Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 21 The Monetary Policy and Aggregate Demand Curves

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1 Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 21 The Monetary Policy and Aggregate Demand Curves 21.1 The Federal Reserve and Monetary Policy 1) Because prices are slow to move in the short-run, when the Federal Reserve lowers the federal funds rate, A) nominal interest rates rise. B) real interest rates fall. C) inflation falls. D) real interest rates rise. 2) Because prices are sticky in the short-run, when the Federal Reserve raises the federal funds rate, A) nominal interest rates fall. B) real interest rates rise. C) inflation falls. D) real interest rates fall The Monetary Policy Curve 1) The monetary policy (MP) curve indicates the relationship between A) the Federal Funds Rate and the real interest rate. B) the Federal Funds Rate and the inflation rate. C) the inflation rate and the expected inflation rate. D) the real interest rate the central bank sets and the inflation rate. 2) The upward slope of the MP curve indicates that A) the central bank lowers real interest rates when inflation rises. B) the central bank raises real interest rates when inflation falls. C) the central bank raises nominal interest rates when inflation rises. D) the central bank raises real interest rates when inflation rises. 1

2 3) The Taylor Principle states that central banks raise nominal rates by than any rise in expected inflation so that real interest rates when there is a rise in inflation. A) less; rise B) more; fall C) less; fall D) more; rise 4) An autonomous tightening of monetary policy Answer: C 5) An autonomous easing of monetary policy 6) Based on the Taylor Principle, a central bank's endogenous response of raising interest rates when inflation rises 7) Based on the Taylor Principle, a central bank's endogenous response of decreasing interest rates when inflation falls 2

3 8) When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate, which indicated that A) the Fed pursued an autonomous monetary policy tightening. B) the Fed pursued an autonomous monetary policy easing. C) the Fed had an automatic negative response to inflation based on the Taylor rule. D) the Fed had an automatic positive response to inflation based on the Taylor rule. 9) When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate, which indicated that A) there was an upward movement along the monetary policy curve. B) there was a downward movement along the monetary policy curve. C) the monetary policy curve shifted upward. D) the monetary policy curve shifted downward The Aggregate Demand Curve 1) In deriving the aggregate demand curve a inflation rate leads the central bank to real interest rates, thereby the level of equilibrium aggregate output. A) higher; raise; lowering B) lower; raise; lowering C) higher; lower; lowering D) higher; lower; raising 2) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise interest rates, thereby the level of equilibrium aggregate output., everything else held constant. A) real; lowering B) real; raising C) nominal; lowering D) nominal; raising 3

4 3) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to real interest rates, thereby the level of equilibrium aggregate output., everything else held constant. A) raise; lowering B) raise; raising C) reduce; lowering D) reduce; raising 4) Everything else held constant, an increase in government spending will cause A) aggregate demand to increase. B) aggregate demand to decrease. C) the quantity of aggregate demand to increase. D) the quantity of aggregate demand to decrease. 5) Everything else held constant, an autonomous easing of monetary policy will cause A) the quantity of aggregate demand to increase. B) the quantity of aggregate demand to decrease. C) aggregate demand to decrease. D) aggregate demand to increase. Ques Status: Revised 6) Everything else held constant, an autonomous tightening of monetary policy will cause A) the quantity of aggregate demand to increase. B) the quantity of aggregate demand to decrease. C) aggregate demand to increase. D) aggregate demand to decrease. Ques Status: Revised 7) Everything else held constant, an autonomous easing of monetary policy will cause A) aggregate demand to increase. B) aggregate demand to decrease. C) the quantity of aggregate demand to increase. D) the quantity of aggregate demand to decrease. Ques Status: Revised 4

5 8) Everything else held constant, an increase in autonomous consumer spending will cause the IS 9) Everything else held constant, a decrease in autonomous consumer spending will cause the IS 10) Everything else held constant, an increase in autonomous planned investment spending will cause the IS 11) Everything else held constant, a decrease in autonomous planned investment spending will cause the IS 5

6 12) Everything else held constant, a decrease in net taxes will cause the IS curve to shift to the and aggregate demand will. 13) Everything else held constant, an increase in net taxes will cause the IS curve to shift to the and aggregate demand will. 14) Everything else held constant, an appreciation of the domestic currency will cause the IS 15) Everything else held constant, a depreciation of the domestic currency will cause the IS 6

7 16) Everything else held constant, a decrease in government spending will cause the IS curve to shift to the and aggregate demand will. 7