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Exam 15: Monetary Policy

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Question 71

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Answer the questions below: (A)What are the advantages of the Fed increasing interest rates when the GDP gap is positive? (B)What are the disadvantages of the Fed increasing interest rates when it believes the GDP gap is positive?

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(A)Raising interest rates enables the Fe...

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Question 72

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The Fed conducts monetary policy so as to counteract any positive or negative demand shocks.

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Question 73

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Assume the Fed has complete control over the money supply. If the demand for money were greater than the supply of money, we would expect

If the Fed wants to fix the interest rate, how does it guarantee that money demand will equal money supply?

Answer the questions below: (A)What should the Fed do if inflation is at the target rate and the GDP gap is positive? Explain using an aggregate demand inflation diagram. (B)What should the Fed do if inflation is below the target rate and the GDP gap is positive? Explain using an aggregate demand inflation model.

The nominal interest rate in the economy cannot go below zero, so at some point increases in reserves will stop lowering the interest rate.

Which of the following represents one of the new monetary tools that the Fed has developed as a result of the recent financial crisis?

Suppose Congress had the power to set monetary policy instead of the Federal Reserve. Do you think we might more frequently observe the "short-run gain, long-run pain" scenario? Please explain.

In most cases, the Fed can determine whether real and potential GDP are equal.

In the last two and a half decades, the Fed has become much less transparent about its actions.

Explain how the facts justify the conclusion implied by the AD-IA analysis: There is no long-run tradeoff between inflation and unemployment.

The low unemployment rate in the late 1990s resulted in high rates of inflation.

Suppose the economy is in a boom in which real GDP is greater than potential GDP. The rate of inflation, however, remains at the target level set by the Fed. Suppose that financial markets are convinced that higher inflation is imminent and, in agreement, the Fed decides to increase interest rates. (A)Illustrate the change in Fed policy with a monetary policy rule diagram. (B)Show, using the aggregate demand curve and an inflation adjustment line, the short-run, medium-run, and long-run effect of the Fed's policy.

Exhibit 27-1 -Suppose the Fed decides to increase the real interest rate. According to the data in Exhibit 27-1,

Use a supply and demand for money diagram to show why, if the Fed is interested in lowering the federal funds rate by a certain amount, the interest sensitivity of the demand for money function will determine the extent of the open market operation, that is, by how much the money supply will have to increase.

In 2009, QE1 involved

Suppose a country is experiencing a deflation while real GDP is below potential GDP. (A)If the country's central bank decides it wants to reinflate the economy, what type of policy should it pursue? (B)Suppose this policy is enacted. What will happen to the real interest rate and investment when the economy returns to potential? (C)Suppose the central bank decides not to reinflate the economy, and the economy eventually returns to potential GDP. How will the long-run equilibrium values for the real interest rate and investment differ from your answer in (B)?

The Phillips curve reflects a

Once a zero interest rate has been reached, even though continuing to increase the money supply will not lower the interest rate, the process can stimulate the economy.

The demand for money is