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Macroeconomics: Policy and Practice, 2e, Global Edition (Mishkin)
Chapter 10 Monetary Policy and Aggregate Demand
4) A central bank can control the real interest rate precisely, so long as ________ remains
constant.
A) the nominal interest rate
B) monetary policy
C) expected inflation
D) all of the above
E) none of the above
Answer: C
Topic: 10.1 The Federal Reserve and Monetary Policy
AACSB: Analytical Thinking
1
Copyright © 2015 Pearson Education Limited
5) In the very short run ________.
A) the real interest rate will be affected by changes in the nominal rate
B) monetary policy has an immediate effect on inflation
C) the inflation rate is determined by the federal funds rate
D) all of the above
E) none of the above
Answer: A
Topic: 10.1 The Federal Reserve and Monetary Policy
1) The MP curve indicates the relationship between ________ and the ________.
A) taxes; price level
B) the real interest rate; inflation rate
C) monetary policy; IS curve
D) all of the above
E) none of the above
Answer: B
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
2
Copyright © 2015 Pearson Education Limited
3) The endogenous variable in the monetary policy curve is ________.
A) the policy parameter, λ
B) the real interest rate
C) the autonomous component,
D) the federal funds rate
E) the inflation rate
Answer: B
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
5) If the central bank did not follow the Taylor principle, an increase in inflation would lead to a
decrease in ________.
A) the nominal interest
B) the real interest rate
C) aggregate output
D) all of the above
E) none of the above
Answer: B
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
6) If the central bank did not follow the Taylor principle, an increase in inflation would lead to
________.
A) a decrease in the nominal interest rate
B) an increase in inflation
C) a decrease in aggregate expenditure
D) all of the above
E) none of the above
Answer: B
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
3
Copyright © 2015 Pearson Education Limited
7) If expected inflation rises, monetary policy ________.
A) is rendered ineffective
B) must be tightened, to prevent further increases in inflation and expected inflation
C) will prevent any increase in the real interest rate
D) is designed to increase the nominal interest rate by more than the increase in expected
inflation
E) none of the above
Answer: D
Topic: 10.2 The Monetary Policy Curve
AACSB: Reflective Thinking
4
Copyright © 2015 Pearson Education Limited
11) A shift of the MP curve ________.
A) implies an automatic adjustment of the interest rate
B) implies a direct policy action of the Federal Reserve
C) does not alter the relationship between inflation and the interest rate
D) all of the above
E) none of the above
Answer: B
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
5
Copyright © 2015 Pearson Education Limited
15) Before the financial crisis of 2007, inflation was on the rise. According to the MP curve, this
would lead to ________.
A) an increase in the real interest rate
B) an upward shift of the MP curve, if policymakers opted for autonomous tightening
C) a decrease in aggregate output
D) all of the above
E) none of the above
Answer: D
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
16) As the financial crisis became more severe in 2008, the Federal Reserve undertook a(n)
________ of monetary policy, an effect of which is to ________ inflation.
A) contraction; raise
B) easing; raise
C) contraction; lower
D) easing; lower
E) none of the above
Answer: B
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
17) Throughout 2008, inflation and the real interest rate declined together. The cause is a
combination of ________.
A) monetary policy easing and declining autonomous spending
B) declining autonomous spending and movement along a fixed MP curve
C) monetary policy tightening and inversion of the MP curve
D) increased government spending and movement along a fixed MP curve
E) none of the above
Answer: A
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
6
Copyright © 2015 Pearson Education Limited
MP Curve
18) Referring to the graph above, a movement from point H to point I might represent ________.
A) the increase in the inflation rate that occurs when the real interest rate rises
B) the automatic response of monetary policy to an increase in the inflation rate
C) an autonomous tightening of monetary policy
D) any of the above
E) none of the above
Answer: B
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
19) On the graph above, which pair of points best represents the impacts in the U. S. of the
financial crisis and policy response from 2007 through 2008?
A) H to I
B) K to G
C) I to H
D) K to F
E) G to J
Answer: E
Topic: 10.2 The Monetary Policy Curve
AACSB: Analytical Thinking
20) On the graph above, which pair of points best represents a scenario in which the nominal
interest rate and expected inflation decline equally?
A) I to H
B) G to K
C) I to J
D) K to F
E) J to H
Answer: D
Topic: 10.2 The Monetary Policy Curve
7
Copyright © 2015 Pearson Education Limited
AACSB: Analytical Thinking
21) Suppose the nominal interest rate is five percent, and the inflation rate rises from two percent
to three percent. Might an increase in the nominal interest rate to 5.5 percent be consistent with
the Taylor Principle? If not, what consequences might ensue?
Answer: Yes, it might be. The Taylor Principle requires that the nominal interest rate rise by
more than the increase in expected inflation. If expected inflation has not changed, or has
increased by less than half a percentage point, then the increase in the nominal interest rate
implies an increase in the real interest rate. If expected inflation has increased by more than
0.5%, then the real interest rate has declined, which will encourage more spending that might
fuel further increases in inflation.
Topic: 10.2 The Monetary Policy Curve
AACSB: Reflective Thinking
22) A key concern of monetary policy makers is credibility. In particular, that people believe that
inflation will not deviate far from a rate consistent with a healthy macroeconomy. How might
credibility affect the slope of the monetary policy curve?
Answer: Credibility implies that the monetary policy curve will be relatively flat. When
inflation expectations rely more on confidence in monetary policy and less on the latest
fluctuations, small changes in the real interest rate suffice to prevent changes in inflation from
acquiring momentum.
Topic: 10.2 The Monetary Policy Curve
AACSB: Reflective Thinking
23) Suppose the economy is just recovering from a recession and all signs now point to robust
growth. How might this transition from recovery to expansion be reflected in the monetary
policy curve?
Answer: The monetary policy curve will have been relatively low, as policy makers kept interest
rates as low as possible to hasten recovery from the recession. Once the recession is over, the
monetary policy curve will shift up, since low interest rates are no longer appropriate, and to
reduce the danger that spending will climb too rapidly and cause inflation to rise. The curve may
become steeper, as well, so that any increases in inflation are countered by substantial increases
in the real interest rate.
Topic: 10.2 The Monetary Policy Curve
AACSB: Reflective Thinking
24) If the monetary policy curve is correct, then policy makers care only about inflation and not
at all about aggregate output and unemployment. Comment.
Answer: The monetary policy curve is a concise expression of monetary policy, highlighting
policy makers' concern with inflation stability. Policy concerns other than inflation are
represented by shifts of the MP curve, so that the real interest rate may change independently of
the inflation rate. Moreover, the goal of inflation stability implies the need to be responsive to
macroeconomic conditions in general, since the behavior of inflation is closely linked to changes
in aggregate output and unemployment.
Topic: 10.2 The Monetary Policy Curve
AACSB: Reflective Thinking
8
Copyright © 2015 Pearson Education Limited
10.3 The Aggregate Demand Curve
10
Copyright © 2015 Pearson Education Limited
9) A decrease in the real interest rate occurs when ________.
A) there is an autonomous tightening of monetary policy
B) expected inflation increases, relative to the nominal interest rate
C) a decrease in autonomous spending causes a decrease in equilibrium output
D) all of the above
E) none of the above
Answer: B
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
12) If people begin to generally feel better about the future ________.
A) autonomous consumption should rise
B) autonomous investment should rise
C) the AD curve will shift to the right
D) all of the above
E) none of the above
Answer: D
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
11
Copyright © 2015 Pearson Education Limited
13) If government cuts taxes ________.
A) after tax income should increase shifting AD to the left to a lower equilibrium level of output
B) after tax income should increase shifting AD to the right to a higher equilibrium level of
output
C) after tax income and the equilibrium level of output remain unchanged
D) after tax income remains unchanged but the equilibrium level of output would increase
E) none of the above
Answer: B
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
12
Copyright © 2015 Pearson Education Limited
17) If the Federal Reserve raises interest rates in an autonomous tightening ________.
A) the MP curve shifts up, there is an upward movement along the IS curve, and the AD curve
shifts to the left to a lower level of equilibrium output
B) the MP curve shifts down, there is a downward movement along the IS curve and the AD
curve shifts to the right to a higher level of equilibrium output
C) the MP curve shifts up, there is a downward movement along the IS curve and the AD curve
shifts to the right to a lower level of equilibrium output
D) the MP curve shifts down, there is an upward movement along the IS curve and the AD curve
shifts to the left to a higher level of equilibrium output
E) none of the above
Answer: A
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
18) If the Federal Reserve raises interest rates in an autonomous tightening ________.
A) the MP curve shifts up, raising the real interest for any given level of the inflation rate
B) there is an upward movement along the IS curve
C) the AD curve shifts to the left
D) all of the above
E) none of the above
Answer: D
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
19) Shifts of the ________ curves result from autonomous monetary policy.
A) MP, IS, & AD
B) MP & IS, but not AD
C) IS & AD, but not MP
D) MP, but not IS nor AD
E) none of the above
Answer: E
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
20) The IS curve is Y = 20 - 1.5r, and the aggregate demand curve is Y = 15.5 - 0.3π. The
monetary policy curve is ________.
A) r = 4.5 - 1.8π
B) r = 20 + 0.3π
C) r = 3 + 0.2π
D) Y = 17.75 + 0.6π
E) none of the above
Answer: C
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
13
Copyright © 2015 Pearson Education Limited
21) The IS curve is Y = 20 - 1.5r, and the aggregate demand curve is Y = 15.5 - 0.3π. When the
interest rate is 7 percent, the inflation rate is ________ percent.
A) 14.6
B) 9.5
C) 3.6
D) 20
E) none of the above
Answer: D
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
22) The IS curve is Y = 20 - 1.5r, and the aggregate demand curve is Y = 15.5 - 0.3π. When the
inflation rate is 3 percent, output is ________.
A) 20
B) 14.6
C) 9.5
D) 3.6
E) none of the above
Answer: B
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
23) The aggregate demand curve is Y = 15 - 0.2π when the inflation rate falls from 6 percent to 5
percent. Then, output increases from 13.8 to 17. The response of monetary policy to the inflation
decline has been ________.
A) autonomous tightening
B) automatic adjustment
C) autonomous easing
D) to increase autonomous spending
E) none of the above
Answer: C
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
24) Suppose the monetary policy curve is r = 5 + 0.8π, and the current values for output and
inflation are 16.8 and 2 percent, respectively. An increase in global resource prices pushes the
inflation rate to 4 percent. Policy makers estimate that the monetary policy in place, responding
to 4 percent inflation, will bring output down to 13.6, a decline considered excessive. Instead,
they implement an autonomous easing of monetary policy to lower output from 16.8 to 16.
Assuming no change in the slope of the monetary policy curve, determine the new curve.
Answer: From the given monetary policy curve, the real interest rate was initially 6.6 percent,
and would rise to 8.2 percent in response to the increase in inflation from 2 percent to 4 percent.
Since this increase in the real interest rate would cause output to decline from 16.8 to 13.6, we
know that the IS curve is Y = 30 - 2r. If output is to be 16, the real interest rate must be 7
percent. The monetary policy curve with slope 0.8 and coordinates 4, 7 is r = 3.8 + 0.8π.
Topic: 10.3 The Aggregate Demand Curve
14
Copyright © 2015 Pearson Education Limited
AACSB: Analytical Thinking
25) Suppose the demand curve is Y = 38 - 3π, and the current values for output and the real
interest rate are 29 and 7 percent, respectively. A decrease in inflation leads to a new output level
of 32 and real interest rate at 6 percent. The monetary policy curve is ________.
Answer: The inflation rate falls from 3 percent to 2 percent. The corresponding real interest
rates are 7 percent and 6 percent, so the MP curve is r = 4 + π.
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
26) When the inflation rate falls, what happens, and why, to the MP, IS, and AD curves?
Answer: A decrease in the inflation rate will, typically, raise the real interest rate, given the
nominal interest rate, because expected inflation will have fallen. To prevent this increase in the
real interest rate, which would cause spending and output to decline, the central bank lowers the
nominal interest rate by more than the decrease in expected inflation. This movement down to
the left along the MP curve corresponds to movement down to the right along the IS curve,
because the lower real interest rate increases consumption, investment, and net exports.
Movement down to the right along the AD curve shows the increase in output that has resulted
from the decrease in the inflation rate.
Topic: 10.3 The Aggregate Demand Curve
AACSB: Analytical Thinking
15
Copyright © 2015 Pearson Education Limited
3) The liquidity preference theory ________.
A) distinguishes between nominal and real quantities
B) shows that demand for real balances depends on real income
C) shows that demand for real balances depends on the nominal interest rate
D) all of the above
E) none of the above
Answer: D
Topic: 10.4 The Money Market and Interest Rates
AACSB: Analytical Thinking
16
Copyright © 2015 Pearson Education Limited
7) According to liquidity preference theory, an increase in the price level would ________.
A) decrease the demand for real money balances
B) increase the supply of real money balances
C) decrease the real interest rate
D) all of the above
E) none of the above
Answer: E
Topic: 10.4 The Money Market and Interest Rates
AACSB: Analytical Thinking
8) According to liquidity preference theory, an increase in the price level would ________.
A) increase the demand for real money balances
B) decrease the supply of real money balances
C) decrease the real interest rate
D) all of the above
E) none of the above
Answer: B
Topic: 10.4 The Money Market and Interest Rates
AACSB: Analytical Thinking
17
Copyright © 2015 Pearson Education Limited
11) As the nominal interest rate increases ________.
A) it becomes more costly to hold money instead of bonds
B) the quantity of money demanded falls
C) the opportunity cost of holding money rises
D) all of the above
E) none of the above
Answer: D
Topic: 10.4 The Money Market and Interest Rates
AACSB: Analytical Thinking
18
Copyright © 2015 Pearson Education Limited
15) Why is the demand for real money balances downward sloping?
A) because the opportunity cost of holding money decreases as interest rates decrease
B) because when the interest rate falls the quantity of money demanded increases
C) because lower interest rates encourage firms and households to increase their money holdings
D) all of the above
E) none of the above
Answer: D
Topic: 10.4 The Money Market and Interest Rates
AACSB: Analytical Thinking
19
Copyright © 2015 Pearson Education Limited
19) Which of the following is true with regard to the supply of money?
A) an open market sale of government securities will increase liquidity
B) an open market purchase of government securities will decrease liquidity
C) liquidity and the money supply are directly related
D) all of the above
E) none of the above
Answer: C
Topic: 10.4 The Money Market and Interest Rates
AACSB: Analytical Thinking
20) Which of the following is true with regard to the supply of money?
A) an open market purchase of government securities will increase liquidity
B) an open market sale of government securities will decrease liquidity
C) liquidity and the money supply are directly related
D) all of the above
E) none of the above
Answer: D
Topic: 10.4 The Money Market and Interest Rates
AACSB: Analytical Thinking
22) When people are holding money in excess of their demand for real money balances
________.
A) the nominal interest rate will fall
B) they increase their purchases of goods and services
C) the central bank buys bonds to correct the imbalance
D) all of the above
E) none of the above
Answer: A
Topic: 10.4 The Money Market and Interest Rates
AACSB: Analytical Thinking
20
Copyright © 2015 Pearson Education Limited
Another random document with
no related content on Scribd:
Section of Bunker Hill Monument
Reproduced from Solomon Willard, Plans and
Sections of the Obelisk on Bunker’s Hill
(Boston, 1843), Plate V
As described in the Baldwin Report, the circular winding
staircase is composed of granite steps, starting with a width of about
four feet and narrowing as the ascent is made. Baldwin called for
“places of repose” (landings) at intervals. Modern architects call the
part around which a circular staircase winds, the “newel.” Baldwin’s
newel is a hallow wall, 10 feet in diameter at the base, about two feet
thick.
Thus, the monument was designed by an engineer, not an
architect. Baldwin violated a common rule for the proportions of
ancient Egyptian obelisks, that the pyramidion should be as high as
the base is wide, which is one reason why the Washington
Monument is so beautiful. One regrets that architect Willard, who
picked up where Baldwin left off, did not see fit to modify the Baldwin
lines. There seems never to have been any question as to the
monument’s material: granite, the native New England stone.
Although we admire the Bunker Hill Monument for its somber
strength, it cannot be called a structure of beauty, as is the lighter-
tinted and finer-textured marble Washington Monument, with its
sharper apex.
We can also speculate on why Baldwin made the monument
wholly of granite. At today’s prices, the circular inner surface of the
shaft and the circular chimney, or newel, around which the stone
staircase winds, would be of tremendous cost. The dressing of the
stone for a square inner area would be much cheaper.
Before criticizing Baldwin on his ponderous stair design, which
could be replaced by a light, modern fire escape, we should look at
the status of the tiny American iron industry of his day. The
ironmasters were recovering from the decline of activity in the War of
1812, during which they had lost their British market. Baldwin would
know that certain early railroad promoters estimated that granite
tracks mounted with iron plates would be less expensive than the
English-rolled rails, which the Americans could not produce. With
masons in Massachusetts receiving about $0.18 an hour, granite
was considered cheaper than iron. Baldwin therefore designed his
stairway of granite, with a massive granite chimney “newel” to
support the inner ends of the treads. Long before the monument was
completed, however, a square staircase of either cast iron or
wrought iron could have been produced, economically, by American
ironmasters. It was then too late to make the change, however.
At about the time of the completion of the monument the first
mechanical elevator was exhibited, but there was no room for an
elevator at Bunker Hill—the newel was in the way. To climb a few
score steps would be an easy task to our sturdy forebears, and to
say that one has “climbed the Bunker Hill Monument” is a boast that
hundreds of thousands of tourists to Boston have been proud to
make for over 100 years. Baldwin may have been right again, as he
usually was.
Baldwin specified that the monument should be square with the
compass, a common Egyptian practice. As built, however, it is
oriented to fit the redoubt (southeast corner) of the battle fortification.
Structurally, Baldwin designed a sound foundation, 12 feet deep,
built of six courses of stone with no small rubble that might
deteriorate through the years. He specified that the starting level of
the base of the monument should be established at the best
elevation to avoid an uneconomical distribution of the excavated
earth; today we would say that he balanced cut and fill.
The modern building contractor finds the estimate that went with
the report both practical and quaint. He will find that the digging of
the pit for the foundation of the monument was figured in “squares,”
at $2.00 each; and since a square meant eight cubic yards, hand
excavation was therefore priced at $0.25 per cubic yard. This price
must have included the expense of shoring; also the pumping that
such a deep pit would require. Baldwin proposed to dig a deep well
on the site (today called a test pit), which would not only indicate the
adequacy of the soil, but would also furnish water for construction
purposes. Much water would be needed to mix the lime and sand
mortar for the monument as well as for the Roman cement, for which
5
the estimated 100 casks were figured at $7.00 each.
5
“The use of natural cement was introduced
by Mr. Parker, who first discovered the properties
of the cement-stone in the Isle of Sheppy, and
took out a patent for the sale of it in 1796, under
the name of ‘Roman Cement.’”—Edward
Dobson, Rudiments of the Art of Building
(London: John Weale, 1854).
Transient Cornerstone
On 17 June 1825, the cornerstone of the monument was laid
with impressive ceremonies. As the colorful procession marched up
Bunker Hill to the stirring rendition of “Yankee Doodle” by the
drummer of Colonel William Prescott’s regiment, who, 50 years
before, had been in the battle, the rear of the procession was just
starting from distant Boston Common. The little Boston of over a
century ago was crowded with visitors who had come from places as
remote as South Carolina by stagecoach, sailing vessel, or on foot,
to hear the great speech of Daniel Webster, President of the Bunker
Hill Monument Association, and America’s first orator of the day.
Years earlier, Chaplain Joseph Thaxter had paid the last offices to
dying soldiers in the battle; now, he invoked God’s blessing on the
young American republic, as 40 veterans of the battle sat in a place
of honor.
The most important visitor, of course, was General Lafayette,
who, as a good Mason, spread the mortar on the stone when it was
laid by Most Worshipful Grand Master of the Grand Lodge of
Massachusetts, John Abbot. As the battle’s only monument up to
this date had been erected by the Masons, it was considered
appropriate that the permanent monument should have its
cornerstone laid with the Masonic ceremony. A little later, this
procedure was sharply criticized during the Antimasonic period,
6
which occurred before the monument was finished.
6
Joseph Warren, the outstanding hero of the
battle, was Grand Master of Freemasons for
North America.
7
Annual Report of the Smithsonian Institution,
1889.
8
For more data on the Granite Railway and
Gridley Bryant, see: Charles B. Stuart, Civil and
Military Engineers of America (New York: D. Van
Nostrand Company, Inc., 1871); and The First
Railroad in America (Boston: Privately printed for
Granite Railway Company, 1926).
9
George E. Ellis, History of the Battle of
Bunker’s (Breed’s) Hill (Boston: Lockwood,
Brooks and Company, 1875).
Hoc nomen est in æternum, et hoc
memoriale in generationem et generationem.
© R. Ruzicka 1915