Question 1

If a country's central bank becomes more credible and announces a monetary contraction in advance, then

Accepted Answer

A)  more firms will invest now before the threat materializes. 
B)  slower wages will fall. 
C)  wages will rise in anticipation of the fall in incomes. 
D)  unemployment costs will be lower. 
A)  more firms will invest now before the threat materializes. 
B)  slower wages will fall. 
C)  wages will rise in anticipation of the fall in incomes. 
D)  unemployment costs will be lower.

Question 2

If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by

Accepted Answer

A)  decreasing money supply to spur the economy out of the recession. 
B)  increasing money supply, lowering real interest rates, and encouraging borrowing. 
C)  increasing government expenditures to spur the economy out of the recession. 
D)  decreasing corporate taxes to encourage firms to increase their spending. 
A)  decreasing money supply to spur the economy out of the recession. 
B)  increasing money supply, lowering real interest rates, and encouraging borrowing. 
C)  increasing government expenditures to spur the economy out of the recession. 
D)  decreasing corporate taxes to encourage firms to increase their spending.

Question 3

In the dynamic AD-AS diagram, an increase in the growth rate of the money supply causes

Accepted Answer

A)  a shift of the aggregate demand curve to the left. 
B)  a shift of the aggregate demand curve to the right. 
C)  a downward movement along the aggregate demand curve. 
D)  an upward movement along the aggregate demand curve. 
A)  a shift of the aggregate demand curve to the left. 
B)  a shift of the aggregate demand curve to the right. 
C)  a downward movement along the aggregate demand curve. 
D)  an upward movement along the aggregate demand curve.

Question 4

In the best case scenario, the Federal Reserve is most successful at counteracting a negative

Accepted Answer

A)  AD shock. 
B)  SRAS shock. 
C)  shock to the Solow growth curve. 
D)  None of the answers is correct. 
A)  AD shock. 
B)  SRAS shock. 
C)  shock to the Solow growth curve. 
D)  None of the answers is correct.

Question 5

The problem associated with too much expansionary monetary policy is

Accepted Answer

A)  additional inflation. 
B)  additional unemployment. 
C)  higher interest rates. 
D)  reduced economic growth. 
A)  additional inflation. 
B)  additional unemployment. 
C)  higher interest rates. 
D)  reduced economic growth.

Question 6

If the Fed reacts to a series of negative real shocks by raising money growth every time,

Accepted Answer

A)  the inflation rate will increase over time. 
B)  the inflation rate will decrease over time. 
C)  deflation will occur. 
D)  the inflation rate will remain unchanged. 
A)  the inflation rate will increase over time. 
B)  the inflation rate will decrease over time. 
C)  deflation will occur. 
D)  the inflation rate will remain unchanged.

Question 7

When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence?

Accepted Answer

A)  Inflation remains high. 
B)  Growth stays positive. 
C)  Interest rates continue to rise. 
D)  Unemployment is high. 
A)  Inflation remains high. 
B)  Growth stays positive. 
C)  Interest rates continue to rise. 
D)  Unemployment is high.

Question 8

Deflation has occurred if the economy's price index for this year is lower than the same economy's price index for last year.

Accepted Answer

A) True 
 B)False

Question 9

The bandwagon effect causes investment to be

Accepted Answer

A)  evenly distributed over time. 
B)  unevenly distributed over time. 
C)  more responsive to monetary policy changes during recessions. 
D)  more responsive to monetary policy changes during expansions. 
A)  evenly distributed over time. 
B)  unevenly distributed over time. 
C)  more responsive to monetary policy changes during recessions. 
D)  more responsive to monetary policy changes during expansions.

Question 10

The housing boom of the 2000s caused a

Accepted Answer

A)  negative aggregate demand shock. 
B)  positive aggregate demand shock. 
C)  negative real shock. 
D)  positive real shock. 
A)  negative aggregate demand shock. 
B)  positive aggregate demand shock. 
C)  negative real shock. 
D)  positive real shock.

Question 11

What was Milton Friedman's reasoning behind the 3 percent growth rule for money supply?

Accepted Answer

A)  monetary neutrality 
B)  increasing long-run economic growth rates 
C)  minimization of negative supply shocks 
D)  price stability 
A)  monetary neutrality 
B)  increasing long-run economic growth rates 
C)  minimization of negative supply shocks 
D)  price stability

Question 12

In the short run, if the Fed responds to a negative real shock by raising the growth rate of money supply, inflation will be

Accepted Answer

A)  lower than the rate without responding to the negative shock. 
B)  higher than the rate without responding to the negative shock. 
C)  the same as the rate without responding to the negative shock. 
D)  lower or higher than the rate without responding to the negative shock, depending on the size of money supply growth. 
A)  lower than the rate without responding to the negative shock. 
B)  higher than the rate without responding to the negative shock. 
C)  the same as the rate without responding to the negative shock. 
D)  lower or higher than the rate without responding to the negative shock, depending on the size of money supply growth.

Question 13

Figure: Monetary Policy and Demand Shocks   Reference: Ref 16-2 (Figure: Monetary Policy and Demand Shocks) The original real growth rate of the economy was 3 percent when a negative aggregate demand shock caused a shift of the AD curve from AD1 to AD2. As a result of the Fed's policy response, the AD curve shifted to AD5 in the short run. Which of the following is TRUE about the Fed's policy response?

Accepted Answer

A)  The Fed responded too little to the shock. 
B)  The Fed responded too much to the shock. 
C)  The Fed provided just the right amount of response to the shock. 
D)  The Fed was too fast in responding to the shock. 
A)  The Fed responded too little to the shock. 
B)  The Fed responded too much to the shock. 
C)  The Fed provided just the right amount of response to the shock. 
D)  The Fed was too fast in responding to the shock.

Question 14

Bringing inflation down is more difficult than raising it because wages and prices are sticky downward.

Accepted Answer

A) True 
 B)False

Question 15

Monetary policy is more effective in changing real GDP growth if the policy is more credible.

Accepted Answer

A) True 
 B)False

Question 16

A potential problem with expansionary monetary policy is that banks can

Accepted Answer

A)  be loaned up prior to open-market operations. 
B)  be unwilling to lend. 
C)  decide that a recession is best for the economy. 
D)  Each of these answers is correct. 
A)  be loaned up prior to open-market operations. 
B)  be unwilling to lend. 
C)  decide that a recession is best for the economy. 
D)  Each of these answers is correct.

Question 17

After September 11, 2001, the Fed resisted the temptation to loan billions of dollars to banks and boost short-run confidence.

Accepted Answer

A) True 
 B)False

Question 18

The Fed dealt with high inflation in the 1980s by

Accepted Answer

A)  reducing the money supply and causing aggregate demand to fall. 
B)  raising the money supply and causing aggregate demand to rise. 
C)  reducing the money supply and causing aggregate demand to rise. 
D)  raising the money supply and causing aggregate demand to fall. 
A)  reducing the money supply and causing aggregate demand to fall. 
B)  raising the money supply and causing aggregate demand to rise. 
C)  reducing the money supply and causing aggregate demand to rise. 
D)  raising the money supply and causing aggregate demand to fall.

Question 19

When people believe that a central bank will stick with its policy, monetary policy is likely to have

Accepted Answer

A)  high credibility. 
B)  low credibility. 
C)  a high bandwagon effect. 
D)  a low bandwagon effect. 
A)  high credibility. 
B)  low credibility. 
C)  a high bandwagon effect. 
D)  a low bandwagon effect.

Question 20

What is a possible reason for the Fed's inability to prevent a recession?

Accepted Answer

A)  The Fed has too much power over M1 and M2 and can flood the money supply. 
B)  Much of the data about the economy is unknown when the Fed is making policy. 
C)  Firms and individuals do not often understand the goals of the Fed. 
D)  The Fed often performs complex and conflicting maneuvers at the same time. 
A)  The Fed has too much power over M1 and M2 and can flood the money supply. 
B)  Much of the data about the economy is unknown when the Fed is making policy. 
C)  Firms and individuals do not often understand the goals of the Fed. 
D)  The Fed often performs complex and conflicting maneuvers at the same time.

Exam 33: Transmission and Amplification Mechanisms

If a country's central bank becomes more credible and announces a monetary contraction in advance, then

If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by

In the dynamic AD-AS diagram, an increase in the growth rate of the money supply causes

In the best case scenario, the Federal Reserve is most successful at counteracting a negative

The problem associated with too much expansionary monetary policy is

If the Fed reacts to a series of negative real shocks by raising money growth every time,

When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence?

Deflation has occurred if the economy's price index for this year is lower than the same economy's price index for last year.

The bandwagon effect causes investment to be

The housing boom of the 2000s caused a

What was Milton Friedman's reasoning behind the 3 percent growth rule for money supply?

In the short run, if the Fed responds to a negative real shock by raising the growth rate of money supply, inflation will be

Bringing inflation down is more difficult than raising it because wages and prices are sticky downward.

Monetary policy is more effective in changing real GDP growth if the policy is more credible.

A potential problem with expansionary monetary policy is that banks can

After September 11, 2001, the Fed resisted the temptation to loan billions of dollars to banks and boost short-run confidence.

The Fed dealt with high inflation in the 1980s by

When people believe that a central bank will stick with its policy, monetary policy is likely to have

What is a possible reason for the Fed's inability to prevent a recession?

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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