Question 1

The Fed increases the money supply by selling bonds.

Accepted Answer

A) True 
 B)False

Question 2

The demand for money can be stated as M = (P * Y)/V.

Accepted Answer

A) True 
 B)False

Question 3

Studies in the 1980s and early 1990s showed that, in general, greater central bank independence

Accepted Answer

A) was associated with lower average inflation. 
B) was associated with lower average inflation and higher average real GDP growth. 
C) was associated with lower average inflation and higher unemployment. 
D) was associated with higher average inflation and higher average real GDP growth. 
A) was associated with lower average inflation. 
B) was associated with lower average inflation and higher average real GDP growth. 
C) was associated with lower average inflation and higher unemployment. 
D) was associated with higher average inflation and higher average real GDP growth.

Question 4

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.

Question 5

Suppose money supply (M)= $500, price level (P)= 2, and real GDP (Y)= $1,000.Calculate the value of velocity using the equation of exchange.

Accepted Answer

A) 1 
B) 2 
C) 4 
D) 5 
A) 1 
B) 2 
C) 4 
D) 5

Question 6

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 7

The equation of exchange determines the supply of money in the economy.

Accepted Answer

A) True 
 B)False

Question 8

When the Fed sells bonds in the open market, in the product market (the aggregate demand- aggregate supply model),

Accepted Answer

A) real GDP will fall and the price level will rise. 
B) real GDP and the price level will rise. 
C) real GDP and the price level will fall. 
D) real GDP will rise and the price level will fall. 
A) real GDP will fall and the price level will rise. 
B) real GDP and the price level will rise. 
C) real GDP and the price level will fall. 
D) real GDP will rise and the price level will fall.

Question 9

Which of the following is a problem with inflation targeting?

Accepted Answer

A) The Fed cannot simultaneously target the inflation rate and move the economy to its potential output. 
B) The amount of time it takes to recognize that inflation has escalated makes it difficult to target inflation in a timely manner. 
C) Targeting inflation in the U.S.has repercussions in global financial markets that could further aggravate inflation in the domestic economy. 
D) Since the inflation rate is not known until after the fact, the Fed would be responding to past economic conditions with policies that have an uncertain length of impact lag. 
A) The Fed cannot simultaneously target the inflation rate and move the economy to its potential output. 
B) The amount of time it takes to recognize that inflation has escalated makes it difficult to target inflation in a timely manner. 
C) Targeting inflation in the U.S.has repercussions in global financial markets that could further aggravate inflation in the domestic economy. 
D) Since the inflation rate is not known until after the fact, the Fed would be responding to past economic conditions with policies that have an uncertain length of impact lag.

Question 10

Figure 11-6
  
-Refer to Figure 11-6.Suppose the economy is operating at "a".Some people observe that an expansionary monetary policy will increase the money supply and ultimately drive the price level to the equilibrium at ______.They rationally adjust their behavior and the _______ curve shifts to the left and _______ becomes the new equilibrium point.

Accepted Answer

A) d; aggregate demand curve; d 
B) b; aggregate demand curve; b 
C) d; short-run aggregate supply curve; d 
D) c; short-run aggregate supply curve; c 
A) d; aggregate demand curve; d 
B) b; aggregate demand curve; b 
C) d; short-run aggregate supply curve; d 
D) c; short-run aggregate supply curve; c

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Which lag stems from the fact that it takes time for people and firms to react to a policy change, to acquire or reduce loans, and to change their level of consumption?

Accepted Answer

A) the implementation lag 
B) the recognition lag 
C) the market lag 
D) the impact lag 
A) the implementation lag 
B) the recognition lag 
C) the market lag 
D) the impact lag

Question 13

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

Accepted Answer

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

The federal funds rate is set directly by the Fed.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following equations correctly describes the quantity equation in terms of percentage rate of change? ? ?means "change in."

Accepted Answer

A) % ?M ÷ % ?V = % ?P*% ?Y 
B) % ?M + % ?V = % ?P + % ?Y 
C) % ?M ÷ % ?V = % ?Y ÷ % ?P 
D) % ?M * % ?V = % ?P *% ?Y 
A) % ?M ÷ % ?V = % ?P*% ?Y 
B) % ?M + % ?V = % ?P + % ?Y 
C) % ?M ÷ % ?V = % ?Y ÷ % ?P 
D) % ?M * % ?V = % ?P *% ?Y

Question 16

The rational expectations argument relies on

Accepted Answer

A) wages and prices being sticky so that changes in expectations about future economic activity and the price level will prevent the short-run aggregate supply curve from shifting quickly to restore long-run equilibrium. 
B) the ability of monetary policy authorities to identify and respond quickly to close output gaps and restore the economy to its long-run equilibrium. 
C) wages and prices being sufficiently flexible so that the change in expectations about future economic activity and the price level will allow the short-run aggregate supply curve to shift quickly to restore long-run equilibrium. 
D) wages and prices being sufficiently flexible so that changes in expectations about future economic activity and the price level will allow the aggregate demand curve to shift quickly to restore long-run equilibrium. 
A) wages and prices being sticky so that changes in expectations about future economic activity and the price level will prevent the short-run aggregate supply curve from shifting quickly to restore long-run equilibrium. 
B) the ability of monetary policy authorities to identify and respond quickly to close output gaps and restore the economy to its long-run equilibrium. 
C) wages and prices being sufficiently flexible so that the change in expectations about future economic activity and the price level will allow the short-run aggregate supply curve to shift quickly to restore long-run equilibrium. 
D) wages and prices being sufficiently flexible so that changes in expectations about future economic activity and the price level will allow the aggregate demand curve to shift quickly to restore long-run equilibrium.

Question 17

Figure 11-2
  
-Refer to Figure 11-2.By shifting the demand curve from D1 to D2, the Fed is exercising ______ monetary policy to _______ interest rates.

Accepted Answer

A) contractionary; lower 
B) expansionary; lower 
C) contractionary; increase 
D) expansionary; increase 
A) contractionary; lower 
B) expansionary; lower 
C) contractionary; increase 
D) expansionary; increase

Question 18

Which of the following statements about the structure of the Fed is an advantage from the perspective of conducting monetary policy?

Accepted Answer

A) The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work very closely with other political institutions. 
B) The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work relatively independently of other political institutions. 
C) The two policymaking bodies of the Fed are small to allow deliberations in private and they work relatively independently of other political institutions. 
D) The two policymaking bodies of the Fed are small to allow members to work closely with other political institutions. 
A) The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work very closely with other political institutions. 
B) The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work relatively independently of other political institutions. 
C) The two policymaking bodies of the Fed are small to allow deliberations in private and they work relatively independently of other political institutions. 
D) The two policymaking bodies of the Fed are small to allow members to work closely with other political institutions.

Question 19

The lag in realizing that a macroeconomic problem exists is called

Accepted Answer

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

Question 20

If inflation is a threat, then the Fed will conduct monetary policy aimed at _______ the interest rate which then will shift aggregate demand to the _______.

Accepted Answer

A) increasing; right 
B) decreasing; right 
C) decreasing; left 
D) increasing; left 
A) increasing; right 
B) decreasing; right 
C) decreasing; left 
D) increasing; left

Exam 26: Monetary Policy and the Fed

The Fed increases the money supply by selling bonds.

The demand for money can be stated as M = (P * Y)/V.

Studies in the 1980s and early 1990s showed that, in general, greater central bank independence

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

Suppose money supply (M)= $500, price level (P)= 2, and real GDP (Y)= $1,000.Calculate the value of velocity using the equation of exchange.

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

The equation of exchange determines the supply of money in the economy.

When the Fed sells bonds in the open market, in the product market (the aggregate demand- aggregate supply model),

Which of the following is a problem with inflation targeting?

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

Which lag stems from the fact that it takes time for people and firms to react to a policy change, to acquire or reduce loans, and to change their level of consumption?

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

The federal funds rate is set directly by the Fed.

Which of the following equations correctly describes the quantity equation in terms of percentage rate of change? ? ?means "change in."

The rational expectations argument relies on

Figure 11-2 -Refer to Figure 11-2.By shifting the demand curve from D1 to D2, the Fed is exercising ______ monetary policy to _______ interest rates.

Which of the following statements about the structure of the Fed is an advantage from the perspective of conducting monetary policy?

The lag in realizing that a macroeconomic problem exists is called

If inflation is a threat, then the Fed will conduct monetary policy aimed at _______ the interest rate which then will shift aggregate demand to 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

Monopoly

The World of Imperfect Competition

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

International Trade

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

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

Macro Inflation and Unemployment

Macro a Brief History of Macroeconomic Thought and Policy

Economic Development

Socialist Economies in Transition

Filters

Figure 11-2 -Refer to Figure 11-2.By shifting the demand curve from D₁ to D₂, the Fed is exercising monetary policy to _ interest rates.

If inflation is a threat, then the Fed will conduct monetary policy aimed at _ the interest rate which then will shift aggregate demand to the _.