Questions (Monetary Policy) Flashcards
An increase in the money supply will..?
decrease interest rates & increase investment spending
The cause and effect chain of contractionary monetary policy will ultimately shift aggregate _______ curve to the _______.
demand / left
Jan has $60,000 in gov bonds. She wants to sell $20,000 to use as a down payment on a home. If the Fed purchases the bonds from Jan, and reserve requirement is 20%, the potential change in the money supply is..?
$100,000
What happens when banks borrow from the Federal Reserve?
Reserves increase & banks expand their ability to make loans to customers.
The tool the Fed uses most often to impact the money supply is..?
Changing reserves of banks by selling & purchasing gov bonds.
To maintain the federal funds rate, the Fed buys…?
gov bonds from the public when the demand for reserves increases.
Is this correct? - The Fed directly sets the federal funds rate.
NOT Correct
In practice, expansionary monetary policy sometimes doesn’t work the way we want it to because..?
Lower interest rates cause the investment demand curve to shift to left.
Assume the Real GDP is $20 billion more than the long-run equilibrium & reserve requirement is 20%. To return to the long-run equilibrium level of real GDP, the Fed should.?
Sell $4 billion of government bonds.
Expansionary monetary policy should initially change gross investment by ___.
less than necessary to reach full employment
Contractionary monetary policy is when..?
taxes are increased
Monetary policy has no..?
legislative lag
When there is a liquidity trap, the money demand curve is ___?
Flat
Is this correct? - The Fed impacts the federal funds rate through the use of open market operations.
IT IS correct
