Question 1

As a result of the financial crisis, the Fed has now become part of the Department of the Treasury.

Accepted Answer

A) True 
 B)False  False

Question 2

An increase in real GDP shortly before a presidential election could signal the start of

Accepted Answer

A)  a political business cycle. 
B)  an economy-wide supply shock. 
C)  a real business cycle. 
D)  a permanent reduction in the inflation rate. 
E)  long-term economic growth. 
A)  a political business cycle. 
B)  an economy-wide supply shock. 
C)  a real business cycle. 
D)  a permanent reduction in the inflation rate. 
E)  long-term economic growth. A

Question 3

The main rationale for central bank independence is that

Accepted Answer

A)  otherwise it would be hard to attract competent people to work for the central bank. 
B)  if the central bank were not independent, the government would be too bureaucratic. 
C)  in counties like the United States, this independence helps reduce the conflict between state and federal government. 
D)  this independence prevents the government from engaging in policies that, though beneficial in the short run, are harmful in the long run. 
E)  politicians find monetary policy too boring. 
A)  otherwise it would be hard to attract competent people to work for the central bank. 
B)  if the central bank were not independent, the government would be too bureaucratic. 
C)  in counties like the United States, this independence helps reduce the conflict between state and federal government. 
D)  this independence prevents the government from engaging in policies that, though beneficial in the short run, are harmful in the long run. 
E)  politicians find monetary policy too boring. D

Question 4

What is the economic justification for an independent central bank?

Accepted Answer

The major justification is that an indep

Question 5

The policy of quantitative easing aims at reducing the interest rate.

Accepted Answer

A) True 
 B)False

Question 6

If the Fed believes there has been a positive wealth effect, it will want to

Accepted Answer

A)  raise interest rates to reduce inflationary pressure. 
B)  raise interest rates to reduce prices. 
C)  lower interest rates to increase potential GDP. 
D)  lower interest rates to offset the increase in wealth. 
E)  raise interest rates to encourage saving and investment. 
A)  raise interest rates to reduce inflationary pressure. 
B)  raise interest rates to reduce prices. 
C)  lower interest rates to increase potential GDP. 
D)  lower interest rates to offset the increase in wealth. 
E)  raise interest rates to encourage saving and investment.

Question 7

Answer the questions below:
(A)Explain how each of the following would affect the money demand function:
1.An increase in the cost of living
2.Financial innovations that make it possible to write checks against saving and money market accounts
3.Financial innovations that make it possible to electronically pay bills out of saving and money market accounts
4.The December holiday season
(B)If the Fed maintains constant growth of the money supply, what happens to interest rates as the money demand function moves around?
(C)Given that the money demand function tends to move around, is it better policy to maintain constant growth of the money supply or a constant level of interest rates?

Accepted Answer

(A)Money demand will shift right, shift

Question 8

Which of the following would cause the Fed to lower interest rates?

Accepted Answer

A)  A decrease in taxes 
B)  A decrease in imports 
C)  A decrease in investment 
D)  An increase in wealth 
E)  A decrease in saving 
A)  A decrease in taxes 
B)  A decrease in imports 
C)  A decrease in investment 
D)  An increase in wealth 
E)  A decrease in saving

Question 9

There is a tradeoff between inflation and unemployment in the medium run only.

Accepted Answer

A) True 
 B)False

Question 10

Currency-the amount of coins and bills in circulation-is part of the money supply.

Accepted Answer

A) True 
 B)False

Question 11

Exhibit 27-1  
-Exhibit 27-1 is an example of

Accepted Answer

A)  how real GDP reacts to changes in the interest rate. 
B)  an aggregate demand curve. 
C)  how potential GDP reacts to changes in inflation. 
D)  the Fed's monetary policy rule. 
E)  how real GDP reacts to changes in inflation. 
A)  how real GDP reacts to changes in the interest rate. 
B)  an aggregate demand curve. 
C)  how potential GDP reacts to changes in inflation. 
D)  the Fed's monetary policy rule. 
E)  how real GDP reacts to changes in inflation.

Question 12

Explain why the Fed adjusts monetary policy in response to both inflation and the output gap.

Accepted Answer

The Fed adjusts monetary policy to maint

Question 13

The policy by which the central bank keeps the growth of the money supply constant is referred to as a

Accepted Answer

A)  constant money growth rule. 
B)  constant interest rate rule. 
C)  constant money demand rule. 
D)  Taylor rule. 
E)  Fisher rule. 
A)  constant money growth rule. 
B)  constant interest rate rule. 
C)  constant money demand rule. 
D)  Taylor rule. 
E)  Fisher rule.

Question 14

Explain the changes made by the Fed as a result of the 2007-08 financial crisis and the corresponding new types of assets it now holds.

Accepted Answer

Before the financial crisis the Fed did

Question 15

Explain why the interest rate is the opportunity cost of holding money.

Accepted Answer

If the interest rate on other assets inc

Question 16

In setting interest rates, the Fed reacts directly to

Accepted Answer

A)  the output gap. 
B)  the price level. 
C)  the level of potential GDP. 
D)  the level of real GDP. 
E)  the level of investment. 
A)  the output gap. 
B)  the price level. 
C)  the level of potential GDP. 
D)  the level of real GDP. 
E)  the level of investment.

Question 17

Which of the following statements is true?

Accepted Answer

A)  Central bank independence guarantees that central banks won't make more mistakes than they would if they were not independent. 
B)  Central bank independence guarantees that the central bank will always pursue price stability. 
C)  Independent central banks do not need to be held accountable for their actions. 
D)  Central bank independence can be taken too far. 
E)  Central banks should pursue the goal of price stability at all costs. 
A)  Central bank independence guarantees that central banks won't make more mistakes than they would if they were not independent. 
B)  Central bank independence guarantees that the central bank will always pursue price stability. 
C)  Independent central banks do not need to be held accountable for their actions. 
D)  Central bank independence can be taken too far. 
E)  Central banks should pursue the goal of price stability at all costs.

Question 18

Which of the following best explains why independent central banks need to be held accountable?

Accepted Answer

A)  Central banks are used to serving politicians. 
B)  They would not otherwise be able to pursue the goal of price stability. 
C)  Central bank independence can be taken too far. 
D)  Central banks are prone to causing political business cycles. 
E)  Central banks do not understand political issues. 
A)  Central banks are used to serving politicians. 
B)  They would not otherwise be able to pursue the goal of price stability. 
C)  Central bank independence can be taken too far. 
D)  Central banks are prone to causing political business cycles. 
E)  Central banks do not understand political issues.

Question 19

Quantitative easing increases all the following except

Accepted Answer

A)  interest rates. 
B)  reserves. 
C)  the monetary base. 
D)  the money supply. 
E)  the size of the Fed's balance sheet. 
A)  interest rates. 
B)  reserves. 
C)  the monetary base. 
D)  the money supply. 
E)  the size of the Fed's balance sheet.

Question 20

If the Fed is worried about increasing inflation and decides to raise the interest rate, real GDP will

Accepted Answer

A)  remain above potential GDP if consumption is more responsive to changes in interest rates than the Fed expected. 
B)  come in below potential if potential GDP is higher than the Fed expected. 
C)  come in above potential GDP if some other factor acts to shift the AD curve to the left. 
D)  come in below potential if investment is less responsive to changes in interest rates than the Fed expected. 
E)  quickly return to potential GDP as the AD curve shifts to the left. 
A)  remain above potential GDP if consumption is more responsive to changes in interest rates than the Fed expected. 
B)  come in below potential if potential GDP is higher than the Fed expected. 
C)  come in above potential GDP if some other factor acts to shift the AD curve to the left. 
D)  come in below potential if investment is less responsive to changes in interest rates than the Fed expected. 
E)  quickly return to potential GDP as the AD curve shifts to the left.

Exam 15: Monetary Policy

As a result of the financial crisis, the Fed has now become part of the Department of the Treasury.

An increase in real GDP shortly before a presidential election could signal the start of

The main rationale for central bank independence is that

What is the economic justification for an independent central bank?

The policy of quantitative easing aims at reducing the interest rate.

If the Fed believes there has been a positive wealth effect, it will want to

Which of the following would cause the Fed to lower interest rates?

There is a tradeoff between inflation and unemployment in the medium run only.

Currency-the amount of coins and bills in circulation-is part of the money supply.

Exhibit 27-1 -Exhibit 27-1 is an example of

Explain why the Fed adjusts monetary policy in response to both inflation and the output gap.

The policy by which the central bank keeps the growth of the money supply constant is referred to as a

Explain the changes made by the Fed as a result of the 2007-08 financial crisis and the corresponding new types of assets it now holds.

Explain why the interest rate is the opportunity cost of holding money.

In setting interest rates, the Fed reacts directly to

Which of the following statements is true?

Which of the following best explains why independent central banks need to be held accountable?

Quantitative easing increases all the following except

If the Fed is worried about increasing inflation and decides to raise the interest rate, real GDP will

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Capital and Financial Markets

Economic Growth and Globalization

International Trade

International Finance

Reading, Understanding, and Creating Graphs

the Miracle of Compound Growth

Present Discounted Value

Deriving the Growth Accounting Formula

Filters