Module 9

Question 1

Primary Goals of Monetary Policy

Answer 1

1) Price stability: high inflation reduces the usefulness of money as a medium of exchange.
2) High employment: avoid worker’s financial distress and discouragement.

Question 2

Secondary Goals of Monetary Policy

Answer 2

1) Financial Stability: The Fed can act as a lender of last resort to increase liquidity.
2) Economic Growth: A stable business environment that encourages long-term investment.

Question 3

Expansionary Monetary Policy

Answer 3

An increase in Ms -> decrease interest rate -> C & I Increase -> AD shifts right -> lower unemployment but higher price level.

Question 4

Contractionary Monetary Policy

Answer 4

A decrease in Ms -> increases the interest rate -> C & I decrease -> AD shifts left -> lower price level but higher unemployment rate.

Question 5

Dual Mandate

Answer 5

Low inflation (1-3%) and Low unemployment (<5%).

Question 6

Using monetary policy to lower unemployment

Answer 6

In a recession, the actual level of GDP without policy is below potential GDP: an expansionary monetary policy shifts the AD right and fills the recessionary gap.

Question 7

Using monetary policy to fight inflation.

Answer 7

In an expansion, the actual level of GDP without policy is above potential GDP: a contractionary monetary policy shifts the AD curve left and decreases the price level.

Question 8

The quantity theory of money

Answer 8

% change in P = % change in M - % change in Y

Question 9

Velocity of money

Answer 9

the average number of times each dollar in M1 is used in a purchase.

Question 10

Monetary Policy

Answer 10

Decide = F.O.M.C in D.C
Execute = N.Y Federal Reserve

Question 11

If we assume a constant velocity in the long run…

Answer 11

Inflation rate = growth rate of money supply - growth rate of real GDP -> inflation results from the money supply growing at a faster rate than real GDP.

Question 12

Fiscal Policy

Answer 12

Decide = U.S Congress and POTUS
Execute = POTUS and Treasury Dept.