lect 6

• Sequence the effects of a decrease in the interest rate on aggregate demand

  1️⃣ Lower interest rate increases investment spending

  2️⃣ Aggregate expenditure shifts upward

  3️⃣ Aggregate demand shifts to the right

  4️⃣ Real GDP increases

  5️⃣ Price level may rise depending on initial conditions
• Demand-shock inflation occurs when an inflationary gap opens and the price level rises further

  True
• Fiscal policy affects aggregate demand through changes in government spending or induced changes in consumption
• Steps in the transmission mechanism of monetary policy

  1️⃣ Change in interest rate

  2️⃣ Affects market rates, asset prices, expectations, and confidence

  3️⃣ Domestic spending changes

  4️⃣ Inflation affected by aggregate demand relative to aggregate supply
• Monetary policy changes take approximately one year to affect output

  True
• Quantitative easing involves central banks buying assets with newly created money
• The price of existing bonds varies positively with the interest rate

  False
• Match the QE channels with their descriptions:

  Macro/policy news channel ↔️ Signals expectations about future policy rates

  Portfolio rebalancing channel ↔️ Investors rebalance portfolios due to imperfect substitutability

  Liquidity premium channel ↔️ Reduces compensation for illiquidity risks
• QE directly increases the money held by households and firms

  False
• One effect of QE was to lower long-term interest rates
• Steps in the process of quantitative tightening

  1️⃣ Central banks reduce their asset stocks

  2️⃣ Prices of government debt fall

  3️⃣ Yields on government debt rise

  4️⃣ Central banks may pause QT during crises

  5️⃣ Balance sheets must be reduced for future flexibility
• Monetary equilibrium occurs when people are willing to hold the existing stocks of money and bonds at the current interest rate

  True
• Changes in interest rates can affect consumption through mortgage and savings rates
• A rise in interest rates always leads to a decrease in investment expenditure

  True