Question 1

Time inconsistency arises when the government

Accepted Answer

A) does not explicitly state its long-term goals. 
B) does not know how to achieve its long-term goals. 
C) is willing to deviate from its long-term goals for the sake of short-run gain. 
D) often changes its long-term goals. 
E) adheres to its long-term goals. 
A) does not explicitly state its long-term goals. 
B) does not know how to achieve its long-term goals. 
C) is willing to deviate from its long-term goals for the sake of short-run gain. 
D) often changes its long-term goals. 
E) adheres to its long-term goals. C

Question 2

A situation in which further increases in the money supply (liquidity)do not lower interest rates is known as

Accepted Answer

A) a liquidity trap. 
B) an asymptotic limit. 
C) credit crunch. 
D) a Fed's failure. 
E) None of these. 
A) a liquidity trap. 
B) an asymptotic limit. 
C) credit crunch. 
D) a Fed's failure. 
E) None of these. A

Question 3

If the Fed believes that real GDP is below potential GDP,it will

Accepted Answer

A) lower interest rates to shift the AD curve to the right and the IA line upward. 
B) do nothing and wait for the IA line to shift and return real GDP to potential GDP at a lower inflation rate. 
C) lower interest rates to shift the AD curve to the right. 
D) lower interest rates to shift the IA line downward. 
E) lower interest rates to shift the AD curve to the right and the IA line downward. 
A) lower interest rates to shift the AD curve to the right and the IA line upward. 
B) do nothing and wait for the IA line to shift and return real GDP to potential GDP at a lower inflation rate. 
C) lower interest rates to shift the AD curve to the right. 
D) lower interest rates to shift the IA line downward. 
E) lower interest rates to shift the AD curve to the right and the IA line downward. C

Question 4

The main rationale for central bank independence is that

Accepted Answer

A) otherwise it would be hard to attract competent people to work for the central bank. 
B) if the central bank were not independent,the government would be too bureaucratic. 
C) in counties like the United States,this independence helps reduce the conflict between state and federal government. 
D) this independence prevents the government from engaging in policies that,though beneficial in the short run,are harmful in the long run. 
E) politicians find monetary policy too boring. 
A) otherwise it would be hard to attract competent people to work for the central bank. 
B) if the central bank were not independent,the government would be too bureaucratic. 
C) in counties like the United States,this independence helps reduce the conflict between state and federal government. 
D) this independence prevents the government from engaging in policies that,though beneficial in the short run,are harmful in the long run. 
E) politicians find monetary policy too boring.

Question 5

One of the main liabilities on the Fed's balance sheet is reserves.Which of the following is the best definition of that item?

Accepted Answer

A) Reserves represent foreign currencies held at the Fed. 
B) Reserves are deposits that banks hold at the Fed. 
C) Reserves represent gold and other precious metals held at the Fed. 
D) Reserves represent loans that the Fed has made to other countries. 
E) None of these is an appropriate definition. 
A) Reserves represent foreign currencies held at the Fed. 
B) Reserves are deposits that banks hold at the Fed. 
C) Reserves represent gold and other precious metals held at the Fed. 
D) Reserves represent loans that the Fed has made to other countries. 
E) None of these is an appropriate definition.

Question 6

The negative correlation between inflation and unemployment is observed because

Accepted Answer

A) a rightward shift of the AD curve will raise unemployment in the long run and decrease inflation in the short run. 
B) a rightward shift of the AD curve will raise unemployment in the short run and decrease inflation in the long run. 
C) a rightward shift of the AD curve will reduce unemployment in the long run and increase inflation in the short run. 
D) a rightward shift of the AD curve will reduce unemployment in the short run and increase inflation in the long run. 
E) a leftward shift the AD curve will increase potential GDP and reduce inflation in the short run. 
A) a rightward shift of the AD curve will raise unemployment in the long run and decrease inflation in the short run. 
B) a rightward shift of the AD curve will raise unemployment in the short run and decrease inflation in the long run. 
C) a rightward shift of the AD curve will reduce unemployment in the long run and increase inflation in the short run. 
D) a rightward shift of the AD curve will reduce unemployment in the short run and increase inflation in the long run. 
E) a leftward shift the AD curve will increase potential GDP and reduce inflation in the short run.

Question 7

The nominal interest rate in the economy cannot go below zero,so at some point increases in reserves will stop lowering the interest rate.

Accepted Answer

A) True 
 B)False

Question 8

Is the interest rate on the federal funds market,the federal funds rate,regulated by the Federal Reserve? Is the discount rate? Explain.

Accepted Answer

The federal funds rate is not regulated

Question 9

One of the basic changes that the Fed has established as a result of the financial crisis is that it now lends to other financial institutions that are not banks,such as the insurance giant AIG.

Accepted Answer

A) True 
 B)False

Question 10

There is no long-run tradeoff between inflation and unemployment because

Accepted Answer

A) the aggregate demand curve always shifts back to its baseline position. 
B) inflation always returns to the baseline level. 
C) unemployment always returns to the natural rate. 
D) the Federal Reserve does not allow such a tradeoff. 
E) potential GDP declines as the rate of inflation increases. 
A) the aggregate demand curve always shifts back to its baseline position. 
B) inflation always returns to the baseline level. 
C) unemployment always returns to the natural rate. 
D) the Federal Reserve does not allow such a tradeoff. 
E) potential GDP declines as the rate of inflation increases.

Question 11

Explain why independent central banks need to be held accountable.

Accepted Answer

Central bank independence can be taken t

Question 12

Which of the following gives the Fed a credibility problem?

Accepted Answer

A) Ricardian equivalence 
B) Sticky prices 
C) Rational expectations 
D) Disinflation 
E) Time inconsistency 
A) Ricardian equivalence 
B) Sticky prices 
C) Rational expectations 
D) Disinflation 
E) Time inconsistency

Question 13

The Federal Reserve must have Congress approve its monetary policy decisions.

Accepted Answer

A) True 
 B)False

Question 14

Nominal interest rates sometimes go negative.

Accepted Answer

A) True 
 B)False

Question 15

The AD-AI analysis in conjunction with the Phillips curve relationship shows that

Accepted Answer

A) it is impossible to trade higher inflation for lower unemployment in the short run. 
B) there is no long-run gain from expansionary monetary policy. 
C) inflation and unemployment are positively correlated in the long run. 
D) it is possible to trade lower inflation for higher unemployment in the long run. 
E) there is no short-run gain from expansionary monetary policy. 
A) it is impossible to trade higher inflation for lower unemployment in the short run. 
B) there is no long-run gain from expansionary monetary policy. 
C) inflation and unemployment are positively correlated in the long run. 
D) it is possible to trade lower inflation for higher unemployment in the long run. 
E) there is no short-run gain from expansionary monetary policy.

Question 16

If the Fed believes there has been a positive wealth effect,it will want to

Accepted Answer

A) raise interest rates to reduce inflationary pressure. 
B) raise interest rates to reduce prices. 
C) lower interest rates to increase potential GDP. 
D) lower interest rates to offset the increase in wealth. 
E) raise interest rates to encourage saving and investment. 
A) raise interest rates to reduce inflationary pressure. 
B) raise interest rates to reduce prices. 
C) lower interest rates to increase potential GDP. 
D) lower interest rates to offset the increase in wealth. 
E) raise interest rates to encourage saving and investment.

Question 17

Quantitative easing increases all the following except

Accepted Answer

A) interest rates. 
B) reserves. 
C) the monetary base. 
D) the money supply. 
E) the size of the Fed's balance sheet. 
A) interest rates. 
B) reserves. 
C) the monetary base. 
D) the money supply. 
E) the size of the Fed's balance sheet.

Question 18

If the Fed thinks there has been a positive wealth effect,what sort of change in monetary policy would it be likely to make? What happens if it does not make the change? Illustrate both cases graphically.

Accepted Answer

A positive wealth effect will shift the

Question 19

Monetary policy is subject to fewer "mistakes" than fiscal policy.

Accepted Answer

A) True 
 B)False

Question 20

The current chairperson of the Federal Reserve Board (Fed)is Alan Greenspan.

Accepted Answer

A) True 
 B)False

Exam 27: Monetary Policy

Time inconsistency arises when the government

A situation in which further increases in the money supply (liquidity)do not lower interest rates is known as

If the Fed believes that real GDP is below potential GDP,it will

The main rationale for central bank independence is that

One of the main liabilities on the Fed's balance sheet is reserves.Which of the following is the best definition of that item?

The negative correlation between inflation and unemployment is observed because

The nominal interest rate in the economy cannot go below zero,so at some point increases in reserves will stop lowering the interest rate.

Is the interest rate on the federal funds market,the federal funds rate,regulated by the Federal Reserve? Is the discount rate? Explain.

One of the basic changes that the Fed has established as a result of the financial crisis is that it now lends to other financial institutions that are not banks,such as the insurance giant AIG.

There is no long-run tradeoff between inflation and unemployment because

Explain why independent central banks need to be held accountable.

Which of the following gives the Fed a credibility problem?

The Federal Reserve must have Congress approve its monetary policy decisions.

Nominal interest rates sometimes go negative.

The AD-AI analysis in conjunction with the Phillips curve relationship shows that

If the Fed believes there has been a positive wealth effect,it will want to

Quantitative easing increases all the following except

If the Fed thinks there has been a positive wealth effect,what sort of change in monetary policy would it be likely to make? What happens if it does not make the change? Illustrate both cases graphically.

Monetary policy is subject to fewer "mistakes" than fiscal policy.

The current chairperson of the Federal Reserve Board (Fed)is Alan Greenspan.

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors,price Ceilings,and Elasticity

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Interaction of People in Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, transfers, and Income Distribution

Public Goods, externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Economic Growth and Globalization

International Trade

International Finance

Reading,understanding,and Creating Graphs

Consumer Theory With Indifference Curves

Producer Theory With Isoquants

Present Discounted Value

The Miracle of Compound Growth

Deriving the Growth Accounting Formula

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

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