Notes

Part before question: Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond.
The opportunity cost of holding the inheritance as money depends on the interest rate on the bond.
For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money.

Interest Rate on Government Bond
(Percent)
8
10

Opportunity Cost
(Dollars per year)
________
________

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What does the previous analysis suggest about the market for money?

The quantity of money demanded decreases as the interest rate rises.
The supply of money is independent of the interest rate.
The quantity of money demanded increases as the interest rate rises.

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True or False: According to the Keynesian view of the economy, this economy is currently in a liquidity trap.

True
False

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True or False: In this case, the Federal Reserve's action shifts the aggregate demand curve to the right.

False
True

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"The effectiveness of monetary policy depends primarily on how monetary policy influences interest rates."

Neither monetarists nor Keynesians agree with this statement.
Monetarists agree with this statement, but Keynesians do not.
Monetarists and Keynesians agree with this statement.
Keynesians agree with this statement, but monetarists do not.

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True or False: Some nonactivists believe in a predetermined-money growth rate, which suggests that the monetary authorities should target the proper federal funds rate before implementing monetary policies.

False
True

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Which of the following is not a point of contention between activist and nonactivist policy advocates with regard to monetary policy?

The flexibility of monetary policy depending on the state of the economy
The time it takes for the economy to adjust to natural real GDP
The effectiveness of monetary policy due to lags
The effect of monetary policy on aggregate demand

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Suppose that U.S. real GDP rises 1% above potential GDP, all else constant. According to the Taylor rule, the Fed should _________ the federal funds rate target by __________ .

First blank: lower/ raise Second blank: 0.25%/ 0.5%/ 0.75%/ 1%

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Suppose instead that the U.S. inflation rate rises by 1%, all else constant. According to the Taylor rule, the Fed should __________ the federal funds rate target by __________ .

First blank: lower/ raise Second blank: 1.5%/ 1.75%/ 2%/ 2.25%