chapter: ©2009  Worth Publishers >> Krugman/Wells Monetary Policy 15 CHECK YOUR UNDERSTANDING

Check Your Understanding 15-1 Question 1 Would each of the following cause a movement along the money demand curve or a shift of the money demand curve?

1a) The short-term interest rate rises from 5% to 30%. 1.movement along the money demand curve 2.shift of the money demand curve

1b) All prices fall by 10%. 1.movement along the money demand curve 2.shift of the money demand curve

1c) New wireless technology automatically charges supermarket purchases to credit cards, eliminating the need to stop at the cash register. 1.movement along the money demand curve 2.shift of the money demand curve

1d) In order to avoid paying taxes, a vast underground economy develops in which workers are paid their wages in cash rather than in checks. 1.movement along the money demand curve 2.shift of the money demand curve

2a) Merchants charge a 1% fee on debit/credit card transactions for purchases of less than $50. How will this affect the opportunity cost of holding cash? 1.increase the opportunity cost of holding cash 2.decrease the opportunity cost of holding cash 3.have no effect on the opportunity cost of holding cash

2b) To attract more deposits, banks raise the interest rate paid on six-month CDs. How will this affect the opportunity cost of holding cash? 1.increase the opportunity cost of holding cash 2.decrease the opportunity cost of holding cash 3.have no effect on the opportunity cost of holding cash

2c) Real estate prices fall significantly. How will this affect the opportunity cost of holding cash? 1.increase the opportunity cost of holding cash 2.decrease the opportunity cost of holding cash 3.have no effect on the opportunity cost of holding cash

2d) The cost of food rises significantly. How will this affect the opportunity cost of holding cash? 1.increase the opportunity cost of holding cash 2.decrease the opportunity cost of holding cash 3.have no effect on the opportunity cost of holding cash

Check Your Understanding 15-2 Questions 1 and 2

1. Assume that there is an increase in the demand for money at every interest rate, and the money supply remains constant. The equilibrium interest rate will: 1.increase. 2.decrease. 3.remain the same.

2. If there is an increase in the demand for money and the Fed wants to keep the federal funds rate constant, it should _______ the money supply. 1.increase 2.decrease 3.not change

Check Your Understanding 15-3 Question 1

1a) What is the short-term effect of an expansionary monetary policy on the money supply curve if the economy is currently suffering from a recessionary gap? 1.The money supply curve shifts to the left. 2.The money supply curve shifts to the right.

1b) What is the short-term effect of an expansionary monetary policy on the equilibrium interest rate if the economy is currently suffering from a recessionary gap? 1.The equilibrium interest rate rises. 2.The equilibrium interest rate falls.

1c) What is the short-term effect of an expansionary monetary policy on investment spending if the economy is currently suffering from a recessionary gap? 1.The investment spending rises. 2.The investment spending falls.

1d) What is the short-term effect of an expansionary monetary policy on consumer spending if the economy is currently suffering from a recessionary gap? 1.The consumer spending rises. 2.The consumer spending falls.

1e) What is the short-term effect of an expansionary monetary policy on aggregate output if the economy is currently suffering from a recessionary gap? 1.The aggregate output rises. 2.The aggregate output falls.

2a) Changes in interest rates predicted by an application of the Taylor rule have always been in the same direction as actual changes in interest rates. 1.True 2.False

2b) In setting monetary policy, the Bank of England is likely to respond more directly to a financial crisis than the Fed. 1.True 2.False

Check Your Understanding 15-4 Questions 1 and 2

1a) Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. What is the effect on aggregate output? 1.Aggregate output rises in the short run and in the long run. 2.Aggregate output rises in the short run and falls back to potential output in the long run. 3.Aggregate output falls in the short run and in the long run. 4.Aggregate output falls in the short run and rises back to potential output in the long run.

1b) Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. What is the effect on the aggregate price level? 1.Aggregate price level rises in the short run and in the long run. 2.Aggregate price level rises in the short run and falls in the long run. 3.Aggregate price level falls in the short run and in the long run. 4.Aggregate price level falls in the short run and rises in the long run.

1c) Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. What is the effect on the real value of the money supply? 1.Real quantity of money rises in the short run and in the long run. 2.Real quantity of money rises in the short run and falls to its original level in the long run. 3.Real quantity of money falls in the short run and in the long run. 4.Real quantity of money falls in the short run and rises to its original level in the long run.

1d) Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. What is the effect on the interest rate? 1.The interest rate rises in the short run and in the long run. 2.The interest rate rises in the short run and falls to its original level in the long run. 3.The interest rate rises falls in the short run and in the long run. 4.The interest rate rises falls in the short run and rises to its original level in the long run.

2) Monetary policy affects the economy in the short run but not in the long run. 1.True 2.False