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Monetary Policy Effects Quiz

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Questions and Answers

What effect predicts an increase in the money supply leads to a rise in interest rates in response to the rise in the price level?

Fisher effect

Price-Level effect (correct)

Wealth effect

Expected-Inflation effect

Why does the Expected-Inflation effect show an increase in interest rates in response to an increase in the money supply?

Because it leads people to expect a lower price level in the future

Because it has no impact on interest rates

Because it shifts the demand curve to the right (correct)

Because it shifts the demand curve to the left

What is the source of the data on Money Growth and Interest Rates from 1950-2017?

World Bank

International Monetary Fund (IMF)

Federal Reserve Bank of St. Louis FRED database (correct)

Federal Deposit Insurance Corporation (FDIC)

According to the liquidity preference framework, what effect does an increase in the money supply have on interest rates?

Interest rates will decrease due to the liquidity effect. Signup and view all the answers

What is the long-term impact of a one-time increase in the money supply on prices according to the text?

Prices will rise to a permanently higher level by the end of the year. Signup and view all the answers

How does a rising price level impact interest rates according to the text?

Interest rates will rise because people expect higher inflation over the year. Signup and view all the answers

What conclusion does the income effect draw about the impact of an increase in the money supply on interest rates?

Interest rates will increase due to a shift in the demand curve to the right. Signup and view all the answers

In the liquidity preference framework, what determines the equilibrium interest rate?

Both supply and demand for money Signup and view all the answers

According to the Keynesian model in the liquidity preference framework, what are the two main categories of assets people use to store their wealth?

Money and bonds Signup and view all the answers

What does the equation Bs - Bd = Ms - Md represent in the liquidity preference framework?

Market for bonds in equilibrium Signup and view all the answers

How is expected inflation calculated according to Frederic S. Mishkin's procedure as outlined in the text?

Using past interest rates, inflation, and time trends Signup and view all the answers