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Chapter 16: Monetary Policy (page 321)
What are the components affected in a contractionary monetary policy?
C, I, (X-M)
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Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.
In 1980, the U.S. inflation rate was 13.5 percent, and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed’s target interest rate? Would you be surprised to learn that the Fed’s targeted interest rate (the federal funds rate) reached 18.9 percent in December 1980?
Refer to the table for Moola below to answer the following questions. What is the equilibrium interest rate in Moola? What is the level of investment at the equilibrium interest rate? Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate, and, if either, what is the amount? Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? What is the expenditure multiplier in Moola?
Money Supply (\() | Money Demand (\)) | Interest Rate (%) | Investment at Interest Rate Shown (\() | Potential Real GDP (\)) | Actual Real GDP at Interest (Rate Shown) ($) |
500 500 500 500 500 | 800 700 600 500 400 | 2 3 4 5 6 | 50 40 30 20 10 | 350 350 350 350 350 | 390 370 350 330 310 |
What are the two parts of the Fed’s dual mandate? How does the dual mandate relate to the bullseye chart? Which quadrants of the bullseye chart give conflicting signals to the Fed, and what is the source of the confusion in each case?
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