Question 1

The Fed must spend time gathering and interpreting economic data, making it difficult to immediately correct a decrease in AD.

Accepted Answer

A) True 
 B)False

Question 2

The key to less painful disinflation is reducing nominal wage flexibility.

Accepted Answer

A) True 
 B)False

Question 3

Between 1997 and 2006, U.S. housing prices

Accepted Answer

A)  remained relatively constant. 
B)  decreased rapidly. 
C)  increased slowly. 
D)  increased rapidly. 
A)  remained relatively constant. 
B)  decreased rapidly. 
C)  increased slowly. 
D)  increased rapidly.

Question 4

Figure: Monetary Policy   Reference: Ref 16-1 (Figure: Monetary Policy) Assume that the economy is initially at Point Y. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend,

Accepted Answer

A)  the Fed action would be magnified and the economy would move to Point X. 
B)  the Fed action would be nullified and the economy would remain at Point Y. 
C)  the Fed action would be partially effective and the economy would move to Point Z. 
D)  the Solow growth curve would shift to the left. 
A)  the Fed action would be magnified and the economy would move to Point X. 
B)  the Fed action would be nullified and the economy would remain at Point Y. 
C)  the Fed action would be partially effective and the economy would move to Point Z. 
D)  the Solow growth curve would shift to the left.

Question 5

When uncertainty causes a delay in investment activity, it leads to a

Accepted Answer

A)  scarcity of information. 
B)  delay in action by the Fed. 
C)  coordination failure. 
D)  bandwagon effect. 
A)  scarcity of information. 
B)  delay in action by the Fed. 
C)  coordination failure. 
D)  bandwagon effect.

Question 6

Which of these statements is TRUE regarding the effects of monetary policy when a real shock occurs?

Accepted Answer

A)  Monetary policy can always be used to simultaneously achieve a high real growth rate and a low inflation rate. 
B)  Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate. 
C)  Monetary policy can be used only to change the real growth rate but not the inflation rate. 
D)  Monetary policy can be used only to change the inflation rate but not the real growth rate. 
A)  Monetary policy can always be used to simultaneously achieve a high real growth rate and a low inflation rate. 
B)  Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate. 
C)  Monetary policy can be used only to change the real growth rate but not the inflation rate. 
D)  Monetary policy can be used only to change the inflation rate but not the real growth rate.

Question 7

An increase in money growth will cause the inflation rate to increase in

Accepted Answer

A)  the short run only. 
B)  the long run only. 
C)  both the short run and the long run. 
D)  neither the short run nor the long run. 
A)  the short run only. 
B)  the long run only. 
C)  both the short run and the long run. 
D)  neither the short run nor the long run.

Question 8

Briefly explain why monetary policy cannot beat both inflation and unemployment at the same time.

Accepted Answer

Monetary policy is a demand-side tool th

Question 9

A central bank can always keep an economy at the Solow growth rate by exactly offsetting any shock to aggregate demand.

Accepted Answer

A) True 
 B)False

Question 10

In the best case scenario, the Federal Reserve can increase the money supply after a negative shock to AD and restore the growth rate.

Accepted Answer

A) True 
 B)False

Question 11

Uncertainty drives people away from investment projects.

Accepted Answer

A) True 
 B)False

Question 12

If the Fed attempts to pop a bubble on a boom such as housing, what sector of the economy is it most sure of having the ability to influence?

Accepted Answer

A)  residential real estate 
B)  residential and commercial real estate 
C)  the GDP of the broader economy 
D)  consumer spending in general 
A)  residential real estate 
B)  residential and commercial real estate 
C)  the GDP of the broader economy 
D)  consumer spending in general

Question 13

How can the Fed offset a positive shock to aggregate demand?

Accepted Answer

A)  Increase the growth rate of the money supply. 
B)  Decrease the growth rate of the money supply. 
C)  Increase the growth rate of government spending. 
D)  Decrease the growth rate of government spending. 
A)  Increase the growth rate of the money supply. 
B)  Decrease the growth rate of the money supply. 
C)  Increase the growth rate of government spending. 
D)  Decrease the growth rate of government spending.

Question 14

If Alan Greenspan had reduced the money supply to limit the housing bubble, the result would have been a

Accepted Answer

A)  limiting of how high house values rose. 
B)  less significant recession than eventually occurred. 
C)  slowdown in overall economic growth. 
D)  Each of these answers is correct. 
A)  limiting of how high house values rose. 
B)  less significant recession than eventually occurred. 
C)  slowdown in overall economic growth. 
D)  Each of these answers is correct.

Question 15

Figure: Monetary Policy and Demand Shocks   Reference: Ref 16-2 (Figure: Monetary Policy and Demand Shocks) The real growth rate in this economy is 3 percent when a positive aggregate demand shock shifts the AD curve from AD1 to AD4. The correct monetary policy response is to

Accepted Answer

A)  reduce money supply growth, so that the AD curve shifts back to AD1. 
B)  reduce money supply growth, so that the AD curve remains at AD4. 
C)  increase money supply growth, so that the AD curve shifts to AD3. 
D)  increase money supply growth, so that the AD curve shifts to AD5. 
A)  reduce money supply growth, so that the AD curve shifts back to AD1. 
B)  reduce money supply growth, so that the AD curve remains at AD4. 
C)  increase money supply growth, so that the AD curve shifts to AD3. 
D)  increase money supply growth, so that the AD curve shifts to AD5.

Question 16

If the Federal Reserve responds to a negative real shock with a decrease in money growth, the Federal Reserve's response will cause inflation to

Accepted Answer

A)  remain constant. 
B)  decrease. 
C)  increase by less than it otherwise would have. 
D)  increase by more than it otherwise would have. 
A)  remain constant. 
B)  decrease. 
C)  increase by less than it otherwise would have. 
D)  increase by more than it otherwise would have.

Question 17

A central bank has market credibility when it is expected to stick with its policy.

Accepted Answer

A) True 
 B)False

Question 18

1997-2006 boom, they felt wealthier and

Accepted Answer

A)  saved more. 
B)  spent more. 
C)  worked more. 
D)  spent less. 
A)  saved more. 
B)  spent more. 
C)  worked more. 
D)  spent less.

Question 19

The supporters of discretionary monetary policy want to see the course of the economy guided by certain targets.

Accepted Answer

A) True 
 B)False

Question 20

An economy where the Central Bank overstimulates aggregate demand will suffer from

Accepted Answer

A)  inflation. 
B)  unemployment. 
C)  increases in money supply. 
D)  deflation. 
A)  inflation. 
B)  unemployment. 
C)  increases in money supply. 
D)  deflation.

Exam 33: Transmission and Amplification Mechanisms

The Fed must spend time gathering and interpreting economic data, making it difficult to immediately correct a decrease in AD.

The key to less painful disinflation is reducing nominal wage flexibility.

Between 1997 and 2006, U.S. housing prices

Figure: Monetary Policy Reference: Ref 16-1 (Figure: Monetary Policy) Assume that the economy is initially at Point Y. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend,

When uncertainty causes a delay in investment activity, it leads to a

Which of these statements is TRUE regarding the effects of monetary policy when a real shock occurs?

An increase in money growth will cause the inflation rate to increase in

Briefly explain why monetary policy cannot beat both inflation and unemployment at the same time.

A central bank can always keep an economy at the Solow growth rate by exactly offsetting any shock to aggregate demand.

In the best case scenario, the Federal Reserve can increase the money supply after a negative shock to AD and restore the growth rate.

Uncertainty drives people away from investment projects.

If the Fed attempts to pop a bubble on a boom such as housing, what sector of the economy is it most sure of having the ability to influence?

How can the Fed offset a positive shock to aggregate demand?

If Alan Greenspan had reduced the money supply to limit the housing bubble, the result would have been a

Figure: Monetary Policy and Demand Shocks Reference: Ref 16-2 (Figure: Monetary Policy and Demand Shocks) The real growth rate in this economy is 3 percent when a positive aggregate demand shock shifts the AD curve from AD1 to AD4. The correct monetary policy response is to

If the Federal Reserve responds to a negative real shock with a decrease in money growth, the Federal Reserve's response will cause inflation to

A central bank has market credibility when it is expected to stick with its policy.

1997-2006 boom, they felt wealthier and

The supporters of discretionary monetary policy want to see the course of the economy guided by certain targets.

An economy where the Central Bank overstimulates aggregate demand will suffer from

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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