Question 1

What type of monetary policy is typically used to counter a recession?

Accepted Answer

A)  expansionary 
B)  contractionary 
C)  supply-based 
D)  demand-based 
A)  expansionary 
B)  contractionary 
C)  supply-based 
D)  demand-based

Question 2

When economists speak of a "zero lower bound" on interest rates, they actually mean a boundary of a rate that is no lower than roughly:

Accepted Answer

A)  1%. 
B)  5%. 
C)  -1%. 
D)  -5%. 
A)  1%. 
B)  5%. 
C)  -1%. 
D)  -5%.

Question 3

When the Federal Reserve engages in forward guidance, it:

Accepted Answer

A)  provides consumers with recommendations about the things that they should do financially over the next year. 
B)  meets with congressional leaders to give guidance on fiscal policy. 
C)  regulates key financial markets to prevent their failure as the economy moves forward. 
D)  announces in advance the types of policies that it will enact over a time period into the future. 
A)  provides consumers with recommendations about the things that they should do financially over the next year. 
B)  meets with congressional leaders to give guidance on fiscal policy. 
C)  regulates key financial markets to prevent their failure as the economy moves forward. 
D)  announces in advance the types of policies that it will enact over a time period into the future.

Question 4

(Figure: Money Supply and Demand) The money demand curve (MD) is downward sloping, reflecting the opportunity cost of holding liquid forms of money such as cash. The money supply curve (MS) is determined by _____. Point (P) is the _____.

Accepted Answer

A)  the Federal Reserve; maximum interest rate 
B)  the Mortgage Banks; maximum interest rate 
C)  the Federal Reserve; equilibrium interest rate 
D)  the Mortgage Banks; equilibrium interest rate 
A)  the Federal Reserve; maximum interest rate 
B)  the Mortgage Banks; maximum interest rate 
C)  the Federal Reserve; equilibrium interest rate 
D)  the Mortgage Banks; equilibrium interest rate

Question 5

Monetarists recommend that the money supply should grow at a:

Accepted Answer

A)  rate that changes as the economy moves from stage to stage in the business cycle. 
B)  steady rate that is higher than output's growth rate to stimulate growth. 
C)  rate that varies in direct proportion to unemployment to offset it. 
D)  slow, steady rate that is based on the long-run real GDP growth rate. 
A)  rate that changes as the economy moves from stage to stage in the business cycle. 
B)  steady rate that is higher than output's growth rate to stimulate growth. 
C)  rate that varies in direct proportion to unemployment to offset it. 
D)  slow, steady rate that is based on the long-run real GDP growth rate.

Question 6

In the United States, the natural rate of unemployment is approximately:

Accepted Answer

A)  0%. 
B)  5%. 
C)  2%. 
D)  8%. 
A)  0%. 
B)  5%. 
C)  2%. 
D)  8%.

Question 7

Which of the following is an example of the Fisher effect?

Accepted Answer

A)  Expansionary monetary policy reduces inflation by 3%, and interest rates rise 3%. 
B)  Inflationary expectations rise from 2% to 6%, which causes interest rates to rise from 5% to 9%. 
C)  Contractionary monetary policy reduces inflation by 2%, and interest rates rise by 3%. 
D)  Inflationary expectations fall from 4% to 2%, which causes interest rates to rise from 6% to 8%. 
A)  Expansionary monetary policy reduces inflation by 3%, and interest rates rise 3%. 
B)  Inflationary expectations rise from 2% to 6%, which causes interest rates to rise from 5% to 9%. 
C)  Contractionary monetary policy reduces inflation by 2%, and interest rates rise by 3%. 
D)  Inflationary expectations fall from 4% to 2%, which causes interest rates to rise from 6% to 8%.

Question 8

An expansionary monetary policy affects a country's foreign exchange rate by making the country's currency:

Accepted Answer

A)  appreciate. 
B)  depreciate. 
C)  lose purchasing power due to deflation. 
D)  gain purchasing power due to deflation. 
A)  appreciate. 
B)  depreciate. 
C)  lose purchasing power due to deflation. 
D)  gain purchasing power due to deflation.

Question 9

Business owners often make the mistake of focusing too heavily on changes in _____ rather than on:

Accepted Answer

A)  unemployment rates; inflation rates. 
B)  policy; unemployment rates. 
C)  interest rates; the causes of the changes in rates. 
D)  product prices; input prices. 
A)  unemployment rates; inflation rates. 
B)  policy; unemployment rates. 
C)  interest rates; the causes of the changes in rates. 
D)  product prices; input prices.

Question 10

Which of the following is NOT consistent with the Keynesian view of policy and a liquidity trap?

Accepted Answer

A)  Monetary stimulus is not effective when interest rates are near zero. 
B)  Liquidity traps require a policy solution that is opposite to the one that would be used in other situations. 
C)  Monetary policy affects aggregate demand through its impact on interest rates. 
D)  Fiscal policy is more effective than monetary policy in addressing a liquidity trap. 
A)  Monetary stimulus is not effective when interest rates are near zero. 
B)  Liquidity traps require a policy solution that is opposite to the one that would be used in other situations. 
C)  Monetary policy affects aggregate demand through its impact on interest rates. 
D)  Fiscal policy is more effective than monetary policy in addressing a liquidity trap.

Question 11

An increase in the money supply affects net exports because the foreign exchange rate _____, which makes imports _____ to citizens of the country and makes exports _____ to foreign buyers.

Accepted Answer

A)  rises; more expensive; cheaper 
B)  falls; cheaper; more expensive 
C)  rises; cheaper; more expensive 
D)  falls; more expensive; cheaper 
A)  rises; more expensive; cheaper 
B)  falls; cheaper; more expensive 
C)  rises; cheaper; more expensive 
D)  falls; more expensive; cheaper

Question 12

When the Federal Reserve reduces the money supply, aggregate ____ will _____, causing short-run output to:

Accepted Answer

A)  demand; fall; fall. 
B)  demand; rise; rise. 
C)  supply; fall; fall. 
D)  supply; rise; rise. 
A)  demand; fall; fall. 
B)  demand; rise; rise. 
C)  supply; fall; fall. 
D)  supply; rise; rise.

Question 13

During the early 2000s, the Federal Reserve had _____ monetary policy that contributed to _____ home sales and home prices.

Accepted Answer

A)  a tight; falling 
B)  a tight; rising 
C)  an easy; falling 
D)  an easy; rising 
A)  a tight; falling 
B)  a tight; rising 
C)  an easy; falling 
D)  an easy; rising

Question 14

If the Federal Reserve wishes to maintain an unchanging target interest rate and the demand for money is falling, then the Fed will:

Accepted Answer

A)  raise the inflation rate. 
B)  reduce the demand for money. 
C)  increase the supply of money. 
D)  decrease the supply of money. 
A)  raise the inflation rate. 
B)  reduce the demand for money. 
C)  increase the supply of money. 
D)  decrease the supply of money.

Question 15

To stabilize an economy, the Keynesian policy approach tends to favor using _____ over:

Accepted Answer

A)  fiscal policy; monetary policy. 
B)  monetary policy; fiscal policy. 
C)  aggregate supply; interest rates. 
D)  interest rates; aggregate supply. 
A)  fiscal policy; monetary policy. 
B)  monetary policy; fiscal policy. 
C)  aggregate supply; interest rates. 
D)  interest rates; aggregate supply.

Question 16

A lower exchange rate has which of the following impacts on a country's net exports and aggregate demand?

Accepted Answer

A)  Both net exports and aggregate demand rise. 
B)  Net exports rise, and aggregate demand falls. 
C)  Both net exports and aggregate demand fall. 
D)  Net exports fall, and aggregate demand rises. 
A)  Both net exports and aggregate demand rise. 
B)  Net exports rise, and aggregate demand falls. 
C)  Both net exports and aggregate demand fall. 
D)  Net exports fall, and aggregate demand rises.

Question 17

Describe the chain of events that explains how a decrease in the money supply eventually affects employment and the price level in an economy.

Accepted Answer

When the money supply decreases, interes

Question 18

Econia increases its money supply. What is likely to happen to the value of Econia's currency in foreign exchange markets and to the level of Econia's net exports?

Accepted Answer

A)  Currency appreciates, and net exports increase. 
B)  Currency appreciates, and net exports decrease. 
C)  Currency depreciates, and net exports increase. 
D)  Currency depreciates, and net exports decrease. 
A)  Currency appreciates, and net exports increase. 
B)  Currency appreciates, and net exports decrease. 
C)  Currency depreciates, and net exports increase. 
D)  Currency depreciates, and net exports decrease.

Question 19

Which of the following does the Federal Reserve consider to be the best option for an inflation goal for the US?

Accepted Answer

A)  0% 
B)  -1% 
C)  2% 
D)  4% 
A)  0% 
B)  -1% 
C)  2% 
D)  4%

Question 20

In the short run, after an increase in the money supply, employment _____, and the price level:

Accepted Answer

A)  rises; rises. 
B)  rises; falls. 
C)  falls; rises. 
D)  falls; falls. 
A)  rises; rises. 
B)  rises; falls. 
C)  falls; rises. 
D)  falls; falls.

Exam 27: Monetary Policy and Interest Rates

What type of monetary policy is typically used to counter a recession?

When economists speak of a "zero lower bound" on interest rates, they actually mean a boundary of a rate that is no lower than roughly:

When the Federal Reserve engages in forward guidance, it:

(Figure: Money Supply and Demand) The money demand curve (MD) is downward sloping, reflecting the opportunity cost of holding liquid forms of money such as cash. The money supply curve (MS) is determined by _____. Point (P) is the _____.

Monetarists recommend that the money supply should grow at a:

In the United States, the natural rate of unemployment is approximately:

Which of the following is an example of the Fisher effect?

An expansionary monetary policy affects a country's foreign exchange rate by making the country's currency:

Business owners often make the mistake of focusing too heavily on changes in _____ rather than on:

Which of the following is NOT consistent with the Keynesian view of policy and a liquidity trap?

An increase in the money supply affects net exports because the foreign exchange rate _____, which makes imports _____ to citizens of the country and makes exports _____ to foreign buyers.

When the Federal Reserve reduces the money supply, aggregate ____ will _____, causing short-run output to:

During the early 2000s, the Federal Reserve had _____ monetary policy that contributed to _____ home sales and home prices.

If the Federal Reserve wishes to maintain an unchanging target interest rate and the demand for money is falling, then the Fed will:

To stabilize an economy, the Keynesian policy approach tends to favor using _____ over:

A lower exchange rate has which of the following impacts on a country's net exports and aggregate demand?

Describe the chain of events that explains how a decrease in the money supply eventually affects employment and the price level in an economy.

Econia increases its money supply. What is likely to happen to the value of Econia's currency in foreign exchange markets and to the level of Econia's net exports?

Which of the following does the Federal Reserve consider to be the best option for an inflation goal for the US?

In the short run, after an increase in the money supply, employment _____, and the price level:

The Basics of Economics

Why We Trade

The Supply and Demand Model

Elasticity

Consumer Choice

The Economic Efficiency of Markets

Taxation: An Economic Analysis

Externalities, the Environment, and Public Goods

Organizing a Business

Stocks and Bonds

The Cost of Doing Business

Perfect Competition

Monopoly and Antitrust Laws

Monopolistic Competition and Price Discrimination

Oligopoly

Behavioral Economics and Strategy

Labor and Other Resources

The Distribution of Income

Information and Health Economics

GDP and the Price Level

Unemployment and the Business Cycle

Long Run Economic Growth

Saving, Investment, and the Federal Budget Deficit

The Monetary System

Money and the Price Level in the Long Run

Aggregate Supply and Aggregate Demand

Fiscal Policy and the Business Cycle

The Aggregate Expenditure Model

Inflation Expectations and Stabilization Policies

International Trade

Foreign Exchange Markets

International Finance

Filters

(Figure: Money Supply and Demand) The money demand curve (MD) is downward sloping, reflecting the opportunity cost of holding liquid forms of money such as cash. The money supply curve (MS) is determined by _. Point (P) is the _.

An increase in the money supply affects net exports because the foreign exchange rate ___, which makes imports _ to citizens of the country and makes exports ___ to foreign buyers.

When the Federal Reserve reduces the money supply, aggregate will _, causing short-run output to:

During the early 2000s, the Federal Reserve had _ monetary policy that contributed to _ home sales and home prices.