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26.4Â Â Inflation and Interest Rates 1) A positive relationship exists between monetary growth and interest rates when the A) aggregate supply curve is horizontal. B) aggregate demand curve is horizontal. C) price level is fixed. D) income effect offsets the liquidity effect. 2) The income effect implies that there is a positive relationship between A) income and the unemployment rate. B) the unemployment rate and the inflation rate. C) aggregate supply and aggregate demand. D) monetary growth and interest rates. 3) A decrease in the money supply will immediately __________ the __________ interest rate, according to the “liquidity effect.” A) raise; natural B) raise; nominal C) lower; natural D) lower; nominal 4) An increase in the money supply will immediately __________ the __________ interest rate, according to the “liquidity effect.” A) raise; natural B) raise; nominal C) lower; natural D) lower; nominal 5) An increase in inflationary expectations __________ interest rate. A) raises the natural B) raises the nominal C) lowers the natural D) lowers the nominal 6) A decrease in inflationary expectations __________ interest rate. A) raises the natural B) raises the nominal C) lowers the natural D) lowers the nominal 7) Monetarists contend that an expansionary monetary policy will lead to a rise in the interest rate because __________ and the __________ effect will raise interest rates by more than the initial __________ effect lowers it. A) inflationary expectations; income; liquidity B) inflationary expectations; liquidity; income C) deflationary expectations; income; liquidity D) deflationary expectations; liquidity; income 8) If policymakers are expected to increase the money supply, Monetarists argue that there is __________ effect. There is __________ effect that raises prices when the money supply actually increases. A) a small liquidity; an income B) no; an income C) a small income; a liquidity D) no; a liquidity 9) If policymakers are expected to increase the money supply, then Monetarists argue that bond demand and thus prices will __________. When it occurs, the actual increase in the money supply will have no further effect on bond prices and thus the anticipated higher inflation rate will cause interest rates to __________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease 26.5Â Â Should a Robot Replace the Federal Reserve? 1) Keynesians believe that to help ensure full employment production, we should use A) both counter-cyclical monetary and fiscal policy. B) a money supply rule and counter-cyclical fiscal policy. C) counter-cyclical fiscal policy only. D) counter-cyclical monetary policy only. 2) Monetarists believe that the type of monetary policy that would lead to greater economic stability is A) a money supply rule. B) a constant money supply. C) a counter-cyclical monetary policy. D) a pro-cyclical monetary policy. 3) Monetarists view the use of monetary policy to fine-tune the economy as A) unnecessary because the private sector is inherently stable. B) always inflationary. C) less predictable than fiscal policy. D) impossible because the Fed does not have the tools to control the money supply. 4) Monetarists consider timing variations in the relationship between money supply changes and income changes to be A) a fundamental problem of counter-cyclical monetary policy. B) inconsequential relative to the problem of instability in the velocity of money. C) a fundamental long-run problem but not a significant problem in the short run. D) offset by predictable changes in the money multiplier. 5) Abandonment of continual active discretionary counter-cyclical policies is advocated by A) Keynesians. B) Monetarists. C) both Keynesians and Monetarists. D) neither Keynesians nor Monetarists.