Monetary Policy


Review Questions

1. What is M1?

 

Currency + checkable deposits + travelers’ checks.
2. What is M2? M1 + savings deposits + small time deposits + MMMFs + MMDAs + overnight repurchase agreements + Eurodollars.

 

3. What is the monetary base, or high-powered money?

 

Currency + bank reserves.
4. What is the money multiplier?

 

The ratio of money (M1, M2, etc.) to the monetary base.
5. What determines how large the money multiplier is?

 

The currency-deposit ratio and the reserve ratio.
6. How does the Federal Reserve control the money supply? With open market operations, the discount rate, and reserve requirements.

 

7. Why might changes in the money supply have real effects on the economy?

 

Because prices do not adjust instantaneously to changes in the money supply.
8. If prices are not perfectly flexible, how does a one-time unanticipated increase in the money supply affect nominal interest rates? Real interest rates? Real output?

 

It lowers nominal and real interest rates and increases real output.
9. How does a sustained increase in the growth rate of the money supply affect nominal interest rates? Real interest rates? Real output?

 

It does not affect real interest rates or output, but raises nominal interest rates.
10. What is the short-run Phillips curve? A negative relation between inflation and the unemployment rate.

 

11. What is the long-run Phillips curve? The long-run Phillips curve is vertical, depicting the lack of any relation between inflation and unemployment.

 

12. What accounts for the difference between the two? Imperfect short-run information.

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