If monetary policymakers cannot accurately forecast shifts in money demand, what are they really only left with for a short-term policy instrument and why?
What will be an ideal response?
If monetary policymakers cannot accurately forecast shifts in money demand, they cannot accurately forecast (predict) shifts in the velocity of money. As a result, if they try to target reserves or money growth, they potentially will create an environment of volatile interest rates, which would be very damaging to the real economy. Since this volatility and resulting damage is exactly what central bankers hope to avoid, they turn to the only viable short-term operating target left which is smoothing fluctuations in the interest rate.
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Consider the budget line in the above figure. If the consumer's income is $240, then the price of a movie is
A) $24 per movie. B) $12 per movie. C) $10 per movie. D) More information is needed to determine the price of a movie.
To be officially counted as unemployed, a person must be
A) at least 16 years old. B) at least 18 years old. C) at least 21 years old. D) any age, so long as you are looking for work.
M2 is comprised of
A) small-denomination time deposits + savings deposits + money market accounts. B) small-denomination time deposits + credit cards + money market accounts + gold deposits. C) M1 + small-denomination time deposits + savings deposits + retail money market mutual funds. D) M1 + small denomination time deposits + credit cards + money market accounts.
Suppose the demand for money and the supply of money increase simultaneously. We can:
A. expect the interest rate to rise and bond prices to fall. B. expect the interest rate to fall and bond prices to rise. C. the nominal GDP to expand. D. not accurately predict what will happen to interest rates or bond prices.