Chapter 21: The Monetary Policy and Aggregate Demand Curve

Question 1

Is the feds fund rate nominal or real?

Answer 1

nominal

Question 2

what do real interest rates affect

Answer 2

net exports and business spending

Question 3

relationship between feds fund rate and real interest rates

Answer 3

• when i_fed rises, r rises
• when i_fed falls, r falls

Question 4

Monetary Policy (MP) curve

Answer 4

indicates the relationship between the real interest rate set by the central bank and inflation rate

Question 5

MP curve equation

Answer 5

r = constant r + lambda (responsiveness to r) * pi (inflation)

Question 6

Taylor principle

Answer 6

raise nominal interest rates more than any rise in inflation so that real interest rates will rise when there is a rise in inflation

Question 7

autonomous change

Answer 7

changes in monetary policy that shift the monetary policy curve

Question 8

automatic adjustments to interest rates

Answer 8

the Taylor principle driven changes that are reflected in movements along the monetary policy curve

Question 9

autonomous tightening of monetary policy

Answer 9

raise the real interest rate at any given inflation rate
- shift up

Question 10

autonomous easing of monetary policy

Answer 10

lower real interest rates at any given inflation rate
- shift down

Question 11

automatic response

Answer 11

a central bank’s normal response of raising interest rates when inflation is rising
- does not involve a shift in MP curve

Question 12

aggregate demand curve

Answer 12

the relationship between the inflation rate and aggregate output when the goods market is in equilibrium

Question 13

Shifts in aggregate demand curve

Answer 13

any factor that shifts the IS curve shifts AD curve
- autonomous tightening of monetary policy, shifts left
- autonomous easing of monetary policy, shifts right

Question 14

financial repression

Answer 14

the same as quantitative easing
1. Fed pushes S.T rates to zero
2. Fed pushes L.T rates very low
3. Let inflation increase to 2.5%
Result: negative real interest rates

Question 15

Fisher Equation

Answer 15

r = i - pi

Question 16

relationship between real and nominal interest rates

Answer 16

if expected inflation is fixed, then when i rises r rises