Question 1

What is meant by the term "credit easing"?

Accepted Answer

A)  It is a strategy which involves the extension of central bank lending to influence more broadly the proper functioning of credit markets and to improve liquidity. 
B)  It is a strategy which involves keeping interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation and encourage spending. 
C)  It is a strategy which involves lowering the required reserve ratio and lowering the federal funds rate to encourage banks to increase loan creation. 
D)  It is a strategy which involves allowing interest rates to rise slowly by providing substantial reserves for as long as is necessary to avoid inflation. 
A)  It is a strategy which involves the extension of central bank lending to influence more broadly the proper functioning of credit markets and to improve liquidity. 
B)  It is a strategy which involves keeping interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation and encourage spending. 
C)  It is a strategy which involves lowering the required reserve ratio and lowering the federal funds rate to encourage banks to increase loan creation. 
D)  It is a strategy which involves allowing interest rates to rise slowly by providing substantial reserves for as long as is necessary to avoid inflation.

Question 2

All other things unchanged, we expect that a reduction in interest rates will tend to

Accepted Answer

A)  increase the quantity of money demanded and increase velocity. 
B)  increase the quantity of money demanded and reduce velocity. 
C)  reduce the quantity of money demanded and increase velocity. 
D)  reduce the quantity of money demanded and reduce velocity. 
A)  increase the quantity of money demanded and increase velocity. 
B)  increase the quantity of money demanded and reduce velocity. 
C)  reduce the quantity of money demanded and increase velocity. 
D)  reduce the quantity of money demanded and reduce velocity.

Question 3

If the velocity of money is constant, then a 2% increase in the money supply

Accepted Answer

A)  must be the result of a 2% increase in the price level. 
B)  would change nominal GDP by a smaller percentage. 
C)  would change nominal GDP by an equal percentage. 
D)  would change nominal GDP by a larger percentage. 
A)  must be the result of a 2% increase in the price level. 
B)  would change nominal GDP by a smaller percentage. 
C)  would change nominal GDP by an equal percentage. 
D)  would change nominal GDP by a larger percentage.

Question 4

Which of the following statements is true if interest rates were zero?

Accepted Answer

A)  The demand for bonds increases because bonds will be a more attractive alternative to money. 
B)  People will hold their wealth in the form of money rather than in bonds. 
C)  Bonds and money will become perfect substitutes since both are non-interest earning assets. 
D)  The supply of bonds will increase. 
A)  The demand for bonds increases because bonds will be a more attractive alternative to money. 
B)  People will hold their wealth in the form of money rather than in bonds. 
C)  Bonds and money will become perfect substitutes since both are non-interest earning assets. 
D)  The supply of bonds will increase.

Question 5

Figure 11-1  
-Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a). As a result, the interest rate

Accepted Answer

A)  increases and investment increases. 
B)  increases and investment decreases. 
C)  decreases and investment increases. 
D)  decreases and investment decreases. 
A)  increases and investment increases. 
B)  increases and investment decreases. 
C)  decreases and investment increases. 
D)  decreases and investment decreases.

Question 6

Expansionary monetary policy, by increasing the money supply, also increases interest rates and recessionary gaps.

Accepted Answer

A) True 
 B)False

Question 7

At the end of 2008, the federal funds rate in the United States was close to zero. Which of the Jfollowing is a major concern associated with such a low rate?

Accepted Answer

A)  That traditional monetary policy will have no impact on the economy. 
B)  Such a low rate spurs excessive consumption and investment spending which may lead to inflation. 
C)  Such a low rate spurs excessive consumption and investment spending which may lead to deflation. 
D)  Economic agents might be unwilling to borrow in anticipation of even lower interest rates. 
A)  That traditional monetary policy will have no impact on the economy. 
B)  Such a low rate spurs excessive consumption and investment spending which may lead to inflation. 
C)  Such a low rate spurs excessive consumption and investment spending which may lead to deflation. 
D)  Economic agents might be unwilling to borrow in anticipation of even lower interest rates.

Question 8

Suppose at present people hold a quantity of money equal to 85% of nominal GDP. What happens to velocity if people wish to increase their money holdings to 80% of nominal GDP?

Accepted Answer

A)  Velocity can increase or decrease depending on people's tastes and preferences toward money. 
B)  Velocity is unaffected. 
C)  Velocity increases. 
D)  Velocity decreases. 
A)  Velocity can increase or decrease depending on people's tastes and preferences toward money. 
B)  Velocity is unaffected. 
C)  Velocity increases. 
D)  Velocity decreases.

Question 9

Which of the following is a major problem with deflation?

Accepted Answer

A)  Money loses value so rapidly that economic agents will be reluctant to hold money. 
B)  Economic agents tend to put off purchases in anticipation of lower prices for goods and services, leading to a downward spiral in economic activity. 
C)  Low prices for goods and services tend to result in massive shortages in most markets. 
D)  Money supply cannot keep pace with consumption spending. 
A)  Money loses value so rapidly that economic agents will be reluctant to hold money. 
B)  Economic agents tend to put off purchases in anticipation of lower prices for goods and services, leading to a downward spiral in economic activity. 
C)  Low prices for goods and services tend to result in massive shortages in most markets. 
D)  Money supply cannot keep pace with consumption spending.

Question 10

If the Fed buys government bonds through open-market operations, it will

Accepted Answer

A)  increase the demand for bonds in the bond market. 
B)  decrease the demand for bonds in the bond market. 
C)  increase the supply of bonds in the bond market. 
D)  decrease the supply of bonds in the bond market. 
A)  increase the demand for bonds in the bond market. 
B)  decrease the demand for bonds in the bond market. 
C)  increase the supply of bonds in the bond market. 
D)  decrease the supply of bonds in the bond market.

Question 11

Which of the following is an important implication of the rational expectations argument?

Accepted Answer

A)  Since people form their expectations using all available information, the use of monetary policies to eliminate output gaps will lead to inflation. 
B)  Since any consistent set of monetary policies will be learned and anticipated by a population with rational expectations, policies designed to influence the economy to a level of production other than the potential real GDP will be ineffective. 
C)  Although people may revise their expectations about the price level and future economic activity, they cannot act on these changes because in reality, wages and prices are sticky. Thus, policy intervention is necessary. 
D)  Policymakers must constantly monitor economic activity and revise their economic policy goals to keep up with changing expectations of a population with rational expectations. 
A)  Since people form their expectations using all available information, the use of monetary policies to eliminate output gaps will lead to inflation. 
B)  Since any consistent set of monetary policies will be learned and anticipated by a population with rational expectations, policies designed to influence the economy to a level of production other than the potential real GDP will be ineffective. 
C)  Although people may revise their expectations about the price level and future economic activity, they cannot act on these changes because in reality, wages and prices are sticky. Thus, policy intervention is necessary. 
D)  Policymakers must constantly monitor economic activity and revise their economic policy goals to keep up with changing expectations of a population with rational expectations.

Question 12

The shortest time lag for monetary policy is the implementation lag.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following result from a change in the money supply brought about by an open market sale?

Accepted Answer

A)  lower interest rate, higher exchange rate, decreased demand for investment and net exports 
B)  higher interest rate, higher exchange rate, decreased demand for investment and decreased demand for net exports 
C)  lower interest rate, lower exchange rate, increased demand for investment and net exports 
D)  higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports 
A)  lower interest rate, higher exchange rate, decreased demand for investment and net exports 
B)  higher interest rate, higher exchange rate, decreased demand for investment and decreased demand for net exports 
C)  lower interest rate, lower exchange rate, increased demand for investment and net exports 
D)  higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports

Question 14

If the Fed sells government bonds, bank reserves will

Accepted Answer

A)  decrease leading to a decrease in the money supply. 
B)  increase leading to a decrease in the money supply. 
C)  increase leading to an increase in the money supply. 
D)  decrease leading to an increase in the money supply. 
A)  decrease leading to a decrease in the money supply. 
B)  increase leading to a decrease in the money supply. 
C)  increase leading to an increase in the money supply. 
D)  decrease leading to an increase in the money supply.

Question 15

A liquidity trap exists when a change in the money supply immediately and drastically affects interest rates.

Accepted Answer

A) True 
 B)False

Question 16

If the economy experiences an inflationary gap, a contractionary monetary policy will

Accepted Answer

A)  increase interest rates and increase exchange rates. 
B)  increase interest rates and decrease exchange rates. 
C)  decrease interest rates and increase exchange rates. 
D)  decrease interest rates and decrease exchange rates. 
A)  increase interest rates and increase exchange rates. 
B)  increase interest rates and decrease exchange rates. 
C)  decrease interest rates and increase exchange rates. 
D)  decrease interest rates and decrease exchange rates.

Question 17

If the economy experiences an inflationary gap, a contractionary monetary policy will

Accepted Answer

A)  increase interest rates and increase the bond prices. 
B)  increase interest rates and decrease the bond prices. 
C)  decrease interest rates and increase the bond prices. 
D)  decrease interest rates and decrease the bond prices. 
A)  increase interest rates and increase the bond prices. 
B)  increase interest rates and decrease the bond prices. 
C)  decrease interest rates and increase the bond prices. 
D)  decrease interest rates and decrease the bond prices.

Question 18

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the following except

Accepted Answer

A)  buying mortgage-backed securities. 
B)  buying long-term Treasury bills. 
C)  creating other new credit facilities to make credit more easily available to households and small businesses. 
D)  lowering the reserve requirement to encourage banks to create loans. 
A)  buying mortgage-backed securities. 
B)  buying long-term Treasury bills. 
C)  creating other new credit facilities to make credit more easily available to households and small businesses. 
D)  lowering the reserve requirement to encourage banks to create loans.

Question 19

During an economic slump, policies that lower interest rates may not actually boost investment because

Accepted Answer

A)  lower interest rates tend to discourage investment, all other things unchanged. 
B)  investment is never affected by interest rate changes. 
C)  of pessimistic expectations by businesses about the future of the economy. 
D)  taxes may have been decreased during a recessionary period. 
A)  lower interest rates tend to discourage investment, all other things unchanged. 
B)  investment is never affected by interest rate changes. 
C)  of pessimistic expectations by businesses about the future of the economy. 
D)  taxes may have been decreased during a recessionary period.

Question 20

Which of the following are monetary policy goals? 
I. maintain high interest rates
II. keep unemployment rates low
III. reduce the size of the banking sector
IV. prevent high rates of inflation

Accepted Answer

A)  I, II, III, and IV 
B)  I, II, and III 
C)  II, III, and IV 
D)  II and IV 
A)  I, II, III, and IV 
B)  I, II, and III 
C)  II, III, and IV 
D)  II and IV

What is meant by the term "credit easing"?

All other things unchanged, we expect that a reduction in interest rates will tend to

If the velocity of money is constant, then a 2% increase in the money supply

Which of the following statements is true if interest rates were zero?

Figure 11-1 -Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a). As a result, the interest rate

Expansionary monetary policy, by increasing the money supply, also increases interest rates and recessionary gaps.

At the end of 2008, the federal funds rate in the United States was close to zero. Which of the Jfollowing is a major concern associated with such a low rate?

Suppose at present people hold a quantity of money equal to 85% of nominal GDP. What happens to velocity if people wish to increase their money holdings to 80% of nominal GDP?

Which of the following is a major problem with deflation?

If the Fed buys government bonds through open-market operations, it will

Which of the following is an important implication of the rational expectations argument?

The shortest time lag for monetary policy is the implementation lag.

Which of the following result from a change in the money supply brought about by an open market sale?

If the Fed sells government bonds, bank reserves will

A liquidity trap exists when a change in the money supply immediately and drastically affects interest rates.

If the economy experiences an inflationary gap, a contractionary monetary policy will

If the economy experiences an inflationary gap, a contractionary monetary policy will

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the following except

During an economic slump, policies that lower interest rates may not actually boost investment because

Which of the following are monetary policy goals? I. maintain high interest rates II. keep unemployment rates low III. reduce the size of the banking sector IV. prevent high rates of inflation

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

What is meant by the term "credit easing"?

All other things unchanged, we expect that a reduction in interest rates will tend to

If the velocity of money is constant, then a 2% increase in the money supply

Which of the following statements is true if interest rates were zero?

Figure 11-1 -Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a). As a result, the interest rate

Expansionary monetary policy, by increasing the money supply, also increases interest rates and recessionary gaps.

At the end of 2008, the federal funds rate in the United States was close to zero. Which of the Jfollowing is a major concern associated with such a low rate?

Suppose at present people hold a quantity of money equal to 85% of nominal GDP. What happens to velocity if people wish to increase their money holdings to 80% of nominal GDP?

Which of the following is a major problem with deflation?

If the Fed buys government bonds through open-market operations, it will

Which of the following is an important implication of the rational expectations argument?

The shortest time lag for monetary policy is the implementation lag.

Which of the following result from a change in the money supply brought about by an open market sale?

If the Fed sells government bonds, bank reserves will

A liquidity trap exists when a change in the money supply immediately and drastically affects interest rates.

If the economy experiences an inflationary gap, a contractionary monetary policy will

If the economy experiences an inflationary gap, a contractionary monetary policy will

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the following except

During an economic slump, policies that lower interest rates may not actually boost investment because

Which of the following are monetary policy goals? I. maintain high interest rates II. keep unemployment rates low III. reduce the size of the banking sector IV. prevent high rates of inflation

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