Chapter 31 Monetary Policy Flashcards Quizlet

Chapter 31: M netary Policy Study Chapter 31: Monetary Policy Terms in this set (36) Correct Answer(s): The inflation rate The Phillips curve graphs the relationship between which two variables? The unemployment rate Incorrect Answer(s): Price level The interest rate Real GDP The Phillips curve was first High inflation and high unemployment in the United suggested as a description of States undermined the Phillips hypothesis. the relationship between inflation and unemployment in the late 1950s, and data through the 1960s were consistent with its predictions. What happened in the 1970s? What is the lasting effect of expansionary monetary policy? Higher prices across all goods and services. Chapter 31: Monetary Policy Study Fill in the blanks to complete rates to rise, which decreases investment activity. the following statement about Consequently, aggregate demand decreases in the the Federal Reserve. short run, causing a decrease in the real GDP and price level. The traditional short-run 1. The economy is in equilibrium at full employment Phillips curve implies a (u=u*) powerful role for monetary 2. The central bank injects new money into the policy. According to the theory, money supply. place the events in order 3. Aggregate demand increases based on what happens when 4. The inflation rate rises, and the unemployment the central bank unexpectedly rate falls to a new equilibrium where u < u* expands the money supply. 2016 - 0% Given the expected inflation 2017 - 2% rate, determine the value of the 2018 - 2% actual inflation rate for each 2019 - 4% year. 2020 - 4% 2021 - 2% Rational expectations are different from adaptive Fill in the blanks to complete the following statement about expectations. expectations in that they are forward-looking, whereas adaptive expectations consider only past experience. Rational expectation theory holds that people form expectations on the basis of all available information. What did Milton Friedman and The relationship between unemployment and Edmund Phelps predict in the inflation would eventually stop following the Phillips late 1960s regarding inflation? curve. Chapter 31: Monetary Policy Study tends to affect output prices before input prices. When the Fed uses dollars to buy bonds from banks, it is attempting to increase the number of dollars in circulation. However, if the banks are slow Fill in the blanks to complete to lend the money out, or if potential borrowers are the passage about the role hesitant to go into debt in uncertain times, then the individuals play in monetary dollars end up staying in the bank's vaults as excess policy. reserves. This is thought to be one problem with the Fed's "quantitative easing" efforts to end the Great Recession and a cause of the slow economic recovery. Expansionary monetary policy 1. The Fed invokes expansionary monetary policy by is used to decrease increasing money supply. unemployment and increase 2. The AD curve shifts rightward. real GDP. This policy works in 3. Resource prices adjust. the short run, but is it effective 4. SRAS shifts to the left. in the long run? Place the 5. The economy moves to a new long-run following events in order from equilibrium. first to last. In the short term, expansionary policy benefits Fill in the blanks to complete many people by increasing aggregate demand and the passage about the benefits reducing unemployment. However, it hurts suppliers of expansionary monetary whose prices are sticky. These suppliers have higher policy. overall costs but their overall revenue does not go up as much. Chapter 31: Monetary Policy Study This figure illustrates what 2.With increased reserves, banks issue more loans happens when the Federal to firms and consumers, who have increased real Reserve buys a large amount purchasing power as a result. of Treasury bonds. Place the 3. Prices across the economy increase and the value following events in order. of money falls. 4. Real impacts of the expansionary policy dissipate completely, and the economy experiences inflation. As shown in the figure, what is The shift in long-run aggregate supply the basic problem that limited the Federal Reserve's ability to move the economy back to full employment after the Great Recession had begun? Suppose that the nation of 2% Rationalia experiences the inflation rates shown from 2016 through 2018. If the Rationalian citizenry behaves according to the rational expectations theory, what will they expect the inflation rate to be in 2019? Which of the following is true 1. Real GDP returns to its original level. in the long run, following a 2. The stimulating effects of the policy action wear deliberate expansion of the off. money supply? 3. Unemployment returns to its original level. Chapter 31: Monetary Policy Study inflation rates shown from 2016 through 2018. If the Adaptistanian citizenry behaves according to the adaptive expectations theory, what will they expect the inflation rate to be in 2019? True: 1. Price level rises. Which of the following is true 2. Real GDP returns to its original level. in the long run, as depicted in 3. Unemployment returns to its original level. the figure showing the effects of an expansionary monetary Not True: policy? 1. Price returns to its original level. 2. The aggregate demand and supply curves return to their original positions. Which of the following was an Actions taken: action taken by the Federal 1. purchased bonds from large corporations Reserve to address the 2. suspended required reserves economic downturn caused by 3. cut the federal funds rate the COVID-19 pandemic? Fill in the blanks to complete the following sentence. Stagflation is when there is a supply shock that causes high levels of both inflation and unemployment. Chapter 31: Monetary Policy Study public. -New bank regulations meant the downturn was at least partially due to a shift in long-run aggregate Match the reasons why the effects of expansionary supply. -Monetary policy is ineffective in the long run. monetary policy were limited during each U.S. recession. Great Depression: -Massive bank failures and money held outside of the banking system resulted in a reduced money multiplier. -The Fed did little proactively to offset the fall of the M2 money supply. In an unprecedented move, the Federal Reserve Fill in the blanks to complete purchased corporate bonds like Apple, Verizon, the passage about the bond and AT&T in 2020 to help lower corporate market during the COVID-19 borrowing costs and prevent massive layoffs. This is pandemic. a type of expansionary monetary policy that had not been used earlier. In the short term, unexpected expansionary policy Fill in the blanks to complete the passage about short-term versus long-term effects of expansionary monetary policy. is effective in lowering the unemployment rate and increasing real GDP by increasing aggregate demand. In the long term, prices adjust and the effects of monetary policy wear off. What remains are higher prices and correspondingly less-valuable money. -lenders that have lent money at interest rates Who is harmed by unexpected inflation? below the new inflation rate -resource suppliers who have fixed prices in the short run -fixed-wage workers Chapter 31: Monetary Policy Study Fill in the blanks to complete increasing real GDP. However, in the long run, the following statement about resource prices adjust, causing firms' input costs to expansionary monetary policy. rise. Consequently, in the long run, both unemployment and real GDP return to previous levels, while inflation rises. Which of the following Partial cause for the great depression? monetary crises are seen as -Lack of deposit insurance partial causes for the Great -Money held outside the banking system Depression? economic output Correct label:goes down interest rate The figure depicts the short- Correct label:goes up term effects of a unemploymentgoes up contractionary monetary Correct label:goes up policy. Match the labels to supply of loanable fundsgoes down show how each element in the Correct label:goes down economy is affected. price levelgoes down Correct label:goes down quantity of investment demandgoes down Correct label:goes down The more predictable policy decisions by the Federal Reserve are, the more effective they are in the long run. false Chapter 31: Monetary Policy Study Assuming adaptive expectations, by what percentage will the Adaptistanian public underestimate the year 4 inflation rate? The active monetary policies of the 1960s were based on the short-run implications of the Phillips curve. It was assumed that the inverse relationship Fill in the blanks to complete between unemployment and inflation would hold the passage about active up in the long run. Recently, the Federal Reserve versus passive monetary has moved to more passive monetary policies that policy. reflect the recognition that people adjust their expectations of future inflation. Recent Fed chairmen have taken actions that lead to fewer surprises in monetary policy. Printing more paper money does not affect the Fill in the blanks to complete economy's long-run productivity or its ability to the following statement about produce. The idea that money supply does not have printing paper money. lasting effects on the economy in known as monetary neutrality. Chapter 31: Monetary Policy Study what the Fed is going to do, the Fed's actions don't have as much impact. Correct label:People adjust their expectations. The Fed can create conditions meant to encourage people to, for example, borrow more money. But if There are three main reasons why monetary policy doesn't always work. Match each reason with its explanation. people are fearful of going into debt when their employment situation is uncertain, they may not respond to the Fed's incentives. Correct label:People don't act as the Fed hopes. Although an expanded money supply can briefly stimulate economic growth, eventually the economy will return to the same level of productivity, just at higher prices for goods and wages. Correct label:The long run is different from the short run. Adaptive theory: Does each statement about inflation listed below have to do with adaptive expectations theory or rational expectations theory? Drag the correct label to each statement. -Next year is expected to be like this year. -People underestimate inflation when inflation is accelerating. Rational theory -Next year is expected to depend on who wins the upcoming election. -People use all available information. Chapter 31: Monetary Policy Study quantities of Treasury bonds than usual. What was the intent of this decision? Assume the economy begins 5% inflation rate and interest rate with 0% inflation and a 5% natural rate of unemployment. Under the influence of expansionary monetary policy, the traditional short-run Phillips curve suggests that the economy will move to a point with higher inflation (for example, 5%) and lower unemployment (for example, 3%). Click on the figure to indicate where the economy will most likely move in the long run, assuming normal economic conditions. People's thinking about inflation is forward-looking Fill in the blanks to complete in the rational expectations theory, whereas the the sentence about inflation. adaptive expectations theory considers only past experience.