Macro Ch. 12

People will hold __________ money as the interest rate __________ because they will __________ other financial assets.

more; decreases; sell

Which of the following would cause a downward movement along the money demand curve?

a decrease in the interest rate

Which of the following is not assumed to be constant along the money demand curve?

the interest rate

When people exchange money for financial assets, the interest rate rises.

False

An increase in the money supply will

lead people to try to exchange money for interest-bearing assets

If the quantity of money supplied exceeds the quantity of money demanded,

the interest rate will fall

In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run

decrease in both the price level and real GDP

If the Fed sells U.S. government securities to drain reserves from banks, which of the following will probably occur?

The interest rate will rise and the quantity of money demanded will fall.

If the Fed sells government securities to banks, eventually we expect

planned investment expenditures to decrease

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be effective in changing aggregate demand.

responsive; sensitive

In the situation shown in Exhibit 15-1, how could the Fed return the economy to potential output?

Decrease money supply

The economy shown in Exhibit 15-3 is in equilibrium where AD=SRAS. To bring the economy to its potential output level, the Fed could

decrease the money supply and decrease the price level to P'

According to the equation of exchange, if nominal GDP equals $6 trillion and the money supply equals $1 trillion, the velocity of money

must be 6

In the long run, an increase in aggregate demand

affects only the price level

In an economy in which real output grows at an average rate of 3 percent per year, a 7 percent average rate of growth in the money supply would result in a(n)

inflation rate of 4 percent, if velocity were constant

The quantity theory of money

states that the quantity of money in circulation determines only the price level in the long run

Velocity will be higher

the less effective money is as a store of value

In the United States over the last decade, the velocity of

both 3) and 4) are true

If the Fed is targeting interest rates and money demand shifts from Dm to Dm' in Exhibit 15-4, the Fed will

increase the money supply to restore its target of i

In the history of monetary policy, the period of October 1979 to October 1982 was notable for

the emphasis placed on controlling the money supply during that period