Question 1

Under Paul Volcker the Fed reduced the inflation rate in the early 1980s by over 10 percent causing

Accepted Answer

A)  unemployment to decrease and a severe recession to take place. 
B)  housing prices to soar and interest rates to remain high. 
C)  GDP growth rise to 6 percent and consumer confidence to grow. 
D)  None of the answers is correct. 
A)  unemployment to decrease and a severe recession to take place. 
B)  housing prices to soar and interest rates to remain high. 
C)  GDP growth rise to 6 percent and consumer confidence to grow. 
D)  None of the answers is correct.

Question 2

How did the Fed encourage business confidence after the September 11th terrorist attacks?

Accepted Answer

A)  by lowering corporate taxes 
B)  by reducing money supply 
C)  by lending billions to banks 
D)  by putting a moratorium on bank loans 
A)  by lowering corporate taxes 
B)  by reducing money supply 
C)  by lending billions to banks 
D)  by putting a moratorium on bank loans

Question 3

Monetary policy is

Accepted Answer

A)  equally effective in dealing with real shocks and aggregate demand shocks. 
B)  more effective in dealing with real shocks than with aggregate demand shocks. 
C)  less effective in dealing with real shocks than with aggregate demand shocks. 
D)  totally ineffective in dealing with real shocks or aggregate demand shocks. 
A)  equally effective in dealing with real shocks and aggregate demand shocks. 
B)  more effective in dealing with real shocks than with aggregate demand shocks. 
C)  less effective in dealing with real shocks than with aggregate demand shocks. 
D)  totally ineffective in dealing with real shocks or aggregate demand shocks.

Question 4

Reference: Ref 16-3 (Table: Annual Inflation) This table shows inflation data for an economy. During what period did it experience disinflation?

Accepted Answer

A)  2001 to 2002 
B)  2003 to 2005 
C)  2005 to 2006 
D)  1998 to 2000 
A)  2001 to 2002 
B)  2003 to 2005 
C)  2005 to 2006 
D)  1998 to 2000

Question 5

Why do many people think that the Fed overstimulated the money supply in the 1970s?

Accepted Answer

A)  because of a presidential dictate to do so 
B)  to induce a recession 
C)  because of the unemployment associated with the oil crises 
D)  because it was trying to control inflation 
A)  because of a presidential dictate to do so 
B)  to induce a recession 
C)  because of the unemployment associated with the oil crises 
D)  because it was trying to control inflation

Question 6

The Fed's job in manipulating monetary policy is made harder by the fact that

Accepted Answer

A)  monetary authorities do not have a good understanding of how monetary policy works. 
B)  monetary policy is usually pulling the economy in the opposite direction from fiscal policy. 
C)  the Fed operates in real time and information on recessions becomes available with a lag. 
D)  monetary policy is hardly ever effective in influencing business fluctuations. 
A)  monetary authorities do not have a good understanding of how monetary policy works. 
B)  monetary policy is usually pulling the economy in the opposite direction from fiscal policy. 
C)  the Fed operates in real time and information on recessions becomes available with a lag. 
D)  monetary policy is hardly ever effective in influencing business fluctuations.

Question 7

If uncertainty causes people to increase their demand for cash at the same time that the Fed raises money supply growth, then the Fed's action will

Accepted Answer

A)  shift the AD curve further to the right. 
B)  shift the AD curve less to the right. 
C)  shift the AD curve further to the left. 
D)  more effectively move the economy back to the old equilibrium point. 
A)  shift the AD curve further to the right. 
B)  shift the AD curve less to the right. 
C)  shift the AD curve further to the left. 
D)  more effectively move the economy back to the old equilibrium point.

Question 8

The lags associated with monetary policy make its implementation more difficult during

Accepted Answer

A)  recessions only. 
B)  contractions only. 
C)  both expansions and contractions. 
D)  None of the answers is correct. 
A)  recessions only. 
B)  contractions only. 
C)  both expansions and contractions. 
D)  None of the answers is correct.

Question 9

If the Fed reacts to a negative real shock by raising aggregate demand, it can keep the inflation rate stable.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following best describes U.S. economic conditions in the 1980s?

Accepted Answer

A)  Deflation occurred because the Fed reacted too much to AD shocks. 
B)  High inflation occurred because the Fed reacted too little to AD shocks. 
C)  High real growth occurred because of the deliberate actions of the Fed. 
D)  Disinflation occurred because of the deliberate actions of the Fed. 
A)  Deflation occurred because the Fed reacted too much to AD shocks. 
B)  High inflation occurred because the Fed reacted too little to AD shocks. 
C)  High real growth occurred because of the deliberate actions of the Fed. 
D)  Disinflation occurred because of the deliberate actions of the Fed.

Question 11

During the late 1970s and first part of the 1980s, the Fed seemed to react in a counter-intuitive manner to the 1970s oil shocks. Explain the reasoning behind the Fed's policy decisions and the effect that they had on the economy.

Accepted Answer

The negative supply shocks of the 1970s

Question 12

When the price level actually falls, what is the economy experiencing?

Accepted Answer

A)  deflation 
B)  disinflation 
C)  stagflation 
D)  devaluation 
A)  deflation 
B)  disinflation 
C)  stagflation 
D)  devaluation

Question 13

Suppose the spending habits of consumers suddenly change so that consumption growth increases. What should the central bank do to restore the economy back to the old equilibrium point? Explain your answer with the aid of a dynamic AS-AD diagram.

Accepted Answer

@#IMG-DLM& The increase in consumption growth is a

Question 14

The disinflation of the 1980s led to

Accepted Answer

A)  high unemployment. 
B)  sticky wages and prices. 
C)  reduced credibility for the Federal Reserve. 
D)  Each of these answers is correct. 
A)  high unemployment. 
B)  sticky wages and prices. 
C)  reduced credibility for the Federal Reserve. 
D)  Each of these answers is correct.

Question 15

What philosophy of economic adjustment is against tying the hands of the central bank?

Accepted Answer

A)  rules 
B)  discretion 
C)  prudence 
D)  inclination 
A)  rules 
B)  discretion 
C)  prudence 
D)  inclination

Question 16

The Fed can only boost market confidence if it is a credible Fed.

Accepted Answer

A) True 
 B)False

Question 17

Suppose the Fed reacts to an economic shock and quickly restores the economy to the Solow growth rate. The shock is most likely

Accepted Answer

A)  an aggregate demand shock. 
B)  a real shock. 
C)  a productivity shock. 
D)  a shock affecting consumer and investor expectations. 
A)  an aggregate demand shock. 
B)  a real shock. 
C)  a productivity shock. 
D)  a shock affecting consumer and investor expectations.

Question 18

A significant real shock in an economy can result in I. a leftward shift of the Solow growth curve. II. a leftward shift of the short-run aggregate supply curve. III. consumer pessimism and a leftward shift of the aggregate demand curve.

Accepted Answer

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

Question 19

Monetary policy is much less effective at combating a real shock than an aggregate demand shock.

Accepted Answer

A) True 
 B)False

Question 20

What strict rule did Milton Friedman believe would provide for greater price stability?

Accepted Answer

A)  GDP should not go above 5 percent. 
B)  Unemployment should never be above 10 percent. 
C)  Inflation should stay below 3 percent a year. 
D)  Money supply should grow by 3 percent annually. 
A)  GDP should not go above 5 percent. 
B)  Unemployment should never be above 10 percent. 
C)  Inflation should stay below 3 percent a year. 
D)  Money supply should grow by 3 percent annually.

Exam 33: Transmission and Amplification Mechanisms

Under Paul Volcker the Fed reduced the inflation rate in the early 1980s by over 10 percent causing

How did the Fed encourage business confidence after the September 11th terrorist attacks?

Monetary policy is

Reference: Ref 16-3 (Table: Annual Inflation) This table shows inflation data for an economy. During what period did it experience disinflation?

Why do many people think that the Fed overstimulated the money supply in the 1970s?

The Fed's job in manipulating monetary policy is made harder by the fact that

If uncertainty causes people to increase their demand for cash at the same time that the Fed raises money supply growth, then the Fed's action will

The lags associated with monetary policy make its implementation more difficult during

If the Fed reacts to a negative real shock by raising aggregate demand, it can keep the inflation rate stable.

Which of the following best describes U.S. economic conditions in the 1980s?

During the late 1970s and first part of the 1980s, the Fed seemed to react in a counter-intuitive manner to the 1970s oil shocks. Explain the reasoning behind the Fed's policy decisions and the effect that they had on the economy.

When the price level actually falls, what is the economy experiencing?

Suppose the spending habits of consumers suddenly change so that consumption growth increases. What should the central bank do to restore the economy back to the old equilibrium point? Explain your answer with the aid of a dynamic AS-AD diagram.

The disinflation of the 1980s led to

What philosophy of economic adjustment is against tying the hands of the central bank?

The Fed can only boost market confidence if it is a credible Fed.

Suppose the Fed reacts to an economic shock and quickly restores the economy to the Solow growth rate. The shock is most likely

A significant real shock in an economy can result in I. a leftward shift of the Solow growth curve. II. a leftward shift of the short-run aggregate supply curve. III. consumer pessimism and a leftward shift of the aggregate demand curve.

Monetary policy is much less effective at combating a real shock than an aggregate demand shock.

What strict rule did Milton Friedman believe would provide for greater price stability?

The Big Ideas in Economics

The Power of Trade and Comparative Advantage

Business Fluctuations: Aggregate Demand and Supply

Equilibrium: How Supply and Demand Determine Prices

Elasticity and Its Applications

Taxes and Subsidies

The Price System: Signals, Speculation, and Prediction

Price Ceilings and Floors

International Trade

Externalities: When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination and Pricing Strategy

Oligopoly and Game Theory

Competing for Monopoly: the Economics of Network Goods

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Asymmetric Information: Moral Hazard and Adverse Selection

Consumer Choice

Gdp and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth, Capital Accumulation, and the Economics of Ideas: Catching up Vs the Cutting Edge

Saving, Investment, and the Financial System

Supply and Demand

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

The Federal Reserve System and Open Market Operations

Monetary Policy

The Federal Budget: Taxes and Spending

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