Question 1

If expectations are adaptive, then what is the long-run danger of an activist monetary policy?

Accepted Answer

A)  high inflation and high unemployment 
B)  stagnant real gross domestic product GDP) and high inflation 
C)  underestimated inflation and high unemployment 
D)  low real gross domestic product GDP) growth and low unemployment 
E)  sticky prices and high unemployment 
A)  high inflation and high unemployment 
B)  stagnant real gross domestic product GDP) and high inflation 
C)  underestimated inflation and high unemployment 
D)  low real gross domestic product GDP) growth and low unemployment 
E)  sticky prices and high unemployment

Question 2

Expectations

Accepted Answer

A)  have no effect on monetary policy. 
B)  have no effect on consumers' spending habits. 
C)  play a role in fiscal policy but not in monetary policy. 
D)  can dampen the effects of monetary policy. 
E)  are easily studied in economics. 
A)  have no effect on monetary policy. 
B)  have no effect on consumers' spending habits. 
C)  play a role in fiscal policy but not in monetary policy. 
D)  can dampen the effects of monetary policy. 
E)  are easily studied in economics.

Question 3

Rational expectations theory sees errors in predicting inflation as

Accepted Answer

A)  common. 
B)  rare. 
C)  impossible. 
D)  random. 
E)  expected. 
A)  common. 
B)  rare. 
C)  impossible. 
D)  random. 
E)  expected.

Question 4

When an employer is forced to increase wages at the same rate of inflation, the

Accepted Answer

A)  worker is receiving a cost-of-living adjustment. 
B)  economy is experiencing stagflation. 
C)  economy is experiencing hyperinflation. 
D)  economy is experiencing disinflation. 
E)  effects of expansionary monetary policy are amplified. 
A)  worker is receiving a cost-of-living adjustment. 
B)  economy is experiencing stagflation. 
C)  economy is experiencing hyperinflation. 
D)  economy is experiencing disinflation. 
E)  effects of expansionary monetary policy are amplified.

Question 5

The widespread problems in financial markets during the Great Recession negatively affected key institutions in the macroeconomy. In addition, the financial regulations that were put in place restricted banks’ ability to lend at levels equal to those in effect prior to 2008. This resulted in a shift
________ of the ________ curve.

Accepted Answer

A)  leftward; aggregate demand 
B)  leftward; long-run aggregate supply 
C)  rightward; long-run aggregate supply 
D)  rightward; aggregate demand 
E)  rightward; short-run aggregate supply 
A)  leftward; aggregate demand 
B)  leftward; long-run aggregate supply 
C)  rightward; long-run aggregate supply 
D)  rightward; aggregate demand 
E)  rightward; short-run aggregate supply

Question 6

According to the Fisher equation, if a bank extends a loan for 3 percent and the inflation rate ends up
being 5 percent, the ________ interest rate is ________ percent.

Accepted Answer

A)  nominal; 2 
B)  real; 2 
C)  nominal; -2 
D)  real;-2 
E)  nominal; 8 
A)  nominal; 2 
B)  real; 2 
C)  nominal; -2 
D)  real;-2 
E)  nominal; 8

Question 7

How did adaptive expectations theory revolutionize the way economists think about monetary policy?

Accepted Answer

A)  It taught that monetary policy should follow the Phillips curve model. 
B)  It implied that monetary policy may not have real effects in the short run. 
C)  It revealed that monetary policy may not have real effects in the long run. 
D)  It implied that monetary policy must be expected to provide a stimulus. 
E)  It taught that monetary policy should develop consistent expectations. 
A)  It taught that monetary policy should follow the Phillips curve model. 
B)  It implied that monetary policy may not have real effects in the short run. 
C)  It revealed that monetary policy may not have real effects in the long run. 
D)  It implied that monetary policy must be expected to provide a stimulus. 
E)  It taught that monetary policy should develop consistent expectations.

Question 8

Injecting new money into the economy eventually causes

Accepted Answer

A)  a recession. 
B)  deflation. 
C)  stagflation. 
D)  unemployment. 
E)  inflation. 
A)  a recession. 
B)  deflation. 
C)  stagflation. 
D)  unemployment. 
E)  inflation.

Question 9

A ________ the aggregate demand curve is shown as a ________ the short-run Phillips curve.

Accepted Answer

A)  movement along; shift of 
B)  shift of; movement along 
C)  shift of; shift of 
D)  movement along; movement along 
E)  shift of; rotation of 
A)  movement along; shift of 
B)  shift of; movement along 
C)  shift of; shift of 
D)  movement along; movement along 
E)  shift of; rotation of

Question 10

When the Fed sells bonds to financial institutions, new money moves directly

Accepted Answer

A)  out of the loanable funds market. 
B)  into the hands of consumers. 
C)  into the loanable funds market. 
D)  out of the hands of consumers. 
E)  into short-run aggregate supply. 
A)  out of the loanable funds market. 
B)  into the hands of consumers. 
C)  into the loanable funds market. 
D)  out of the hands of consumers. 
E)  into short-run aggregate supply.

Question 11

Which of the following best describes how contractionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

Accepted Answer

A)  Contractionary monetary policy directly pulls money out of the loanable funds market. This lowers the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the right. 
B)  Contractionary monetary policy directly puts money into the loanable funds market. This lowers the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the right. 
C)  Contractionary monetary policy directly puts money into the loanable funds market. This raises the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the right. 
D)  Contractionary monetary policy directly puts money into the loanable funds market. This lowers the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the left. 
E)  Contractionary monetary policy directly pulls money out of the loanable funds market. This raises the interest rate, which provides a lesser incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the left. 
A)  Contractionary monetary policy directly pulls money out of the loanable funds market. This lowers the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the right. 
B)  Contractionary monetary policy directly puts money into the loanable funds market. This lowers the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the right. 
C)  Contractionary monetary policy directly puts money into the loanable funds market. This raises the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the right. 
D)  Contractionary monetary policy directly puts money into the loanable funds market. This lowers the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the left. 
E)  Contractionary monetary policy directly pulls money out of the loanable funds market. This raises the interest rate, which provides a lesser incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the left.

Question 12

The Federal Reserve's response to the Great Recession was an attempt to

Accepted Answer

A)  increase aggregate demand. 
B)  decrease aggregate demand. 
C)  decrease the price level. 
D)  increase short-run aggregate supply. 
E)  decrease short-run aggregate supply. 
A)  increase aggregate demand. 
B)  decrease aggregate demand. 
C)  decrease the price level. 
D)  increase short-run aggregate supply. 
E)  decrease short-run aggregate supply.

Question 13

Explain the theory behind the traditional short-run Phillips curve and draw the traditional short-run Phillips curve.

Accepted Answer

The theory behind the traditional short-

Question 14

Only the short-run Phillips curve is downward sloping because

Accepted Answer

A)  in the long run, prices adjust, eliminating the relationship between inflation and unemployment. 
B)  in the long run, prices are sticky, eliminating the relationship between inflation and unemployment. 
C)  central banks have no influence over the economy in the short run. 
D)  central banks only have influence over the economy in the long run. 
E)  long-run effects of monetary policy are negated by fiscal policy. 
A)  in the long run, prices adjust, eliminating the relationship between inflation and unemployment. 
B)  in the long run, prices are sticky, eliminating the relationship between inflation and unemployment. 
C)  central banks have no influence over the economy in the short run. 
D)  central banks only have influence over the economy in the long run. 
E)  long-run effects of monetary policy are negated by fiscal policy.

Question 15

Which of the following statements would be true if the short-run Phillips curve relationship held in the long run?

Accepted Answer

A)  A central bank has no control over unemployment. 
B)  Only monetary policy, not fiscal policy, has any real effects on the economy. 
C)  Prices fully adjust in the long run. 
D)  A central bank can always steer an economy out of recession, simply through creating inflation. 
E)  Expansionary monetary policy can decrease inflation at the expense of unemployment. 
A)  A central bank has no control over unemployment. 
B)  Only monetary policy, not fiscal policy, has any real effects on the economy. 
C)  Prices fully adjust in the long run. 
D)  A central bank can always steer an economy out of recession, simply through creating inflation. 
E)  Expansionary monetary policy can decrease inflation at the expense of unemployment.

Question 16

Contractionary monetary policy ________ interest rates, by ________ the ________.

Accepted Answer

A)  raises; decreasing; supply of loanable funds 
B)  raises; increasing; demand for loanable funds 
C)  lowers; decreasing; short-run aggregate supply 
D)  lowers; increasing; aggregate demand 
E)  raises; increasing; long-run aggregate supply 
A)  raises; decreasing; supply of loanable funds 
B)  raises; increasing; demand for loanable funds 
C)  lowers; decreasing; short-run aggregate supply 
D)  lowers; increasing; aggregate demand 
E)  raises; increasing; long-run aggregate supply

Question 17

Which of the following statements best describes monetary policy during the Great Recession?

Accepted Answer

A)  During the wake of the Great Recession, there were significant expansionary monetary policy interventions. 
B)  During the wake of the Great Recession, there were significant contractionary monetary policy interventions. 
C)  During the wake of the Great Recession, there was a lack of monetary policy interventions. 
D)  Monetary policy during the Great Recession was completely unexpected. 
E)  Monetary policy during the Great Recession had no impact in the short run. 
A)  During the wake of the Great Recession, there were significant expansionary monetary policy interventions. 
B)  During the wake of the Great Recession, there were significant contractionary monetary policy interventions. 
C)  During the wake of the Great Recession, there was a lack of monetary policy interventions. 
D)  Monetary policy during the Great Recession was completely unexpected. 
E)  Monetary policy during the Great Recession had no impact in the short run.

Question 18

Expansionary monetary policy occurs when

Accepted Answer

A)  a central bank acts to decrease the money supply in an effort to stimulate the economy. 
B)  Congress and the president increase taxes in an effort to stimulate the economy. 
C)  Congress and the president decrease taxes in an effort to stimulate the economy. 
D)  a central bank acts to increase the money supply in an effort to stimulate the economy. 
E)  a central bank acts to increase government spending in an effort to stimulate the economy. 
A)  a central bank acts to decrease the money supply in an effort to stimulate the economy. 
B)  Congress and the president increase taxes in an effort to stimulate the economy. 
C)  Congress and the president decrease taxes in an effort to stimulate the economy. 
D)  a central bank acts to increase the money supply in an effort to stimulate the economy. 
E)  a central bank acts to increase government spending in an effort to stimulate the economy.

Question 19

What did the Federal Reserve do in response to the Great Recession?

Accepted Answer

A)  It conducted open market purchases to drive up interest rates. 
B)  It conducted open market selling to drive up interest rates. 
C)  It conducted open market purchases to drive down interest rates. 
D)  It conducted open market selling to drive down interest rates. 
E)  It decreased the reserve requirements to drive up interest rates. 
A)  It conducted open market purchases to drive up interest rates. 
B)  It conducted open market selling to drive up interest rates. 
C)  It conducted open market purchases to drive down interest rates. 
D)  It conducted open market selling to drive down interest rates. 
E)  It decreased the reserve requirements to drive up interest rates.

Question 20

Over the past five years, you have recorded the inflation rate to be 3 percent, 4 percent, 3 percent, 4 percent, and 3 percent, respectively. According to rational expectations theory, what would market participants expect inflation to be next year, and why?

Accepted Answer

Rational expectations theory holds that

If expectations are adaptive, then what is the long-run danger of an activist monetary policy?

Expectations

Rational expectations theory sees errors in predicting inflation as

When an employer is forced to increase wages at the same rate of inflation, the

According to the Fisher equation, if a bank extends a loan for 3 percent and the inflation rate ends up being 5 percent, the interest rate is percent.

How did adaptive expectations theory revolutionize the way economists think about monetary policy?

Injecting new money into the economy eventually causes

A the aggregate demand curve is shown as a the short-run Phillips curve.

When the Fed sells bonds to financial institutions, new money moves directly

Which of the following best describes how contractionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

The Federal Reserve's response to the Great Recession was an attempt to

Explain the theory behind the traditional short-run Phillips curve and draw the traditional short-run Phillips curve.

Only the short-run Phillips curve is downward sloping because

Which of the following statements would be true if the short-run Phillips curve relationship held in the long run?

Contractionary monetary policy interest rates, by the .

Which of the following statements best describes monetary policy during the Great Recession?

Expansionary monetary policy occurs when

What did the Federal Reserve do in response to the Great Recession?

Over the past five years, you have recorded the inflation rate to be 3 percent, 4 percent, 3 percent, 4 percent, and 3 percent, respectively. According to rational expectations theory, what would market participants expect inflation to be next year, and why?

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Market Outcomes and Tax Incidence

Price Controls

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

The Price Level and Inflation

Savings, Interest Rates, and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

The Great Recession, the Great Depression, and Great Macroeconomic Debates

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

International Trade

International Finance

Filters

Exam 18: Monetary Policy Learning Objectives

If expectations are adaptive, then what is the long-run danger of an activist monetary policy?

Expectations

Rational expectations theory sees errors in predicting inflation as

When an employer is forced to increase wages at the same rate of inflation, the

According to the Fisher equation, if a bank extends a loan for 3 percent and the inflation rate ends up being 5 percent, the ________ interest rate is ________ percent.

How did adaptive expectations theory revolutionize the way economists think about monetary policy?

Injecting new money into the economy eventually causes

A ________ the aggregate demand curve is shown as a ________ the short-run Phillips curve.

When the Fed sells bonds to financial institutions, new money moves directly

Which of the following best describes how contractionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

The Federal Reserve's response to the Great Recession was an attempt to

Explain the theory behind the traditional short-run Phillips curve and draw the traditional short-run Phillips curve.

Only the short-run Phillips curve is downward sloping because

Which of the following statements would be true if the short-run Phillips curve relationship held in the long run?

Contractionary monetary policy ________ interest rates, by ________ the ________.

Which of the following statements best describes monetary policy during the Great Recession?

Expansionary monetary policy occurs when

What did the Federal Reserve do in response to the Great Recession?

Over the past five years, you have recorded the inflation rate to be 3 percent, 4 percent, 3 percent, 4 percent, and 3 percent, respectively. According to rational expectations theory, what would market participants expect inflation to be next year, and why?

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Market Outcomes and Tax Incidence

Price Controls

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

The Price Level and Inflation

Savings, Interest Rates, and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

The Great Recession, the Great Depression, and Great Macroeconomic Debates

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

International Trade

International Finance

Filters

According to the Fisher equation, if a bank extends a loan for 3 percent and the inflation rate ends up being 5 percent, the interest rate is percent.

A the aggregate demand curve is shown as a the short-run Phillips curve.

Contractionary monetary policy interest rates, by the .