Question 1

Explain why the Federal Reserve did not reduce the growth rate of the money supply in response to rising oil prices in 2007 and 2008.

Accepted Answer

Rising oil prices are a negative real sh

Question 2

The economy is growing at the Solow growth rate of 3 percent with an inflation rate of 4 percent. If a positive aggregate demand shock occurs and the Fed responds by decreasing the money supply but fails to offset the aggregate demand shock, then in the short run

Accepted Answer

A)  the real growth rate will be 3 percent, and the inflation rate will be 4 percent. 
B)  the real growth rate will be lower than 3 percent, and the inflation rate will be lower than 4 percent. 
C)  the real growth rate will be higher than 3 percent and the inflation rate will be lower than 4 percent. 
D)  the real growth rate will be higher than 3 percent and the inflation rate will be higher than 4 percent. 
A)  the real growth rate will be 3 percent, and the inflation rate will be 4 percent. 
B)  the real growth rate will be lower than 3 percent, and the inflation rate will be lower than 4 percent. 
C)  the real growth rate will be higher than 3 percent and the inflation rate will be lower than 4 percent. 
D)  the real growth rate will be higher than 3 percent and the inflation rate will be higher than 4 percent.

Question 3

When a negative shock to aggregate demand occurs, the inflation rate will

Accepted Answer

A)  increase. 
B)  remain the same. 
C)  decrease. 
D)  be automatically adjusted by the Fed. 
A)  increase. 
B)  remain the same. 
C)  decrease. 
D)  be automatically adjusted by the Fed.

Question 4

When the Fed increases the money supply to counteract a negative real shock

Accepted Answer

A)  growth usually returns to the level it was before the shock. 
B)  half of the increase is seen in growth and half in inflation. 
C)  inflation increases a lot and growth increases a little. 
D)  growth remains stuck at the level of the negative real shock. 
A)  growth usually returns to the level it was before the shock. 
B)  half of the increase is seen in growth and half in inflation. 
C)  inflation increases a lot and growth increases a little. 
D)  growth remains stuck at the level of the negative real shock.

Question 5

Why did Greenspan receive criticism during the 2008 financial crisis and the recession?

Accepted Answer

A)  Critics argue that Greenspan should have tried to control the rise in AD by reducing the money supply. 
B)  Critics argue that Greenspan should have put a cap on home values. 
C)  Critics argue that Greenspan left the Fed without any direction as to monetary policy. 
D)  Critics argue that Greenspan should have increased the money supply to lower house price inflation. 
A)  Critics argue that Greenspan should have tried to control the rise in AD by reducing the money supply. 
B)  Critics argue that Greenspan should have put a cap on home values. 
C)  Critics argue that Greenspan left the Fed without any direction as to monetary policy. 
D)  Critics argue that Greenspan should have increased the money supply to lower house price inflation.

Question 6

Suppose a central bank targets a fixed rate of inflation. If a negative real shock occurs, then the central bank can use monetary policy to

Accepted Answer

A)  shift the AD curve to the right. 
B)  shift the AD curve to the left. 
C)  shift the SRAS curve to the right. 
D)  shift the SRAS curve to the left. 
A)  shift the AD curve to the right. 
B)  shift the AD curve to the left. 
C)  shift the SRAS curve to the right. 
D)  shift the SRAS curve to the left.

Question 7

Briefly explain why the Fed is not very effective when a negative real shock occurs.

Accepted Answer

A negative real shock raises inflation a

Question 8

During the 1970s, the Fed often reacted to negative oil shocks by decreasing the money supply and focusing on

Accepted Answer

A)  increasing long-run growth in the economy. 
B)  reducing inflation. 
C)  reducing unemployment. 
D)  raising employment. 
A)  increasing long-run growth in the economy. 
B)  reducing inflation. 
C)  reducing unemployment. 
D)  raising employment.

Question 9

What kind of monetary policy rule did Milton Friedman advocate?

Accepted Answer

A)  The money supply should increase by 3 percent each year. 
B)  Prices should increase by 3 percent each year. 
C)  Economic growth should be 3 percent every year. 
D)  Long-run economic growth should be 3 percent. 
A)  The money supply should increase by 3 percent each year. 
B)  Prices should increase by 3 percent each year. 
C)  Economic growth should be 3 percent every year. 
D)  Long-run economic growth should be 3 percent.

Question 10

Bubbles in asset markets are usually easy to identify.

Accepted Answer

A) True 
 B)False

Question 11

When hit with a real negative economic shock, the Fed must make its policy choice between

Accepted Answer

A)  too low of a growth rate and too high of an unemployment rate. 
B)  too low of a growth rate and too high of an inflation rate. 
C)  too high of a growth rate and too low wages. 
D)  too high of a growth rate and too low of a savings rate. 
A)  too low of a growth rate and too high of an unemployment rate. 
B)  too low of a growth rate and too high of an inflation rate. 
C)  too high of a growth rate and too low wages. 
D)  too high of a growth rate and too low of a savings rate.

Question 12

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 overestimates how serious the recession is

Accepted Answer

A)  the Solow growth curve would shift to the left. 
B)  the Fed would take the economy to Point X. 
C)  the Fed would fail to stimulate the economy and it would remain at Point Y. 
D)  the Fed would overshoot and the economy would move to Point W. 
A)  the Solow growth curve would shift to the left. 
B)  the Fed would take the economy to Point X. 
C)  the Fed would fail to stimulate the economy and it would remain at Point Y. 
D)  the Fed would overshoot and the economy would move to Point W.

Question 13

Figure: Monetary Policy   Reference: Ref 16-1 (Figure: Monetary Policy) Assume that the economy is initially at Point Y. In the best case scenario, the Fed will

Accepted Answer

A)  increase money supply to take the economy to Point X. 
B)  decrease money supply to take the economy to Point W. 
C)  increase money supply to take the economy to Point W. 
D)  decrease money supply to take the economy to Point X. 
A)  increase money supply to take the economy to Point X. 
B)  decrease money supply to take the economy to Point W. 
C)  increase money supply to take the economy to Point W. 
D)  decrease money supply to take the economy to Point X.

Exam 33: Transmission and Amplification Mechanisms

Explain why the Federal Reserve did not reduce the growth rate of the money supply in response to rising oil prices in 2007 and 2008.

The economy is growing at the Solow growth rate of 3 percent with an inflation rate of 4 percent. If a positive aggregate demand shock occurs and the Fed responds by decreasing the money supply but fails to offset the aggregate demand shock, then in the short run

When a negative shock to aggregate demand occurs, the inflation rate will

When the Fed increases the money supply to counteract a negative real shock

Why did Greenspan receive criticism during the 2008 financial crisis and the recession?

Suppose a central bank targets a fixed rate of inflation. If a negative real shock occurs, then the central bank can use monetary policy to

Briefly explain why the Fed is not very effective when a negative real shock occurs.

During the 1970s, the Fed often reacted to negative oil shocks by decreasing the money supply and focusing on

What kind of monetary policy rule did Milton Friedman advocate?

Bubbles in asset markets are usually easy to identify.

When hit with a real negative economic shock, the Fed must make its policy choice between

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 overestimates how serious the recession is

Figure: Monetary Policy Reference: Ref 16-1 (Figure: Monetary Policy) Assume that the economy is initially at Point Y. In the best case scenario, the Fed will

The Big Ideas in Economics

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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

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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

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Economics, Ethics, and Public Policy

Managing Incentives

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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

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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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