Chapter 16
The discount rate is _______.
the interest rate the Fed charges on loans to banks
When prices rise at an extraordinarily high rate, it is called _______.
hyperinflation
According to the interest-rate effect, aggregate demand slopes downward because _______.
lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases
Automatic Stabilizers
changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession but that occur without policymakers having to take any deliberate action
The Phillips curve started as an observed ________ correlation between the inflation rate and the ________.
negative, unemployment rate
The Fed's tools of monetary control are _______.
open-market operations, lending to banks, reserve requirements, and paying interest on reserves
An inflation tax is _______.
a tax on everyone who holds money
Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the _______.
misperceptions theory of the short-run aggregate-supply curve
Monetary policy affects the economy with a lag mainly because it takes a long time _________________.
for a change in interest rates to affect investment spending
When the Federal Reserve increases the money supply and expands aggregate demand, it moves the economy along the Phillips curve to a point with ________ inflation and ________ unemployment.
higher, lower
To insulate the Federal Reserve from political pressure, _______.
the Board of Governors is appointed to 14-year terms
If actual inflation turns out to be greater than people had expected, then _______.
wealth was redistributed to borrowers from lenders
Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in investment spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?
Prices fall and output falls.
When an increase in net exports increases the income of domestic consumers, and those consumers spend some of that increase in income on additional consumer goods, we have seen a demonstration of _______.
the multiplier effect
If people have rational expectations, a monetary policy contraction that is announced and is credible could _______.
reduce inflation with little or no increase in unemployment
If banks increase their holdings of excess reserves, _______.
the money multiplier and the money supply decrease
The quantity equation states that _______.
money × velocity = price level × real output
In the model of aggregate demand and aggregate supply, the initial impact of a decrease in consumer optimism is to _______.
shift aggregate demand to the left
Suppose a wave of negative "animal spirits" overruns the economy, and people become pessimistic about the future. To stabilize aggregate demand, the Fed could ________ its target for the federal funds rate or Congress could ________ taxes.
Decrease, Decrease
If the Fed were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long-run result would be _______.
an increase in the rate of inflation
If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements, _______.
we cannot be certain what will happen to the money supply
If money is neutral, _______.
a change in the money supply only affects nominal variables such as prices and dollar wages
Policymakers are said to "accommodate" an adverse supply shock if they _______.
respond to the adverse supply shock by increasing aggregate demand, which further raises prices
Suppose that irrational exuberance has generated an increase in investment spending so that the current level of output exceeds the long-run natural level. If policymakers choose to engage in activist stabilization policy, they should _______.
decrease government spending, which shifts aggregate demand to the left
The financial crisis of 2008–2009 that led to the Great Recession reduced aggregate __________, which tends to _________ the Phillips curve.
demand; move the economy along