Chapter 15

Question 1

short-term interest rates

Answer 1

Interest rates on financial assets that mature within less than a year

Question 2

long-term interest rates

Answer 2

Interest rates on financial assets that mature a number of years in the future

Question 3

The higher the short-term interest rate, ______________

Answer 3

the higher the opportunity cost of holding money

Question 4

The lower the short-term interes rate, _________________

Answer 4

the lower the opportunity cost of holding money

Question 5

What affects money demand?

Answer 5

short-term interest rates

Question 6

Money demand curve

Answer 6

Shows the relationship between the interest rate and the quantity of money demanded

slopes downward

Question 7

Why is interest rate on the vertical axis for the money demand curve?

Answer 7

Because for most people the question is deciding whether to put the funds in the form of other assets that can quickly and easily be turned into money

Question 8

Factors that shift money demand curve:

Answer 8

Changes in:

Aggregate price level

real GDP

Credit markets and banking technoogy

institutions

Question 9

higher prices =>

Answer 9

increase demand for money

Question 10

lower prices =>

Answer 10

decrease demand for money

Question 11

The demand for money is ________ to the price level

Answer 11

proportional

If aggregate price level rises by 20%, the quantity of money demanded also rises by 20%

Question 12

increase in GDP =>

Answer 12

increases demand of money

Question 13

decrease in GDP =>

Answer 13

decreases demand for money

Question 14

“revolving balance”

Answer 14

Credit card that allows customers to carry a balance from month to month

Question 15

Credit cards more available

banking technology increases

Answer 15

decreases the demand for money

Question 16

Changes in institutions: allow banks to pay interest on checking account funds

Answer 16

increase demand for money

Question 17

Liquidity preference model of the interest rate

Answer 17

The interest rate is determined by the supply and demand for money

Question 18

Money supply curve

Answer 18

Shows how the quantity of money supplied varies with the interest rate

Question 19

An increase in the money supply, ___________

Answer 19

drives the interest rate down

Question 20

A decrease in the money supply, ______________

Answer 20

drives the interest rate up

Question 21

Target federal funds rate

Answer 21

The federal reserve’s desired federal funds rate

Question 22

When long term rates are higher than short-term rates, _______________________

Answer 22

short-term rates are expected to rise in the future

Question 23

Expansionary monetary policy

Answer 23

Monetary policy that increases aggregate demand

Question 24

Contractionary monetary policy

Answer 24

Monetary policy that decreases aggregate demand

Question 25

price stability

Answer 25

low (though usually not zero) inflation

Question 26

When output gap is rising

Answer 26

raise interest rates

Question 27

when output gap is falling

Answer 27

lower interest rates

Question 28

Federal funds rate tends to be high when______________

Answer 28

inflation is high

Question 29

Federal Funds rate tends to be low when __________________

Answer 29

inflation is low

Question 30

Taylor rule formula

Answer 30

Federal funds rate =

2.07

+ (1.28 x inflation rate)

• (1.95 x unemployment gap)

Question 31

Taylor rule for monetary policy

Answer 31

A rule that sets the federal funds rate according to the level of the inflation rate and either the output gap or the unemployment rate

Question 32

inflation target

Answer 32

the inflation rate that they want to achieve

Question 33

Inflation targeting

Answer 33

When the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target

Question 34

Difference between inflation targeting and the Taylor rule

Answer 34

Taylor rule method adjusts monetary policy in response to past inflation

Inflation targeting is based on a forecast of future inflation (forward-looking)

Question 35

Two advantages of inflation targeting over a Taylor rule

Answer 35

1. Transparency - the public knows the objective of an inflation-targeting central bank
2. Accountability - the central bank’s success can be judged by seeing how closely actual inflation rates have matched the inflation target, making banks accountable

Question 36

price stability seeks

Answer 36

a 2% inflation

Question 37

Critic of inflation targeting:

Answer 37

argue that it’s too restrictive because there are times when other concerns should take priority

Question 38

quantitative easing

Answer 38

Buying longer0term government debt

Question 39

Zero lower bound for interest rates

Answer 39

Means that interest rates cannot fall below zero

Question 40

embedded inflation

Answer 40

inflation that people believe will persist into the future

monetary policy is used to get rid of embedded inflation

Question 41

In the long run, changes in the quantity of money affect __________________________

Answer 41

the aggregate price level, but they do not change real aggregate output or the interest rate

Question 42

increase in the money supply effect on GDP

Answer 42

positive short-run effect

no long-run effect

Question 43

If the money supply falls 25%, _______________

Answer 43

the aggregate price level will fall 25% in the long run

Question 44

money is _________ in the long run

Answer 44

neutral

Question 45

Monetary neutrality

Answer 45

Changes in the money supply have no real effects on the economy

Question 46

When a fall in the interest rate leads to higher investment spending, __________________________

Answer 46

the resulting increase in real GDP generates exactly enough additional savings to match the rise in investment spending

Question 47

What is the equilibrium interest rate determined by in the long run?

Answer 47

by matching the supply and demand for loanable funds that arises when real GDP equals potential output