Exam 11: Monetary Policy and the Fed

The rational expectations hypothesis suggests that

If velocity is constant in the long run, which of the following results flow from the quantity theory of money?

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by

The time it takes to collect and process data is the biggest source of which lag?

Figure 11-5 -Refer to Figure 11-5. If the economy is at point c,

The monetary policy tool that involves the buying and selling of government bonds is

Suppose money supply (M) = $3,960 billion, price level (P) = 1.1, and real GDP (Y) = $7,200 billion. Calculate the value of velocity using the equation of exchange.

Which of the following predictions can be made using the growth rates associated with the quantity equation, assuming velocity is stable?

The Fed increases the money supply by selling bonds.

When the Fed sells bonds in the open market, we can expect

Figure 11-5 -Refer to Figure 11-5. Short-run but not long-run equilibrium positions occur at points

Figure 11-4 -Refer to Figure 11-4. Which of the following actions by the Fed could have caused the movement from AD₁ to AD₂ in Panel (a)?

When the Fed raises the target for federal funds, it

The Fed changes the federal funds rate using open-market operations.

Figure 11-5 -Refer to Figure 11-5. If the economy is at point c, an open market purchase would cause

Suppose inflationary pressures are building up in an economy. Is this economy likely to Jexperience a recessionary gap or an inflationary gap? Explain how the Fed could use monetary policy to combat inflation. A complete answer must include an explanation of the policy tools that can be used and their effects on the money supply, interest rates, and aggregate demand. Use a diagram of LRAS, SRAS, and AD to illustrate your answer.

Following the U.S. financial crisis in 2008, some observers assert that the policies of Fed Chairman Greenspan contributed to the crisis. Which of the following is a criticism of Greenspan's policies? I. The very low interest rates used to fight the 2001 recession were maintained for too long, leading to the real estate bubble. II. The Fed provided real estate developers with liquidity to encourage property development and offered tax breaks to first-time home buyers, which in turn fueled the real estate bubble. III. The Fed did not promote appropriate regulations to deal with the new financial instruments that were created in the early 2000s.

An effort by the Fed to reduce aggregate demand may be thwarted because

Mary Chestnut reported in her diary that, during the Civil War, she became much less willing to hold "'Confederates," currency issued by the Confederate State of America. Assuming that this change in preferences was widespread in the South, it suggests

Suppose velocity = 5, money supply = $200, and price = 2. What is the value of real GDP?