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Exam 15: Monetary Policy

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Question 81

Multiple Choice

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The liquidity trap refers to the

A) assumption that the money supply curve is vertical as a result of the Fed's control.
B) problem that occurs when interest rates reach such high levels that no individuals want to hold their wealth in the form of money.
C) situation that occurs when an excess supply of money results in people holding more money than they desire.
D) possibility that interest rates drop so low that people willingly hold all the additions to the money supply, rather than use it to buy bonds.

E) None of the above
F) B) and D)

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Question 82

Multiple Choice

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Exhibit 15-3 -Refer to Exhibit 15-3. The economy is currently at point 5. If contractionary monetary policy is implemented, and prices are flexible, the economy will likely move to point ______ in the short run.

A) 1
B) 3
C) 2
D) 4
E) none of the above

F) C) and D)
G) B) and C)

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Question 83

Essay

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Suppose that the bond market and the money market start out in equilibrium. Explain the process by which the interest rate and the price of bonds will change as a result of the Fed increasing the money supply.

Activists hold that

Assume the Keynesian transmission mechanism is operational and the economy is currently operating in the horizontal portion of the AS curve. If the money supply decreases and the demand for money curve is downward sloping and investment is interest-____________, then Real GDP will ___________________.

According to the Keynesian transmission mechanism (and assuming there is no liquidity trap and investment is not interest insensitive) , if the money supply increases, the interest rate __________, investment spending __________ and the AD curve shifts to the __________.

Suppose that one year ago you purchased a $1,000 bond with an interest payment of $40 per year and, at the time, the interest rate was 4 percent. One year later the interest rate on bonds has increased to 5 percent, and you still hold the bond you purchased a year ago. If you were to sell your bond now, the price that you could sell it for would be

Exhibit 15-1 -Refer to Exhibit 15-l. A Keynesian would say that natural market forces work so slowly in a recessionary gap in taking the economy between point __________ that an activist monetary policy is called for.

Exhibit 15-2 -Refer to Exhibit 15-2. If the interest rate is i₂ and the relevant money supply curve is S₁, then there is a

The economy is in a recessionary gap and there is evidence that the economy is in a liquidity trap. In this situation, a Keynesian is likely to advocate the use of __________ policy.

In the monetarist transmission mechanism, changes in the money market directly affect aggregate demand.

The object of inflation targeting is for a country's central bank to try to keep the inflation rate near

Under a gold standard, if the market price of gold is above the official price of gold (set by the monetary authority) members of the public would likely buy gold _______________ and sell it __________________, causing the market price of gold to ____________________.

Suppose that the bond market and the money market both start out in equilibrium, then the Federal Reserve decreases the money supply. The result will be a ______________ in the money market and a _________________ in the bond market, which will push bond prices _________________ and interest rates will ___________________ until a new equilibrium is reached.

People should buy bonds when they think that interest rates are as high as they will go.

To try to eliminate a recessionary gap the Fed typically__________ the money supply, and to try to eliminate an inflationary gap the Fed typically __________ the money supply.

The rules-based monetary policy reads: The annual growth rate in the money supply will be equal to the average annual growth rate in Real GDP minus the growth rate in velocity. If the average growth rate in Real GDP this year is 3 percent and the growth rate in velocity is 2 percent, then the money supply will increase by ______________ percent this year.

Suppose the money market is in the liquidity trap and the Fed increases the supply of money. We expect that

Under a gold standard, if the market price of gold is below the official price of gold (set by the monetary authority) , people will be more likely to sell gold __________________, which will cause the money supply to _______________ and the price level.to _______________.

Exhibit 15-4 Assume that people have only two choices when it comes to holding their wealth: in money or in bonds. -Refer to Exhibit 15-4. In the row of this table containing blank (C) , people are holding ______________ of their wealth in bonds and ________________ of their wealth in money.