leads to a _____ in the interest rate. A) decreases; rise B) increases; fall C) decreases; fall D) increases; rise

If the quantity of money demanded is $100 billion and the quantity of money supplied is $200 billion, then the interest rate will: A) fall. B) rise. C) remain unchanged. D) be in equilibrium.

If the quantity of money demanded is $300 billion and the quantity of money supplied is $200 billion, then the interest rate will: A) fall. B) rise. C) remain unchanged. D) be in equilibrium.

The liquidity preference model uses the demand for and supply of money to determine: A) GDP. B) the price level. C) the interest rate. D) nominal output.

At interest rates below equilibrium, people will want to: A) shift their wealth into Treasury bills. B) shift their wealth into money. C) decrease the amount of money that they hold. D) make no changes to their assets.

If the equilibrium interest rate in the money market is 5%, at an interest rate of 2% the quantity of nonmonetary interest-bearing financial assets demanded is _____ the quantity supplied. A) less than B) greater than C) equal to D) irrelevant to

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2% sellers of interest-bearing financial assets _____ interest rates to find willing buyers. A) must offer higher B) can offer lower C) can offer 2% D) Sales of financial assets do not depend on the rate offered.

According to the liquidity preference model, the equilibrium interest rate is determined by the: A) supply of and demand for loanable funds. B) supply of and demand for money. C) level of investment spending and saving. D) International Monetary Fund.

If the interest rate is below the equilibrium rate, the: A) quantity supplied of nonmonetary financial assets is greater than the quantity demanded. B) quantity demanded for nonmonetary financial assets is greater than the quantity supplied. C) quantity of money demanded equals the quantity of money supplied. D) quantity of money supplied is greater than the quantity of money demanded.

Use the following to answer questions: Figure: Equilibrium in the Money Market -(Figure: Equilibrium in the Money Market) Refer to Figure: Equilibrium in the Money Market. Equilibrium will occur at interest rate _____ and quantity of money _____. A) r₂; Q₀ B) r₀; Q₂ C) r₁; Q₁ D) r₁; Q₂

Use the following to answer questions: Figure: Equilibrium in the Money Market -(Figure: Equilibrium in the Money Market) Refer to Figure: Equilibrium in the Money Market. If the interest rate is above equilibrium, there will be an excess _____ money and the interest rate will _____. A) demand for; rise B) supply of; fall C) demand for; fall D) supply of; rise

Use the following to answer questions: Figure: Equilibrium in the Money Market -(Figure: Equilibrium in the Money Market) Refer to Figure: Equilibrium in the Money Market. If the rate of interest is below equilibrium, there will be an excess _____ money and the interest rate will _____. A) demand for; rise B) supply of; fall C) demand for; fall D) supply of; rise

An increase in the demand for money with no change in supply will lead to _____ in the equilibrium quantity of money and _____ in the equilibrium interest rate. A) no change; a rise B) no change; a fall C) a decrease; a rise D) an increase; a fall

The idea that the interest rate is determined by the supply and demand for money is known as: A) the liquidity preference model. B) the quantity theory of money. C) the monetarist theory. D) the loanable funds theory.

The money supply curve is: A) downward sloping. B) vertical. C) upward rising. D) horizontal.

An increase in the supply of money with no change in demand will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate. A) increase; rise B) increase; fall C) decrease; rise D) decrease; fall

A decrease in the supply of money with no change in demand for money will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate. A) increase; rise B) increase; fall C) decrease; rise D) decrease; fall

A sale of Treasury bills by the Federal Reserve _____ interest rates and _____ the money supply. A) raises; increases B) raises; reduces C) lowers; reduces D) lowers; increases

Suppose that the Federal Reserve buys Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates. A) reduce; increase; lower B) increase; lower; lower C) increase; raise; lower D) reduce; reduce; raise

Suppose that the Federal Reserve sells Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates. A) reduce; increase; lower B) increase; lower; lower C) increase; raise; lower D) reduce; reduce; raise

Use the following to answer questions: Figure: Changes in the Money Supply -(Figure: Changes in the Money Supply) Refer to Figure: Changes in the Money Supply. If the supply of money shifts from S₁ to S₂, the Federal Reserve must have _____ Treasury bills in the open market. A) sold B) bought C) issued new D) borrowed

Use the following to answer questions: Figure: Changes in the Money Supply -(Figure: Changes in the Money Supply) Refer to Figure: Changes in the Money Supply. Federal Reserve policy to increase the supply of money, hence to lower the interest rate from 6% to 4%, is accomplished by action that ________ Treasury bills. A) lowers the price of B) increases the interest rate on C) increases the demand for D) increases the supply of

According to the liquidity preference model: A) an increase in the money supply lowers the equilibrium rate of interest. B) a decrease in the money supply lowers the equilibrium rate of interest. C) the money supply curve is a horizontal line. D) the demand for money curve is a vertical line.

If the Federal Reserve wants to lower the interest rate, it will: A) decrease the money supply. B) increase the money supply. C) keep the money supply unchanged. D) mandate a lower interest rate.

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will _____ Treasury bills in the open market, _____ the supply of money, and _____ the interest rate to the target rate. A) sell; increase; lower B) buy; increase; lower C) sell; decrease; raise D) buy; decrease; raise

Suppose that the Federal Reserve has set a target for the federal funds rate. If initially the equilibrium interest rate happens to be higher than the target interest rate, then the Federal Reserve should _____ Treasury bills in the open market, _____ the money supply, shift the supply of money curve to the _____, and _____ the interest rate to the target rate. A) sell; decrease; left; raise B) purchase; decrease; left; lower C) purchase; increase; right; lower D) sell; increase; left; raise

The federal funds rate is: A) determined by the supply of and demand for money. B) set by Congress. C) determined in the real market by the aggregate supply and aggregate demand curves. D) the interest rate that banks pay when they borrow directly from the Fed.

If the Federal Reserve wants to lower interest rates, it can _____ the money supply by _____ Treasury bills. A) decrease; selling B) decrease; buying C) increase; selling D) increase; buying

To expand the money supply, the Federal Reserve would have to: A) make an open purchase of Treasury bills. B) have an open sale of Treasury bills. C) raise interest rates. D) get approval from Congress.

According to the liquidity preference model, a(n) _____ in the money supply shifts the money supply curve to the _____ and increases the equilibrium interest rate. A) decrease; right B) increase; left C) decrease; left D) increase; right

The Federal Reserve affects interest rates by: A) setting them with regulations. B) open market operations that shift the money demand curve. C) open market operations that shift the money supply curve. D) changing tax rates.

The Federal Open Market Committee sets the target interest rate for the next: A) three months. B) six months. C) three weeks. D) six weeks.

To lower the short-term interest rate, the Federal Reserve can: A) buy Treasury bills. B) sell Treasury bills. C) tell the banks to make more loans. D) tell the banks to make fewer loans.

When the Federal Reserve buys Treasury bills, this leads to a(n): A) decrease in the money supply. B) increase in the money supply. C) increase in short-term interest rates. D) increase in the Federal Reserve funds rate.

Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open market operation. The result of this action will be a _____ in the interest rate as the money _____ shifts _____. A) fall; supply curve; outward B) fall; supply curve; inward C) fall; demand curve; inward D) rise; demand curve; outward

The Federal Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to _____ Treasury bills to _____ money _____. A) sell; decrease; demand B) sell; decrease; supply C) buy; decrease; supply D) buy; increase; demand

The Federal Open Market Committee has decided that the federal funds rate should be 0.5% rather than the current rate of 1.25%. The appropriate open market action is to _____ Treasury bills to _____ money _____. A) buy; decrease; demand B) buy; decrease; supply C) sell; decrease; demand D) buy; increase; supply

When long-term interest rates are higher than short-term rates, as they were in 2010, it: A) implies that short-term interest rates are expected to fall. B) has no implication for short-term interest rates. C) implies that inflation will fall. D) implies that short-term interest rates are expected to rise.

If long-term interest rates are 8% and short-term rates are 3%, the market expects: A) short-term rates to fall. B) short-term rates to rise. C) short-term rates to remain the same. D) there is no relationship between long-term and short-term rates.

Long-term interest rates and short-term interest rates: A) usually move in lockstep. B) always move closely together. C) don't always move closely together. D) are independent of one another.

Long-term interest rates are higher than short-term rates. This reflects a belief that: A) short-term rates will fall. B) short-term rates will rise. C) short-term rates will remain the same. D) the Federal Reserve is undergoing a change in policy.

In September 2007, reversing its course, the Federal Reserve began a series of: A) interest rate increases, reversing its previous policy of lowering interest rates to fight the financial crisis. B) interest rate increases to combat inflation. C) cuts in the reserve requirements, reversing its previous policy of increasing the reserve requirement, to stop bank failures. D) cuts in the federal funds target rate to lower the interest rate, reversing its previous policy of raising interest rates, to fight the financial crisis.

Use the following to answer questions: Figure: Money Market I -(Figure: Money Market I) Refer to Figure: Money Market I. If the money market is initially in equilibrium at point E and the central bank sells Treasury bills, then the interest rate will: A) move toward rH. B) move toward rL C) remain at rE. D) shift rightward.

Use the following to answer questions: Figure: Money Market I -(Figure: Money Market I) Refer to Figure: Money Market I. If the money market is initially in equilibrium at point E and the central bank buys Treasury bills, then the interest rate will: A) move toward rH. B) move toward rL. C) remain at rE. D) shift leftward.

Use the following to answer questions: Figure: Money Market I -(Figure: Money Market I) Refer to Figure: Money Market I. If the interest rate is at r_L and the central bank neither buys nor sells Treasury bills, then the interest rate will: A) move toward rH. B) move toward rL. C) move toward rE. D) not change.

According to the liquidity preference model, if the Federal Reserve increases the money supply, the equilibrium interest rate _____, and this leads to a(n) _____ in the quantity demanded of nonmonetary interest-bearing financial assets. A) rises; increase B) falls; decrease C) rises; decrease D) falls; increase

Other things equal, rising interest rates lead to a _____ in investment spending and a _____ in _____ spending. A) fall; fall; consumer B) rise; rise; consumer C) fall; rise; consumer D) fall; rise; investment

Expansionary monetary policy _____ the money supply, _____ interest rates, and _____ consumption and investment spending. A) increases; increases; increases B) decreases; decreases; decreases C) increases; decreases; increases D) decreases; increases; decreases

Monetary policy that lowers the interest rate is called _____ because it _____. A) contractionary; aims to head off inflation B) expansionary; increases short-run aggregate supply C) contractionary; reduces saving and increases consumption D) expansionary; increases aggregate demand

The main objective of contractionary monetary policy is to: A) decrease aggregate demand. B) close a recessionary gap. C) increase investment. D) raise the level of potential output.

Monetary policy affects GDP and the price level by: A) changing aggregate supply. B) changing aggregate demand. C) changing the aggregate amount of labor supplied. D) changing exports.

Monetary policy affects aggregate demand through changes in: A) government spending. B) consumer and investment spending. C) tax receipts. D) export demand.

Expansionary monetary policy does NOT increase: A) aggregate demand. B) GDP and the price level. C) consumption spending. D) interest rates.

If interest rates rise, there will be a(n): A) decrease in aggregate demand. B) increase in aggregate demand. C) increase in aggregate supply. D) increase in the money supply.

In the income-expenditure model, expansionary monetary policy leads to _____ interest rates, a(n) _____ in planned investment spending, and a(n) _____ in equilibrium GDP. A) lower; increase; increase B) lower; decrease; increase C) higher; increase; increase D) higher; decrease; decrease

In the income-expenditure model, contractionary monetary policy leads to _____ interest rates, a(n) _____ in planned investment spending, and a(n) _____ in equilibrium GDP. A) lower; increase; increase B) lower; decrease; decrease C) higher; increase; increase D) higher; decrease; decrease

Contractionary monetary policy entails _____ the money supply, _____ interest rates, and _____ aggregate demand. A) increasing; increasing; increasing B) increasing; decreasing; decreasing C) decreasing; decreasing; decreasing D) decreasing; increasing; decreasing

Contractionary monetary policy: A) increases aggregate demand. B) increases aggregate supply. C) works by discouraging investment spending. D) decreases interest rates.

An increase in the money supply that will decrease interest rates causes a shift of the: A) aggregate demand curve to the left. B) aggregate demand curve to the right. C) short-run aggregate supply curve to the left. D) short-run aggregate supply curve to the right.

A rise in interest rates due to a decrease in the money supply will _____ aggregate demand. A) reduce B) not change C) increase D) cause random fluctuations in

An increase in the supply of money will lead to a(n) _____ in the equilibrium interest rate and a(n) _____ in real GDP. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

An increase in the supply of money will lead to a(n) _____ in equilibrium real GDP and a _____ equilibrium interest rate. A) increase; higher B) increase; lower C) decrease; higher D) decrease; lower

A decrease in the supply of money will lead to a(n) _____ in equilibrium real GDP and a(n) _____ in equilibrium interest rates. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A decrease in the supply of money will lead to a(n) _____ in equilibrium real GDP and a _____ equilibrium interest rate. A) increase; higher B) increase; lower C) decrease; higher D) decrease; lower

Contractionary monetary policy: A) is appropriate during a recessionary gap. B) decreases aggregate demand. C) increases aggregate demand. D) helps solve the problem of unemployment.

If the economy is in an inflationary gap, the Federal Reserve should conduct _____ monetary policy to _____ aggregate demand. A) contractionary; decrease B) contractionary; increase C) expansionary; decrease D) expansionary; increase

Scenario: Taylor Rule Suppose that the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account when setting the federal funds rate. Also suppose that the inflation rate in the economy is 3% and the unemployment gap is -2%. The economy has a(n): A) inflationary gap since the inflation rate is high. B) recessionary gap since the economy is not producing potential GDP. C) inflationary gap since actual real GDP exceeds potential real GDP. D) recessionary gap since potential real GDP exceeds actual real GDP.

Scenario: Taylor Rule Suppose that the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account when setting the federal funds rate. Also suppose that the inflation rate in the economy is 3% and the unemployment gap is -2%. In this case, the Federal Reserve will set the federal funds rate at _____%. A) 9.8 B) 6.25 C) 5.75 D) 4.75

If the Federal Reserve sets the federal funds rate on the basis of inflation and the output gap, then the Federal Reserve is following: A) inflation targeting. B) the Taylor rule. C) money illusion. D) the quantity theory.

When the central bank announces the desired inflation rate and sets policy to reach that rate, it is using: A) monetary neutrality policy. B) the Taylor rule. C) inflation targeting. D) fiscal policy.

The zero lower bound for interest rates is: A) the fact that interest rates can't go below zero. B) a theory that says that interest rates should have no bounds or limits. C) a law that prohibits credit unions from paying interest on checkable deposits. D) only a theory that never actually occurs in the real world.

If interest rates are at the zero lower bound: A) the effectiveness of monetary policy increases. B) monetary policy is ineffective. C) automatic stabilizers don't work. D) monetary policy is more effective than fiscal policy.

When the Fed uses quantitative easing, it is: A) buying three-month Treasury bills. B) selling three-month Treasury bills. C) buying longer-term government debt. D) selling longer-term government debt.

If the economy is in a recessionary gap, the Federal Reserve should conduct _____ monetary policy by _____ the money supply. A) expansionary; decreasing B) expansionary; increasing C) contractionary; decreasing D) contractionary; increasing

To close a recessionary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____. A) increase; increase; left B) decrease; decrease; left C) increase; increase; right D) decrease; decrease; right

To close an inflationary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____. A) increase; increase; left B) decrease; decrease; left C) increase; increase; right D) decrease; decrease; right

Given an inflationary gap, the Federal Reserve will use monetary policy to _____ real GDP and _____ the interest rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Given an inflationary gap, the Federal Reserve will use monetary policy to _____ interest rates and _____ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Given a recessionary gap, the Federal Reserve will use monetary policy to _____ interest rates and _____ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Given a recessionary gap, the Federal Reserve will use monetary policy to _____ real GDP and _____ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Use the following to answer questions: Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. Panel (a) illustrates what happens when the Federal Reserve decides to _____ the money supply and _____ interest rates. A) decrease; lower B) increase; raise C) increase; lower D) decrease; raise

Use the following to answer questions: Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. Panel (b) illustrates what happens when the Federal Reserve decides to _____ the money supply and _____ interest rates. A) decrease; lower B) increase; raise C) increase; lower D) decrease; raise

Use the following to answer questions: Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. Panel _____ illustrates what happens when the Fed decides to _____ Treasury bills and _____ the money supply. A) (a); sell; increase B) (b); buy; increase C) (b); sell; decrease D) (a); buy; decrease

Use the following to answer questions: Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. If the economy is in a recessionary gap, the Federal Reserve will _____ Treasury bills, which will _____ the money supply and _____ interest rates. This is shown in panel _____. A) sell; decrease; raise; (b) B) buy; decrease; lower; (a) C) buy; increase; lower; (a) D) sell; increase; lower; (a)

Use the following to answer questions: Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. If the economy is in an inflationary gap, the Federal Reserve will _____ Treasury bills, which will _____ the money supply and _____ interest rates. This is shown in panel _____. A) buy; increase; lower; (a) B) sell; decrease; raise; (b) C) buy; decrease; raise; (b) D) sell; increase; raise; (b)

Use the following to answer questions: Figure: The Money Supply and Aggregate Demand -(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. If the Federal Reserve intended to encourage investment and expand the economy, it would _____ Treasury bills, _____ the money supply, and _____ interest rates. This is shown in panel _____. A) buy; increase; lower; (a) B) sell; increase; lower; (b) C) buy; decrease; lower; (a) D) buy; increase; raise; (a)

Suppose that the Federal Reserve is conducting an expansionary monetary policy. It will _____ Treasury bills on the open market, so that the money supply will _____, interest rates will _____, planned investment spending will _____, and the AD curve will shift to the _____. A) buy; decrease; fall; fall; left B) sell; decrease; rise; fall; left C) buy; increase; fall; rise; right D) sell; increase; rise; rise; left

If the Federal Reserve wants to close an inflationary gap, it will _____ the money supply and _____ the interest rate, thus _____ investment spending and GDP. The AD curve will shift to the _____. A) increase; raise; increasing; right B) increase; lower; lowering; left C) decrease; raise; lowering; left D) decrease; lower; lowering; right

To fight inflation, the Federal Reserve should conduct _____ monetary policy to _____ interest rates, which will shift the aggregate demand curve to the _____. A) contractionary; raise; left B) contractionary; raise; right C) expansionary; lower; right D) expansionary; raise; left

To fight a recession, the Federal Reserve should conduct _____ monetary policy to _____ interest rates, which will shift the aggregate demand curve to the _____. A) expansionary; lower; left B) contractionary; raise; left C) contractionary; lower; right D) expansionary; lower; right

Which statement is FALSE? A) The Taylor rule sets the federal funds rate on the basis of both inflation rate and output gap, whereas inflation targeting is based on a desired inflation rate. B) The Taylor rule sets the federal funds rate on the basis of past inflation rates, whereas inflation targeting is based on a forecast of the inflation rate. C) The Taylor rule can be more flexible, whereas inflation targeting provides more transparency and accountability. D) The Taylor rule sets the federal funds rate on the basis of only past inflation rates, whereas inflation targeting is based on a target interest rate and business cycles.

Which statement describes the difference between the Taylor rule and inflation targeting? A) The Federal Reserve uses inflation targeting, and the Bank of England uses the Taylor rule. B) The Taylor rule responds to past inflation, and inflation targeting is based on a forecast of inflation. C) Inflation targeting responds to past inflation, and the Taylor rule is based on a forecast of inflation. D) Inflation targeting is used in conducting fiscal policy, while the Taylor rule is used in monetary policy.

Which monetary policy would be destabilizing? I. an expansionary policy during an expansion II) an expansionary policy during a recession III) a contractionary policy during an expansion A) I only B) II only C) III only D) I, II, and III

In the short run, the interest rate is determined in the _____ market. A) stock B) money C) loanable funds D) commodity

In the long run, the interest rate is determined in the _____ market. A) stock B) money C) loanable funds D) commodity

In the long run, a change in the money supply will affect: I. the interest rate. II) real GDP. III) prices. A) I only B) II only C) III only D) I, II, and III

If the economy is at potential output and the Fed increases the money supply, in the short run interest rates will likely: A) increase. B) decrease. C) remain constant. D) fluctuate randomly.

If the economy is at potential output and the Fed increases the money supply, in the short run the likely result will be a(n) _____ in investment and a(n) _____ in consumption. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

If the economy is at potential output and the Fed increases the money supply, in the short run the aggregate demand will likely: A) shift to the left. B) remain the same. C) increase. D) decrease.

If the economy is at potential output and the Fed increases the money supply, in the short run the price level will likely: A) fluctuate randomly. B) remain the same. C) decrease. D) increase.

If the economy is at potential output and the Fed increases the money supply, in the short run real GDP will likely: A) fluctuate randomly. B) remain the same. C) decrease. D) increase.

If the economy is at potential output and the Fed increases the money supply so that actual output exceeds potential output, eventually nominal wages will: A) increase. B) decrease. C) remain the same. D) fluctuate randomly.

When nominal wages increase, the short-run aggregate supply curve: A) shifts to the right. B) shifts to the left. C) remains constant. D) disappears.

If the economy is at potential output and the Fed increases the money supply, in the long run the price level will likely: A) fluctuate randomly. B) remain the same. C) decrease. D) increase.

If the economy is at potential output and the Fed increases the money supply, in the long run real GDP will likely: A) fluctuate randomly. B) remain the same. C) decrease. D) increase.

If the economy is at potential output and the Fed decreases the money supply, in the short run the likely result will be a(n) _____ in investment and a(n) _____ in consumption. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

If the economy is at potential output and the Fed decreases the money supply, in the short run the aggregate demand will likely: A) shift to the right. B) remain the same. C) increase. D) decrease.

If the economy is at potential output and the Fed decreases the money supply, in the short run the price level will likely_____ and real GDP will likely_____ . A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

If the economy is at potential output and the Fed decreases the money supply so that actual output is less than potential output, eventually nominal wages will_____ and short-run aggregate supply will _____. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

If the economy is at potential output and the Fed decreases the money supply, in the long run the price level will likely: A) fluctuate randomly. B) remain the same. C) decrease. D) increase.

If the economy is at potential output and the Fed decreases the money supply, in the LONG run real GDP will likely: A) fluctuate randomly. B) remain the same. C) decrease. D) increase.

When actual output is above potential output, over time: A) nominal wages will increase, and the short-run supply curve will shift to the right. B) nominal wages will increase, and the short-run supply curve will shift to the left. C) the aggregate demand curve will shift to the right. D) the short-run aggregate supply curve will shift to the right.

An increase in the money supply causes _____ in output in the short run and _____ in output in the long run. A) an increase; no change B) an increase; an increase C) no change; an increase D) no change; no change

Contractionary monetary policy causes _____ in the price level in the short run and _____ in the price level in the long run. A) no change; a decrease B) a decrease; a decrease C) a decrease; no change D) no change; no change

The short-run aggregate supply curve is _____, and the long-run aggregate supply curve is _____. A) vertical; upward sloping B) upward sloping; vertical C) downward sloping; vertical D) vertical; horizontal

Suppose that the economy is operating at potential output and the money supply increases. Aggregate output will _____ potential output, nominal wages will _____, and the SRAS will shift _____. A) rise above; rise; leftward B) fall below; rise; leftward C) rise above; fall; leftward D) rise above; rise; rightward

Over time, contractionary monetary policy _____ nominal wages and causes the short-run aggregate supply curve to shift _____. A) lowers; leftward B) raises; rightward C) lowers; rightward D) raises; leftward

Figure: Short-Run and Long-Run Effects of Monetary Policy Refer to Figure: Short-Run and Long-Run Effects of Monetary Policy. If the economy is initially at E₂ and the central bank makes no change in its monetary policy: A) AD₂ will shift to the right, increasing the existing inflationary gap. B) AD₂ will shift to the left, closing the inflationary gap. C) SRAS₁ will eventually shift to the left, closing the existing inflationary gap but raising the aggregate price level. D) SRAS₂ will immediately shift to the right, increasing the existing inflationary gap.

Use the following to answer questions: Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. An increase in the money supply is most likely to cause a shift: A) from SRAS to SRAS'. B) from AD to AD'. C) from SRAS' to SRAS. D) from AD' to AD.

Use the following to answer questions: Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. The economy may move from point i to point h as a result of: A) an increase in the money supply. B) a rise in the discount rate. C) a decrease in the money supply. D) sales of government securities in the open market.

Use the following to answer questions: Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of: A) a decrease in the money supply. B) a rise in the discount rate. C) an increase in the money supply. D) sales of government securities in the open market.

Use the following to answer questions: Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. The economy could move from point g to point f as a result of: A) an increase in the money supply. B) a reduction in the discount rate. C) a decrease in the money supply. D) purchases of government securities in the open market.

Use the following to answer questions: Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of: A) a decrease in government spending. B) an increase in the discount rate. C) a decrease in the money supply. D) purchases of government securities in the open market.

Use the following to answer questions: Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is in an inflationary gap at point h, it can move to point i as a result of: A) an increase in the money supply. B) a reduction in the discount rate. C) a decrease in the money supply. D) purchases of government securities in the open market.

Use the following to answer questions: Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is at point h because of an open market purchase by the Federal Reserve and no further monetary policy is implemented, in the long run nominal wages will _____, SRAS will shift _____, real GDP will _____, and the price level will _____. A) increase; to SRAS'; decrease; increase B) increase; to SRAS'; increase; decrease C) decrease; farther to the right; decrease; increase D) decrease; to SRAS'; increase; decrease

Use the following to answer questions: Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is at point f because of an open market sale by the Federal Reserve and no further monetary policy is implemented, in the long run nominal wages will _____ and _____ will shift to _____, real GDP will _____, and the price level will _____. A) increase; SRAS; SRAS'; decrease; increase B) increase; SRAS; SRAS'; increase; decrease C) decrease; SRAS; SRAS; increase; decrease D) decrease; SRAS; SRAS; decrease; decrease

Consider an economy that is facing a recessionary gap. The Federal Reserve decides to use expansionary monetary policy to close that gap. As a result of this policy, in the short run the money supply will _____, the interest rate will _____, investment and consumption spending will _____, and real GDP will _____. A) decrease; fall; decrease; increase B) increase; increase; decrease; decrease C) decrease; increase; decrease; decrease D) increase; fall; increase; increase

Use the following to answer questions: Figure: Output Gap -(Figure: Output Gap) Refer to Figure: Output Gap. If the economy is producing at Y₁, then it has a(n) _____ gap, as _____ real GDP exceeds _____ real GDP, and the Federal Reserve should use _____ monetary policy. A) inflationary; actual; potential; contractionary B) recessionary; potential; actual; expansionary C) inflationary; potential; actual; contractionary D) recessionary; actual; potential; expansionary

Use the following to answer questions: Figure: Output Gap -(Figure: Output Gap) Refer to Figure: Output Gap. If the economy is producing at Y₂, then it has a(n) _____ gap, as _____ real GDP exceeds _____ real GDP, and the Federal Reserve should use _____ monetary policy. A) recessionary; actual; potential; expansionary B) recessionary; potential; actual; expansionary C) inflationary; actual; potential; contractionary D) inflationary; potential; actual; contractionary

Use the following to answer questions: Figure: Output Gap -(Figure: Output Gap) Refer to Figure: Output Gap. If the economy is at Y₁ as a result of expansionary monetary policy and no further policy is implemented, in the long run nominal wages will _____ and shift the short-run aggregate supply curve to the _____, which will _____ real output. A) increase; left; decrease B) increase; right; increase C) decrease; left; decrease D) decrease; right; increase

Use the following to answer questions: Figure: Output Gap -(Figure: Output Gap) Refer to Figure: Output Gap. If the economy is at Y₂ because of contractionary monetary policy and no further policy is implemented, in the long run nominal wages will _____ and shift the short-run aggregate supply curve to the _____, which will _____ real output. A) increase; left; decrease B) increase; right; increase C) decrease; left; decrease D) decrease; right; increase

If the Federal Reserve uses expansionary monetary policy there is a _____ short-run effect on _____, but_____. A) negative short-run; real GDP; prices remain unchanged in the long run. B) positive short-run; real GDP; GDP remains equal to potential GDP in the long run. C) positive long-run; real GDP; GDP remains unchanged at its potential level in the short run. D) positive short-run; the price level; the aggregate price level remains unchanged in the long run.

Suppose that the economy is in long-run equilibrium at full employment levels of real GDP. In the long run, if the money supply increases, we would expect _____ in the price level and _____ in real GDP. A) an increase; no change B) an increase; an increase C) a decrease; no change D) no change; an increase

In the long run, changes in the money supply _____ the aggregate price level and _____ aggregate output. A) affect; affect B) affect; do not affect C) do not affect; affect D) do not affect; do not affect

Assume the money supply doubles, followed by a doubling of the wage rate and the price level. Under these circumstances, we can safely conclude that: A) real aggregate output will double. B) real aggregate output will fall in half. C) nominal output will double, but real output will fall. D) nominal output will double, but real output will remain unchanged.

Economists argue that money is neutral in: A) both the short and the long run. B) the short run only. C) the long run, but money does affect the price level. D) the long run, but money does not affect the price level.

Monetary neutrality implies that in the long run: A) monetary policy does not affect the level of economic activity. B) long-run aggregate supply depends on monetary policy. C) changing the money supply does not affect the aggregate price level. D) aggregate demand is independent from monetary policy.

Which statement is FALSE? In the long run, monetary policy: A) affects only the aggregate price level. B) does not affect aggregate output. C) is neutral. D) increases potential output.

If the money supply increases by 10%, in the long run: A) unemployment drops by 10%. B) the price level increases by 10%. C) real GDP increases by 10%. D) unemployment drops by 20%.

If the money supply decreases by 5%, in the long run: A) interest rates rise by 5%. B) the unemployment rate rises by 10%. C) the price level drops by 5%. D) real GDP drops by 5%.

In the long run, an increase in the quantity of money: A) increases real output. B) increases prices but not long-run output. C) increases real interest rates. D) has no effect on the economy.

According to the concept of monetary neutrality, _____ in the money supply _____ real GDP _____ the price level. A) increases; do not change; but do raise B) increases; raise; but do not change C) decreases; lower; but do lower D) increases; raise; but do raise

Expansionary monetary policy causes _____ in interest rates in the short run and _____ in interest rates in the long run. A) a fall; no change B) a fall; a fall C) no change; a fall D) no change; no change

An increase in the money supply _____ the interest rate in the short run but _____ the interest rate in the long run. A) lowers; does not affect B) raises; lowers C) does not affect; raises D) does not affect; lowers

In the long run, changes in the money supply: A) don't affect the interest rate. B) lower the interest rate. C) raise the interest rate. D) have a small but indeterminate impact on the interest rate.

Contractionary monetary policy causes a short-run _____ in interest rates in the short run and _____ in interest rates in the long run. A) increase; an increase B) increase; no change C) decrease; no change D) decrease; a decrease

An increase in the money supply will decrease interest rates in the short run but will not affect interest rates in the long run because an increase in the money supply will eventually _____ prices and _____ money demand. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

Available international evidence for the period 1970-2015 shows that the: A) increases in the quantity of money led to a proportionate increase in the aggregate price level. B) relationship between money and the aggregate price level changes over time and across countries. C) concept of monetary neutrality applies only to developing countries. D) increases in the money supply in the long run led to equal percent rises in the aggregate price level.

Between 1970 and the present, research comparing similar wealthy countries found that increases in the money supply: A) and increases in the price level were roughly proportional. B) had little effect on prices. C) caused large increases in real GDP. D) caused large decreases in real GDP.

Monetary policy is similar among wealthy countries because the central banks of most countries: A) try to keep inflation between 2% and 3% per year. B) try to keep inflation between 5% and 6% per year. C) try to keep inflation between 0% and 2% per year. D) are trying to establish a single global currency.

In the long run, the only effect of monetary policy is on the: A) long-run aggregate supply. B) interest rate. C) aggregate output level. D) aggregate price level.

Use the following to answer questions: Figure: A Money Market -(Figure: A Money Market) Refer to Figure: A Money Market. The equilibrium interest rate is: A) r_1. B) r_2. C) r_3. D) M_0.

Use the following to answer questions: Figure: A Money Market -(Figure: A Money Market) Refer to Figure: A Money Market. If the interest rate is r₃, the interest rate will _____ because there is a _____ of money in the market. A) fall; surplus B) fall; shortage C) rise; surplus D) rise; shortage

Use the following to answer questions: Figure: A Money Market -(Figure: A Money Market) Refer to Figure: A Money Market. If the current interest rate is r₁, the interest rate will _____ because there is a _____ of money in the market. A) fall; surplus B) fall; shortage C) rise; surplus D) rise; shortage

Use the following to answer questions: Figure: A Money Market -(Figure: A Money Market) Refer to Figure: A Money Market. Holding the money supply constant, which reason might cause the equilibrium interest rate to decrease to r₁? A) The inflation rate rises to historically high levels. B) Higher payroll taxes cause employers to pay workers cash under the table. C) A recession decreases real GDP. D) There is a significant increase in the stock market.

Scenario: Money and Interest Rates Banks decide to do away with fees charged when other banks' customers use the bank's own ATM. The demand for money will _____, and the supply of money will _____. A) increase; not change B) increase; decrease C) decrease; not change D) decrease; increase

Scenario: Money and Interest Rates Banks decide to do away with fees charged when other banks' customers use the bank's own ATM. If the money supply remains constant, interest rates will likely: A) decrease. B) increase. C) remain the same. D) increase or decrease, depending upon what maximizes profits for the largest commercial banks.

Scenario: Money and Interest Rates Banks decide to do away with fees charged when other banks' customers use the bank's own ATM. If the Federal Reserve wants to maintain the same federal funds rate, it should: A) increase taxes. B) decrease government spending. C) sell Treasury bills. D) buy Treasury bills.

Use the following to answer questions: Figure: Economic Adjustments -(Figure: Economic Adjustments) Refer to Figure: Economic Adjustments. Assume that the economy is at point c. The effect of an increase in the money supply is represented by a shift of the _____ curve to _____. A) SRAS₁; SRAS₂ B) SRAS₂; SRAS₁ C) AD₁; AD₂ D) AD₂; AD₁

Use the following to answer questions: Figure: Economic Adjustments -(Figure: Economic Adjustments) Refer to Figure: Economic Adjustments. Assume that the economy is at point b. The effect of a decrease in the money supply is represented by a shift of the _____ curve to _____. A) SRAS₁; SRAS₂ B) SRAS₂; SRAS₁ C) AD₁; AD₂ D) AD₂; AD₁

Use the following to answer questions: Figure: Monetary Policy I -(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₂ and the central bank chooses to sell Treasury bills, _____ shift to _____ a(n) _____ gap. A) AD₂ will; the right, causing; inflationary B) AD₂ will; AD₁, causing; recessionary C) AD₁ will; AD₂, closing; recessionary D) AD₁ will; the left, closing; recessionary

Use the following to answer questions: Figure: Monetary Policy I -(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₁ and the central bank chooses to buy Treasury bills, _____ shift to _____ a(n) _____ gap. A) AD₂ will; right, causing; inflationary B) AD₂ will; AD₁, causing; recessionary C) AD₁ will; AD₂, closing; recessionary D) AD₁ will; left, increasing; recessionary

Use the following to answer questions: Figure: Monetary Policy I -(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₂ and the central bank chooses to buy Treasury bills, _____ shift to _____ a(n) _____ gap. A) AD₂ will; the right, causing; inflationary B) AD₂ will; AD₁, causing; recessionary C) AD₁ will; AD₂, closing; recessionary D) AD₁ will; the left, increasing; recessionary

Use the following to answer questions: Figure: Monetary Policy I -(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₂ and the central bank chooses to sell Treasury bills_____ shift to _____ a(n) _____ gap. A) AD₂ will; the right, causing; inflationary B) AD₂ will; AD₁, causing; recessionary C) AD₁ will; AD₂, closing; recessionary D) AD₁ will; the left, increasing; recessionary

Use the following to answer questions: Figure: Monetary Policy I -(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₁ and the central bank chooses to buy Treasury bills, _____ shift to _____ a(n) _____ gap. A) AD₁ will; AD₂, closing; recessionary B) AD₁ will; the left, increasing; recessionary C) SRAS₁ will immediately; left, closing; inflationary D) SRAS₂ will immediately; right, increasing; inflationary

Use the following to answer questions: Figure: Monetary Policy I -(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₂ and the central bank chooses to sell Treasury bills: A) AD₂ will shift to the right, causing an inflationary gap. B) AD₂ will shift to AD₁, causing a recessionary gap. C) SRAS₁ will shift immediately to the left, closing an inflationary gap. D) SRAS₂ will shift immediately to the right, increasing an inflationary gap.

Use the following to answer questions: Figure: Monetary Policy II -(Figure: Monetary Policy II) Refer to Figure: Monetary Policy II. To eliminate the inflationary gap from the short-run equilibrium at Y₂, monetary policy should be: A) expansionary. B) contractionary. C) neutral. D) balanced.

Use the following to answer questions: Figure: Monetary Policy II -(Figure: Monetary Policy II) Refer to Figure: Monetary Policy II. If the short-run equilibrium is at Y₂, appropriate central bank policy is: A) contractionary. B) expansionary. C) neutral. D) balanced.

Use the following to answer questions: Figure: Monetary Policy III -(Figure: Monetary Policy III) Refer to Figure: Monetary Policy III. The central bank should adopt policies to move the economy to: A) Y₁. B) Y₂. C) Y₃. D) Y₄.

Use the following to answer questions: Figure: Monetary Policy III -(Figure: Monetary Policy III) Refer to Figure: Monetary Policy III. Expansionary economic policy will lead to an equilibrium GDP of: A) Y₁. B) Y₂. C) Y₃. D) Y₄.

Use the following to answer questions: Figure: Monetary Policy III -(Figure: Monetary Policy III) Refer to Figure: Monetary Policy III. Expansionary monetary policy will lead to an equilibrium price level of: A) P₁. B) P₂. C) P₃. D) P₄.

Expansionary monetary policy will _____ interest rates and _____ savings in the short run. A) raise; increase B) raise; decrease C) lower; increase D) lower; decrease

In the short run: A) only the supply of money determines the interest rate. B) only the demand for money determines the interest rate. C) the supply and demand for money determine the interest rate, and the loanable funds market follows the lead of the money market. D) the supply and demand for money determine the interest rate, and the money market follows the lead of the loanable funds market.

According to the loanable funds model, in the short run, expansionary monetary policy: A) increases the supply of loanable funds. B) increases the demand for loanable funds. C) increases the quantity of loanable funds supplied. D) has no effect on the supply of loanable funds.

According to the loanable funds model, in the short run, contractionary monetary policy shifts the _____ curve for loanable funds to the _____. A) demand; right B) supply; right C) demand; left D) supply; left

The loanable funds model focuses on the: A) demand for money. B) supply of funds from lenders. C) supply of funds from borrowers and the demand by lenders. D) supply of funds from lenders and the demand from borrowers.

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the central bank buys Treasury bills, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the: A) money supply curve to MS₂, which raises the interest rate. B) supply of loanable funds from S₁ to S₂, which lowers the interest rate. C) supply of loanable funds from S₂ to S₁, which raises the interest rate. D) interest rate from r₂ to r₁.

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₂ and the central bank sells Treasury bills, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the: A) money supply curve to MS₁, which lowers the interest rate. B) supply of loanable funds from S₁ to S₂, which lowers the interest rate. C) supply of loanable funds from S₂ to S₁, which raises the interest rate. D) interest rate from r₁ to r₂.

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the central bank buys Treasury bills, then in the short run the interest rate will: A) increase above r₁. B) remain at r₁. C) decrease to r₂. D) fluctuate randomly.

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₂ and the central bank sells Treasury bills, then in the short run the interest rate will: A) decrease below r₂. B) remain at r₂. C) increase to r₁. D) fluctuate randomly.

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r₂. In the long run prices will _____ thereby ___________the demand for money. A) decrease, decreasing B) decrease, increasing C) increase, decreasing D) increase, increasing

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r₂. In the long run the demand for money will _____, and the interest rate will_____. A) increase; increase to r₁ B) increase; remain at r₂ C) decrease; decrease below r₂ D) decrease; remain at r₂

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₂ and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r₁. In the long run prices will _____ thereby _________ the demand for money. A) decrease, decreasing B) decrease, increasing C) increase, decreasing D) increase, increasing

Use the following to answer questions: Figure: Short-Run Determination of the Interest Rate -(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₂ and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r₁. In the long run: the demand for money will _____, and the interest rate will_____. A) increase; increase to r₁ B) increase; remain at r₂. C) decrease; decrease to r₂. D) decrease; remain at r₁.

When the Fed changes tax rates, interest rates change, and this changes real GDP.

As of 2017, Janet Yellen is the chair of the Board of Governors of the Federal Reserve.

People incur a cost for holding money instead of nonmonetary assets such as Treasury bills.

The higher the short-term interest rate, the lower the opportunity cost of holding money.

Long-term interest rates apply to financial assets that mature a number of years in the future.

Long-term interest rates affect the demand for money more than short-term interest rates.

As the opportunity cost of holding money changes from 5% to 3%, the quantity of money demanded increases.

If the opportunity cost of holding money rises, then the money demand curve shifts to the left.

If the inflation rate is 3% this year, the demand for money will increase by 6% this year.

If the economy is in a recession and real GDP decreases, the demand for money will shift to the left.

If requirements for having a credit card become stricter, so that fewer people qualify for one, the demand for money will decrease.

If banks were suddenly prohibited from paying interest on checking accounts, the demand for money would likely decrease.

The demand for money in Japan is much lower than the demand for money in the United States.

Congress sets the target federal funds rate, but it is the Fed's responsibility to achieve the target rate through purchases and sales of reserves.

According to the liquidity preference model, the supply and demand for money determine the interest rate.

If the interest rate is below equilibrium, then the quantity of money demanded is more than the quantity of money supplied, and the quantity of interest-bearing financial assets demanded is also more than the quantity supplied.

If the interest rate is below equilibrium, then the quantity demanded of interest-bearing financial assets is less than the quantity supplied, so people selling interest-bearing financial assets have to offer higher interest rates to get people to buy them, thus raising interest rates back to the equilibrium level.

Other things equal, if there is an excess demand for money, the interest rate may rise.

Other things equal, if the amount of money demanded is greater than the amount of money supplied, then the interest rate may fall.

The loanable funds model focuses on interest rates in the short run.

The liquidity preference model focuses on interest rates in the short run.

To decrease interest rates, the Fed should increase the money supply.

To decrease interest rates, the Fed should make an open-market sale of Treasury bills.

If the actual interest rate is below the target rate, the Fed should decrease the money supply.

If the actual interest rate is 6% and the target rate is 4%, the Fed should decrease the money supply.

If the actual interest rate is below the target rate, the Fed should sell Treasury bills.

If the actual interest rate is 6% and the target rate is 4%, the Fed should sell Treasury bills.

When long-term rates are lower than short-term rates, the market is signaling that it expects short-term rates to fall.

On average, short-term interest rates are higher than long-term rates to compensate for higher risk in the short term.

Between 2015 and 2017, the Fed raised its target federal funds rate by a large amount to prevent inflation.

In 2007, the Fed raised its target federal funds rate to prevent unemployment and a recession.

Expansionary monetary policy decreases interest rates and increases aggregate demand.

Expansionary monetary policy works by decreasing consumption, allowing other sectors of the economy to spend more.

Expansionary monetary policy may increase consumer spending.

Expansionary monetary policy may decrease investment spending.

To close a recessionary gap, the central bank could adopt an expansionary economic policy.

When real GDP is above potential GDP, the Fed uses contractionary monetary policy.

When the economy is developing an inflationary gap, the Fed should increase the money supply to decrease interest rates.

According to the Taylor rule, the target federal funds rate should be positively related to the inflation rate and inversely related to the unemployment rate.

Usually there is an inverse relationship between the federal funds rate and the output gap.

Inflation targeting occurs when the central bank sets an explicit goal for the inflation rate and uses monetary policy to hit that goal.

Inflation targeting is different from the Taylor rule because the Taylor rule is based on a forecast of inflation, but inflation targeting adjusts monetary policy to past inflation.

One advantage of inflation targeting over the Taylor rule is that with inflation targeting, because the public knows the target in advance, uncertainty is reduced.

One advantage of inflation targeting over the Taylor rule is that the central bank's policy can be evaluated by seeing how close to the target actual inflation rates are.

The zero lower bound for interest rates is the target that the Taylor rule sets.

Quantitative easing occurs when instead of purchasing only short-term government debt, the Fed buys long-term government debt as well.

The appropriate monetary policy to stabilize the economy during a recession is an expansionary policy.

A contractionary monetary policy is appropriate during a recession.

A contractionary monetary policy is appropriate during an expansion.

The interest rate is determined in the loanable funds market in the short run.

The interest rate is determined in the money market in the short run.

The Fed prints money only when it is conducting monetary policy.

In the long run, changes in the money supply will change prices, real GDP, and interest rates.

In the long-run, changes in the money supply will change prices but not real GDP or interest rates.

Monetary policy affects both the aggregate price level and output in the long run.

If the economy is at potential output and the Fed increases the money supply, interest rates will likely increase in the short run.

If the economy is at potential output and the Fed decreases the money supply, in the short run the likely result will be a decrease in investment and a decrease in consumption.

If the economy is at potential output and the Fed increases the money supply, the aggregate demand will likely decrease in the short run.

If the economy is at potential output and the Fed decreases the money supply, run the price level will likely decrease in the short run.

If the economy is at potential output and the Fed increases the money supply, run real GDP will likely remain the same in the short run.

If the economy is at potential output and the Fed decreases the money supply so that actual output is less than potential output, eventually nominal wages will decrease.

When nominal wages decrease, the short-run aggregate supply curve shifts to the left.

If the economy is at potential output and the Fed increases the money supply, in the long run the price level will likely increase.

If the economy is at potential output and the Fed decreases the money supply, run real GDP will likely decrease in the long run.

The concept of monetary neutrality means that changes in the money supply have no real effects on real output in the long run.

If the money supply decreases by 10%, the aggregate price level will remain constant in the long run.