Exam 12: Monetary Policy and the Phillips Curve

Refer to the following figure when answering the following questions. Figure 12.4: Phillips Curve -Consider the Phillips curve in Figure 12.4. At point a, the economy is ________; at point c, the economy is ________.

An implication of sticky inflation is that, through monetary policy changes, the Federal Reserve (the Fed):

Monetary economists find that it takes anywhere from six to eight weeks for monetary policy to have a substantial impact on economic activity.

If the Federal Reserve reduces the money supply:

An increase in the interest rate by the Federal Reserve will affect only real interest rates because:

Refer to the following figure when answering the following questions. Figure 12.4: Phillips Curve -Consider the Phillips curve in Figure 12.4. At point b, the economy is ________, and at point a, the economy is ________.

Which of the following is the mission of the Federal Reserve Bank? i. Preserve price stability ii. Foster economic growth and employment iii. Promote a stable financial system

Adaptive expectations imply that firms:

When the Federal Reserve wants to increase the money supply, it:

Refer to the following figure when answering the following questions. Figure 12.9: Change in Inflation by Quarter -Consider Figure 12.9. You are Federal Reserve chairman Greenspan and today's date is the fourth quarter of 1997 (1997.4). Given the information you have, using the Phillips curve, to stabilize the economy you would ________ interest rates, risking ________.

The money demand curve:

When economists say "sticky inflation," they mean that inflation does not react directly with the monetary policy.

When the Fed targets the interest rate, it adjusts the money supply to maintain that interest-rate target.

Once a ________ is chosen, the main tool the Federal Reserve uses to change the money supply is ________.

Figure 12.7: Output -Consider Figure 12.7. You are chairman of the Federal Reserve in 1975. You believe potential output follows the dotted line after 1973, but in actuality, it follows the line denoted "True potential output." The current state of the economy is given by the curve "Actual output." Given the information in the figure, you ________, because you believe the economy is in a ________, but your advice instead ________.

Refer to the following figure when answering the following questions. Figure 12.9: Change in Inflation by Quarter -Consider Figure 12.9. You are Federal Reserve chairman Greenspan and today's date is the first quarter of 1999 (1999.1). Given the information you have, using the Phillips curve, to stabilize the economy you would ________ interest rates, risking ________.

In a weakening economy, you might expect producers to:

The interest rate that the Fed charges to banks to borrow is the federal funds rate.

One of the explanations for the high rates of inflation in the 1970s is a productivity slowdown.

If the central bank is targeting the money supply, the money supply is ________ and ________ with respect to the nominal interest rate.