11 Questions
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?
Price-Level effect
Why does the Expected-Inflation effect show an increase in interest rates in response to an increase in the money supply?
Because it shifts the demand curve to the right
What is the source of the data on Money Growth and Interest Rates from 1950-2017?
Federal Reserve Bank of St. Louis FRED database
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.
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.
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.
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.
In the liquidity preference framework, what determines the equilibrium interest rate?
Both supply and demand for money
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
What does the equation Bs - Bd = Ms - Md represent in the liquidity preference framework?
Market for bonds in equilibrium
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
Test your understanding of the effects of monetary policy on interest rates and the price level. This quiz covers topics such as the Price-Level Effect and Expected-Inflation Effect in response to changes in the money supply.
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