Question 1

The Employment Act of 1946 was an outgrowth of the Great Depression.

Accepted Answer

A) True 
 B)False

Question 2

Figure 11-4
  
-Refer to Figure 11-4.The shift in the demand for bonds from D1 to D2, in Panel (b)will result in a _______ interest rate and _______ investment.

Accepted Answer

A) lower; no change in 
B) higher; lower 
C) lower; lower 
D) higher; higher 
A) lower; no change in 
B) higher; lower 
C) lower; lower 
D) higher; higher

Question 3

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 4

The Fed is structured as an agency of the executive branch, with the Chairman of the Fed answering directly to the President.

Accepted Answer

A) True 
 B)False

Question 5

If inflation is a threat, then the Fed will be expected to engage in

Accepted Answer

A) expansionary monetary policy. 
B) contractionary monetary policy. 
C) policies to increase the money supply. 
D) policies to lower the rate of interest. 
A) expansionary monetary policy. 
B) contractionary monetary policy. 
C) policies to increase the money supply. 
D) policies to lower the rate of interest.

Question 6

If the Fed sells government bonds, bank reserves will _______, leading to a(n)_______ in the money supply.

Accepted Answer

A) decrease; decrease 
B) increase; decrease 
C) increase; increase 
D) decrease; increase 
A) decrease; decrease 
B) increase; decrease 
C) increase; increase 
D) decrease; increase

Question 7

Figure 11-4
  
-Refer to Figure 11-4.If the Fed acts to close the output gap in Panel (a), it would ____ government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and _______ the interest rate.

Accepted Answer

A) sell; lower 
B) buy; increase 
C) buy; lower 
D) sell; increase 
A) sell; lower 
B) buy; increase 
C) buy; lower 
D) sell; increase

Question 8

The impact lag is the time between putting a policy in place and when its effects are felt in the economy.

Accepted Answer

A) True 
 B)False

Question 9

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 10

If GDP is $5,000 billion and the velocity of the M2 money supply is 5, what is the amount of the public's holding in the form of M2?

Accepted Answer

A) $500 
B) $1,000 
C) $1,500 
D) $2,000 
A) $500 
B) $1,000 
C) $1,500 
D) $2,000

Question 11

Contractionary monetary policy by the Fed could include

Accepted Answer

A) lowering the discount rate. 
B) decreasing government transfer payments. 
C) decreasing reserve requirements. 
D) selling government securities in the open market. 
A) lowering the discount rate. 
B) decreasing government transfer payments. 
C) decreasing reserve requirements. 
D) selling government securities in the open market.

Question 12

Figure 11-4
  
-Refer to Figure 11-4.Suppose the economy is initially at Y1 in Panel (a).It is experiencing

Accepted Answer

A) an inflationary gap. 
B) a recessionary gap. 
C) an actual unemployment rate that is less than the natural unemployment rate. 
D) a situation that warrants a decrease in the money supply. 
A) an inflationary gap. 
B) a recessionary gap. 
C) an actual unemployment rate that is less than the natural unemployment rate. 
D) a situation that warrants a decrease in the money supply.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

When interest rates are near zero and traditional monetary policy is ineffective, the Fed or other central bank resorts to a strategy referred to as quantitative easing.What does this strategy involve?

Accepted Answer

A) allowing interest rates to rise slowly by providing substantial reserves for as long as is necessary to avoid inflation 
B) reducing the money supply to raise the interest rates slowly without discouraging spending 
C) keeping interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation and encourage spending 
D) increasing the money supply and interest rates at a constant rate to stimulate economic activity 
A) allowing interest rates to rise slowly by providing substantial reserves for as long as is necessary to avoid inflation 
B) reducing the money supply to raise the interest rates slowly without discouraging spending 
C) keeping interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation and encourage spending 
D) increasing the money supply and interest rates at a constant rate to stimulate economic activity

Question 15

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 16

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

Accepted Answer

A) it is in a recessionary gap. 
B) it is at natural level of employment. 
C) the level of employment is greater than the natural level of employment. 
D) the unemployment rate is negative. 
A) it is in a recessionary gap. 
B) it is at natural level of employment. 
C) the level of employment is greater than the natural level of employment. 
D) the unemployment rate is negative.

Question 17

The delay between the time at which an event occurs and the time at which policymakers become aware of it 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 18

Open-market operations are such a powerful tool of monetary policy that they are seldom used.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

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

Question 20

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.

Exam 26: Monetary Policy and the Fed

The Employment Act of 1946 was an outgrowth of the Great Depression.

Figure 11-4 -Refer to Figure 11-4.The shift in the demand for bonds from D1 to D2, in Panel (b)will result in a _______ interest rate and _______ investment.

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

The Fed is structured as an agency of the executive branch, with the Chairman of the Fed answering directly to the President.

If inflation is a threat, then the Fed will be expected to engage in

If the Fed sells government bonds, bank reserves will _______, leading to a(n)_______ in the money supply.

Figure 11-4 -Refer to Figure 11-4.If the Fed acts to close the output gap in Panel (a), it would ____ government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and _______ the interest rate.

The impact lag is the time between putting a policy in place and when its effects are felt in the economy.

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

If GDP is $5,000 billion and the velocity of the M2 money supply is 5, what is the amount of the public's holding in the form of M2?

Contractionary monetary policy by the Fed could include

Figure 11-4 -Refer to Figure 11-4.Suppose the economy is initially at Y1 in Panel (a).It is experiencing

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

When interest rates are near zero and traditional monetary policy is ineffective, the Fed or other central bank resorts to a strategy referred to as quantitative easing.What does this strategy involve?

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?

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

The delay between the time at which an event occurs and the time at which policymakers become aware of it is called

Open-market operations are such a powerful tool of monetary policy that they are seldom used.

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

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

Economics: the Study of Choice

Confronting Scarcity: Choices in Production

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

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Wages and Employment in Perfect Competition

Interest Rates and the Markets for Capital and Natural Resources

Imperfectly Competitive Markets for Factors of Production

Public Finance and Public Choice

Inflation and Unemployment

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The Economics of the Environment

Inequality, Poverty, and Discrimination

Macroeconomics: the Big Picture

Measuring Total Income and Output

Aggregate Demand and Aggregate Supply

Economic Growth

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Government and Fiscal Policy

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Figure 11-4 -Refer to Figure 11-4.The shift in the demand for bonds from D₁ to D₂, in Panel (b)will result in a _ interest rate and _ investment.

If the Fed sells government bonds, bank reserves will _, leading to a(n)_ in the money supply.

Figure 11-4 -Refer to Figure 11-4.If the Fed acts to close the output gap in Panel (a), it would government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and ___ the interest rate.

Figure 11-4 -Refer to Figure 11-4.Suppose the economy is initially at Y₁ in Panel (a).It is experiencing