Exam 33: Transmission and Amplification Mechanisms

Economists who believe that the Federal Reserve is likely to make lots of mistakes in the implementation of monetary policy believe

A negative shock to AD will cause the growth rate of real GDP to increase in

Which of the following would be an example of running monetary policy by rules?

A reduction in the rate of inflation is called

Monetary policy rules are risky because I. the severity and nature of economic fluctuations are unpredictable. II. Fed Chairs have counseled against the use of rules to influence the economy. III. unexpected shocks may occur that require emergency action by the Fed.

Figure: Negative Supply Shock (Figure: Negative Supply Shock) This economy initially begins at Point A and a negative supply shock takes it to Point Y. If the Fed reacts by increasing money growth by 9 percent, this would take the economy to

According to Milton Friedman, if the Solow growth rate is 3 percent, then the Fed should set the annual money growth rate at

In the dynamic AD-AS model, an increase in money growth will cause the growth rate of real GDP to increase in

Monetary policy works best to counteract

When the Fed reacts to a positive aggregate demand shock, which of the following is likely to make the period of disinflation shorter? I. credibility on the part of the Fed II. higher uncertainty about investment returns III. greater nominal wage flexibility

Figure: Negative Supply Shock Reference: Ref 16-4 (Figure: Negative Supply Shock) This economy initially begins at Point A and a negative supply shock takes it to Point Y. Taking the economy back to the Solow growth curve would require.

A reduction in the rate of inflation is called

One reason the Fed has difficulty adjusting to a decrease in aggregate demand is that it must spend time persuading politicians to agree to its actions.

Milton Friedman recommended a monetary policy rule by which the

A negative shock to AD will cause the inflation rate to increase in

What happens to GDP if the Fed is too responsive to changes in aggregate demand?

Using monetary policy to deal with aggregate demand shocks is much easier in theory than in practice. Describe three major difficulties that a central bank might face.

At the onset of the subprime mortgage crisis, most investors had no idea how many banks and other financial firms would fail.

Why is monetary policy not fully effective in combating a negative supply shock?

Reference: Ref 16-3 (Table: Annual Inflation) This table shows inflation data for an economy. During what period did it experience deflation?