Question 1

Figure 11-5  
-Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap

Accepted Answer

A)  by pursuing an expansionary monetary policy to raise the interest rate and decrease short-run aggregate supply. 
B)  by pursuing a contractionary monetary policy to drive down the interest rate and decrease aggregate demand. 
C)  by pursuing an expansionary monetary policy to drive down the interest rate and decrease short-run aggregate supply. 
D)  by pursuing a contractionary monetary policy to raise the interest rate and reduce aggregate demand. 
A)  by pursuing an expansionary monetary policy to raise the interest rate and decrease short-run aggregate supply. 
B)  by pursuing a contractionary monetary policy to drive down the interest rate and decrease aggregate demand. 
C)  by pursuing an expansionary monetary policy to drive down the interest rate and decrease short-run aggregate supply. 
D)  by pursuing a contractionary monetary policy to raise the interest rate and reduce aggregate demand.

Question 2

Which of the following is a tool used by the Fed in the conduct of monetary policy?

Accepted Answer

A)  changes in the prime rate 
B)  issuing new government bonds and retiring old ones 
C)  buying and selling corporate bonds 
D)  buying and selling federal government bonds 
A)  changes in the prime rate 
B)  issuing new government bonds and retiring old ones 
C)  buying and selling corporate bonds 
D)  buying and selling federal government bonds

Question 3

Using the quantity equation, the demand for money can be expressed as

Accepted Answer

A)  M = (V * Y) ÷ P. 
B)  M = (P * Y) ÷ V. 
C)  M = (P * V) ÷ Y. 
D)  M * V = (1/ P) V * Y. 
A)  M = (V * Y) ÷ P. 
B)  M = (P * Y) ÷ V. 
C)  M = (P * V) ÷ Y. 
D)  M * V = (1/ P) V * Y.

Question 4

Explain how the Fed could use monetary policy to close a recessionary gap. A complete answer
Jmust 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.

Accepted Answer

The Federal Reserve (the Fed) can use mo

Question 5

What are the three types of monetary policy lags?

Accepted Answer

A)  the recognition lag, the identification lag, and the implementation lag 
B)  the recognition lag, the inflation lag, and the impact lag 
C)  the recognition lag, the implementation lag, and the government lag 
D)  the recognition lag, the implementation lag, and the impact lag 
A)  the recognition lag, the identification lag, and the implementation lag 
B)  the recognition lag, the inflation lag, and the impact lag 
C)  the recognition lag, the implementation lag, and the government lag 
D)  the recognition lag, the implementation lag, and the impact lag

Question 6

All other things unchanged, the velocity of money will

Accepted Answer

A)  increase if the quantity of money demanded decreases. 
B)  increase if the quantity of money demanded increases. 
C)  decrease if the quantity of money demanded decreases. 
D)  fall to zero if the quantity of money demanded increases. 
A)  increase if the quantity of money demanded decreases. 
B)  increase if the quantity of money demanded increases. 
C)  decrease if the quantity of money demanded decreases. 
D)  fall to zero if the quantity of money demanded increases.

Question 7

Which of the following is perhaps the greatest obstacle facing the Fed in discharging monetary policy?

Accepted Answer

A)  the difficulties involved in regulating the complex structure of financial institutions 
B)  the problem of monetary policy lags 
C)  the problem of identifying a monetary measure that is closely linked to real GDP 
D)  the problem of coordinating monetary and fiscal policy 
A)  the difficulties involved in regulating the complex structure of financial institutions 
B)  the problem of monetary policy lags 
C)  the problem of identifying a monetary measure that is closely linked to real GDP 
D)  the problem of coordinating monetary and fiscal policy

Question 8

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

Accepted Answer

A)  exchange rate to rise and interest rates to fall. 
B)  exchange rate and interest rates to rise. 
C)  exchange rate to fall and interest rates to rise. 
D)  exchange rate and interest rates to fall. 
A)  exchange rate to rise and interest rates to fall. 
B)  exchange rate and interest rates to rise. 
C)  exchange rate to fall and interest rates to rise. 
D)  exchange rate and interest rates to fall.

Question 9

If inflation is a threat, the Fed is likely to engage in a contractionary monetary policy.

Accepted Answer

A) True 
 B)False

Question 10

According to the text, in many respects, the single most powerful economic policymaker in the United States is

Accepted Answer

A)  Congress. 
B)  the Federal Reserve. 
C)  the President. 
D)  the Supreme Court. 
A)  Congress. 
B)  the Federal Reserve. 
C)  the President. 
D)  the Supreme Court.

Question 11

Changing the required reserve ratio is an often-used monetary tool to influence the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 12

Figure 11-4  
-Refer to Figure 11-4. In Panel (b), assume that the price of bonds rises from P1 to P2. Now, in Panel (c), the higher price of bonds will

Accepted Answer

A)  reduce the demand for and increase the supply of dollars and cause the exchange rate to increase. 
B)  reduce the demand for and increase the supply of dollars and cause the exchange rate to rise. 
C)  increase the demand for and reduce the supply of dollars and cause the exchange rate to increase. 
D)  reduce the demand for and increase the supply of dollars and cause the exchange rate to fall. 
A)  reduce the demand for and increase the supply of dollars and cause the exchange rate to increase. 
B)  reduce the demand for and increase the supply of dollars and cause the exchange rate to rise. 
C)  increase the demand for and reduce the supply of dollars and cause the exchange rate to increase. 
D)  reduce the demand for and increase the supply of dollars and cause the exchange rate to fall.

Question 13

The problem of lags suggests that monetary policy should

Accepted Answer

A)  respond swiftly to statistical reports of economic conditions in the recent past. 
B)  respond to conditions expected to exist in the future. 
C)  stagger its implementation of policies so that there will be an ongoing effect on the economy. 
D)  not respond to changing economic conditions in the economy but instead rely on the economy's self correcting mechanism. 
A)  respond swiftly to statistical reports of economic conditions in the recent past. 
B)  respond to conditions expected to exist in the future. 
C)  stagger its implementation of policies so that there will be an ongoing effect on the economy. 
D)  not respond to changing economic conditions in the economy but instead rely on the economy's self correcting mechanism.

Question 14

In the short-run velocity is not constant. Which of the following variables can be affected by a change in money supply? 
I. real GDP
II. nominal GDP
III. the price level

Accepted Answer

A)  III only 
B)  II and III 
C)  I, II, and III 
D)  If velocity is not constant, then none of the variables is affected. 
A)  III only 
B)  II and III 
C)  I, II, and III 
D)  If velocity is not constant, then none of the variables is affected.

Question 15

What is the rational expectations hypothesis? Using a diagram of the aggregate demand and
Jaggregate supply to illustrate your answer, explain how the hypothesis suggests that monetary policy may affect the price level but not real GDP.

Accepted Answer

The rational expectations hypothesis is

Question 16

Figure 11-5  
-Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,

Accepted Answer

A)  the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates. 
B)  the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates. 
C)  the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates. 
D)  the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates. 
A)  the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates. 
B)  the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates. 
C)  the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates. 
D)  the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Question 17

The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the

Accepted Answer

A)  impact lag. 
B)  recognition lag. 
C)  implementation lag. 
D)  theory lag. 
A)  impact lag. 
B)  recognition lag. 
C)  implementation lag. 
D)  theory lag.

Question 18

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called

Accepted Answer

A)  the impact lag. 
B)  the implementation lag. 
C)  the government lag. 
D)  the recognition lag. 
A)  the impact lag. 
B)  the implementation lag. 
C)  the government lag. 
D)  the recognition lag.

Question 19

Figure 11-5  
-Refer to Figure 11-5. Long-run equilibrium positions occur at points

Accepted Answer

A)  a and d. 
B)  a and b. 
C)  c and d. 
D)  b and d. 
A)  a and d. 
B)  a and b. 
C)  c and d. 
D)  b and d.

Question 20

Suppose the interest rate is zero and the public expects the price level to fall by 2%. Which of the following statement is true?

Accepted Answer

A)  The value of money falls by 2%. 
B)  Money becomes an interest earning asset; it earns a nominal interest rate of 2%. 
C)  Money becomes an interest earning asset; it earns a real interest rate of 2%. 
D)  Bonds and money will become perfect substitutes since both are non-interest earning assets. 
A)  The value of money falls by 2%. 
B)  Money becomes an interest earning asset; it earns a nominal interest rate of 2%. 
C)  Money becomes an interest earning asset; it earns a real interest rate of 2%. 
D)  Bonds and money will become perfect substitutes since both are non-interest earning assets.

Figure 11-5 -Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap

Which of the following is a tool used by the Fed in the conduct of monetary policy?

Using the quantity equation, the demand for money can be expressed as

Explain how the Fed could use monetary policy to close a recessionary gap. A complete answer Jmust 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.

What are the three types of monetary policy lags?

All other things unchanged, the velocity of money will

Which of the following is perhaps the greatest obstacle facing the Fed in discharging monetary policy?

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

If inflation is a threat, the Fed is likely to engage in a contractionary monetary policy.

According to the text, in many respects, the single most powerful economic policymaker in the United States is

Changing the required reserve ratio is an often-used monetary tool to influence the federal funds rate.

Figure 11-4 -Refer to Figure 11-4. In Panel (b), assume that the price of bonds rises from P₁ to P₂. Now, in Panel (c), the higher price of bonds will

The problem of lags suggests that monetary policy should

In the short-run velocity is not constant. Which of the following variables can be affected by a change in money supply? I. real GDP II. nominal GDP III. the price level

What is the rational expectations hypothesis? Using a diagram of the aggregate demand and Jaggregate supply to illustrate your answer, explain how the hypothesis suggests that monetary policy may affect the price level but not real GDP.

Figure 11-5 -Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,

The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called

Figure 11-5 -Refer to Figure 11-5. Long-run equilibrium positions occur at points

Suppose the interest rate is zero and the public expects the price level to fall by 2%. Which of the following statement is true?

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Exam 11: Monetary Policy and the Fed

Figure 11-5 -Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap

Which of the following is a tool used by the Fed in the conduct of monetary policy?

Using the quantity equation, the demand for money can be expressed as

Explain how the Fed could use monetary policy to close a recessionary gap. A complete answer Jmust 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.

What are the three types of monetary policy lags?

All other things unchanged, the velocity of money will

Which of the following is perhaps the greatest obstacle facing the Fed in discharging monetary policy?

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

If inflation is a threat, the Fed is likely to engage in a contractionary monetary policy.

According to the text, in many respects, the single most powerful economic policymaker in the United States is

Changing the required reserve ratio is an often-used monetary tool to influence the federal funds rate.

Figure 11-4 -Refer to Figure 11-4. In Panel (b), assume that the price of bonds rises from P1 to P2. Now, in Panel (c), the higher price of bonds will

The problem of lags suggests that monetary policy should

In the short-run velocity is not constant. Which of the following variables can be affected by a change in money supply? I. real GDP II. nominal GDP III. the price level

What is the rational expectations hypothesis? Using a diagram of the aggregate demand and Jaggregate supply to illustrate your answer, explain how the hypothesis suggests that monetary policy may affect the price level but not real GDP.

Figure 11-5 -Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,

The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called

Figure 11-5 -Refer to Figure 11-5. Long-run equilibrium positions occur at points

Suppose the interest rate is zero and the public expects the price level to fall by 2%. Which of the following statement is true?

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Figure 11-4 -Refer to Figure 11-4. In Panel (b), assume that the price of bonds rises from P₁ to P₂. Now, in Panel (c), the higher price of bonds will