Deck 17: Monetary Policy

Question 1

When the Fed lowers the federal funds rate, the quantity of money _{--------------------}and the supply of loanable funds _{--------------------} .

A)increases; decreases
B)increases; does not change
C)decreases; decreases
D)decreases; increases
E)increases; increases

Answer 1

increases; increases

Question 2

Monetary policy decisions are made by the

A)Federal Open Market Committee.
B)Federal Reserve Economic Committee.
C)U.S. Mint.
D)Congress of the United States.
E)Council of Economic Advisors.

Answer 2

A

Question 3

Which of the following is the Fed's monetary policy instrument?

A)the supply of reserves
B)the federal funds rate
C)the demand for reserves
D)the output gap
E)the core inflation rate

Answer 3

B

Question 4

The operational goals the Fed uses for its monetary policy objectives are

A)the core inflation rate and the output gap.
B)the supply of reserves and the output gap.
C)the federal funds rate and the core inflation rate.
D)the federal funds rate and the supply of reserves.
E)the demand for reserves and the supply of reserves.

Question 5

The core inflation rate measures changes in the

A)prices of consumer goods except food and fuel.
B)prices of consumer goods except health care.
C)price of only two consumer goods: food and fuel.
D)prices of all consumer goods.
E)prices of all the "core" goods and services a typical family buys.

Question 6

The Federal Reserve monetary policy goals of maximum employment means

A)a zero percent natural unemployment rate.
B)cyclical unemployment should not necessarily be minimized.
C)keeping the unemployment rate close to the natural unemployment rate.
D)a zero percent unemployment rate.
E)aiming for an amount of employment that exceeds full employment.

Question 7

If the Fed increases interest rates, other things remaining the same, foreigners demand_{--------------------} dollars, thereby_{--------------------} the exchange rate.

A)more; increasing
B)the same number of; not affecting
C)fewer; decreasing
D)more; decreasing
E)fewer; increasing

Question 8

-
If the Fed wants to increase the federal funds rate, it will conduct an open market operation in which it _{--------------------}government securities and thereby shifts the_{--------------------} curve _{--------------------} .

A)sell; RD; leftward
B)buy; RS; leftward
C)sell; RS; rightward
D)buy; RD; rightward
E)sell; RS; leftward

Question 9

Which of the following is a problem in pursuing monetary policy?

A)The Fed must reveal to the public anytime the Fed changes its policy.
B)Monetary policy must be approved by the Congress.
C)The Fed cannot control the federal funds rate.
D)The lag between a change in the quantity of money and its effect on economic activity may be long.
E)None of the above answers is correct.

Question 10

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals?
I. government expenditure on goods and services and taxes
ii. the government budget deficit or surplus
Iii. changes in the federal funds rate

A)ii only
B)iii only
C)i and ii
D)i and iii
E)ii and iii

Question 11

Steps in the transmission of monetary policy are

A)Congress increases the money supply, which lowers the interest rate, and leads to an increase in aggregate demand.
B)The Federal Reserve increases government expenditures on goods and services, leading to an increase in aggregate demand.
C)Congress increases the budget deficit, which increases the money supply, which increases aggregate supply.
D)Congress increases government expenditures on goods and services, leading to an increase in aggregate demand.
E)The Federal Reserve lowers the federal funds rate, which lowers the real interest rate, and leads to an increase in aggregate demand.

Question 12

Under a k-percent rule, if the economy goes into expansion, the Fed would

A)raise the federal funds rate.
B)increase the quantity of money.
C)lower the federal funds rate.
D)lower tax rates to keep revenue constant.
E)None of the above answers are correct.

Question 13

In a recession, the Fed's monetary policy aims to _{--------------------}the real interest rate, _{--------------------} aggregate demand, and aggregate supply.

A)decrease; increase; increase
B)decrease; increase; not change
C)increase; decrease; not change.
D)increase; not change; increase
E)increase; increase; increase

Question 14

If real GDP exceeds potential GDP, to move the economy to potential GDP the Fed

A)lowers the federal funds rate to increase potential GDP but not real GDP.
B)lowers the federal funds rate to decrease real GDP but not potential GDP.
C)raises the federal funds rate to increase potential GDP but not real GDP.
D)raises the federal funds rate to decrease both real GDP and potential GDP.
E)raises the federal funds rate to decrease real GDP but not potential GDP.

Question 15

During the Great Depression, real GDP decreased, unemployment soared, and the inflation ratewas negative. Which would have been the appropriate federal government policy combination to improve economic performance?

A)decrease government expenditures, increase taxes, do not change the quantity of money
B)do not change government expenditures or taxes , increase the quantity of money
C)increase government expenditure, decrease taxes, increase the quantity of money
D)decrease government expenditure, increase taxes, decrease the quantity of money
E)increase government expenditure, decrease taxes, decrease the quantity of money

Question 16

In the short run, if the Fed wants to raise the federal funds rate, it

A)instructs large commercial banks to sell government securities in the open market.
B)instructs the New York Fed to sell government securities in the foreign exchange market.
C)tells large commercial banks to raise their interest rates.
D)instructs the New York Fed to buy government securities in the open market.
E)instructs the New York Fed to sell government securities in the open market.

Question 17

If the Fed sells U.S. government securities,

A)the U.S. Treasury gains some revenue.
B)the federal funds rate rises.
C)banks' reserves increase.
D)the U.S. Treasury loses some revenue.
E)None of the above answers is correct.

Question 18

The output gap is the

A)difference between actual inflation and core inflation.
B)percentage increase in the growth rate of real GDP.
C)difference in graduation levels between high school and college.
D)percentage increase in the growth rate of real GDP minus the unemployment rate.
E)percentage deviation of real GDP from potential GDP.

Question 19

In the United States,

A)the President initializes changes in monetary policy and the Fed approves the changes.
B)the Federal Reserve sets monetary and fiscal policies.
C)Congress initializes changes in monetary policy and the Fed approves the changes.
D)the Federal Reserve sets monetary policy.
E)Congress must approve monetary policy changes.

Question 20

The Fed decreases the quantity of money to counteract

A)an inflationary gap.
B)a rise in the unemployment rate.
C)a federal budget deficit.
D)a recessionary gap.
E)positive net exports.

Question 21

The federal funds rate is

A)also known as the prime rate.
B)the interest rate banks charge each other on overnight loans.
C)another name for the real interest rate.
D)the interest rate on the 30-year treasury bond.
E)the interest rate on the 3-month Treasury bill.

Question 22

If the Fed's policies aim to increase aggregate demand, the Fed must fear

A)a supply shock that decreases potential GDP.
B)stagflation.
C)recession.
D)a supply shock that increases aggregate supply.
E)inflation.

Question 23

Discretionary monetary policy is monetary policy that is based on

A)the ups and downs of the stock market.
B)rules that depend upon the state of the economy.
C)a rule that allows no discretion in how policymakers respond to the state of the economy.
D)the judgment of Congress about the current needs of the economy.
E)the judgment of the monetary policymakers about the current needs of the economy.

Question 24

When the Federal Reserve increases the federal funds rate, bank loans_{--------------------} , the supply of loanable funds _{--------------------}, and the real interest rate _{--------------------}.

A)increase; increases; falls
B)decrease; decreases; rises
C)increase; increases; rises
D)does not change; decreases; rises
E)decrease; does not change; rises

Question 25

If the Fed buys U.S. government securities from banks, the federal funds rate _{--------------------}and banks' reserves _{--------------------}.

A)rises; increase
B)falls; decrease
C)rises; decrease
D)falls; increase
E)does not change; increases

Question 26

If the Fed raises the federal funds rate, eventually the

A)AD curve shifts leftward, decreasing real GDP and increasing the price level.
B)AD curve shifts leftward, decreasing real GDP and the price level.
C)AS curve shifts rightward, decreasing real GDP and increasing the price level.
D)AD curve shifts rightward, increasing real GDP and the price level.
E)AS curve shifts leftward, decreasing real GDP and increasing the price level.

Question 27

As the Fed lowers the federal funds rate,

A)aggregate income decreases.
B)aggregate demand increases.
C)aggregate supply increases.
D)the price level falls.
E)real GDP decreases.

Question 28

-If the Fed increases the quantity of money and lowers the federal funds rate, real GDP_{--------------------} and the price level _{--------------------}.

A)decreases; increases
B)increases; decreases
C)decreases; decreases
D)increases; increases
E)increases; does not change

Question 29

-
The change illustrated in the figure above is part of the transmission process of the Fed's monetary policy. As a result of the increase in the supply of loanable funds, aggregate demand_{--------------------} , real GDP_{--------------------} , and the price level _{--------------------} .

A)increases; decreases; falls
B)decreases; decreases; falls
C)increases; increases; rises
D)increases; does not change; does not change
E)None of the above answers are correct.

Question 30

If the Fed lowers the interest rate, then

A)net exports will increase.
B)only investment decreases.
C)consumption expenditure decreases and investment increases.
D)both consumption expenditure and investment decrease.
E)only consumption expenditure decreases.

Question 31

To change the federal funds rate, the Fed

A)changes the income tax rate on interest income.
B)increases or removes money from the stock market.
C)coordinates with banks on establishing the new rate.
D)tells banks how much to charge.
E)uses open market operations to change the quantity of reserves.

Question 32

Discretionary monetary policy has the drawback that it

A)must lead to very high inflation.
B)makes inflation expectations harder to manage.
C)is currently illegal in the United States.
D)cannot be implemented using changes in the federal funds rate.
E)None of the above answers are correct.

Question 33

Which of the following statements are correct?
I. The Federal Reserve's monetary policy must be approved by the President of the United States
.
Ii. The Federal Reserve Board of Directors meets approximately every six months to review the state of the economy and determine monetary policy.
Iii. The Federal Reserve has determined it will use the monetary base as its policy instrument.

A)iii only
B)ii only
C)i and ii
D)i only
E)None of the above answers is correct.

Question 34

The Fed increases the quantity of money to counteract

A)a federal budget surplus.
B)negative net exports.
C)an inflationary gap.
D)a recessionary gap.
E)inflation.

Question 35

When the exchange rate falls, imports_{--------------------}and exports _{--------------------}

A)increase; increase
B)decrease; increase
C)decrease; do not change
D)decrease; decrease
E)increase; decrease

Question 36

If the Fed is concerned about inflation, its actions_{--------------------} long-term interest rates so that investment_{--------------------} and net exports _{--------------------}.

A)lower; decreases; decrease
B)raise; decreases; decrease
C)lower; increases; decrease
D)raise; increases; increase
E)lower; increases; increase

Question 37

A decrease in the federal funds rate

A)decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate demand.
B)decreases the supply of loanable funds, raises the real interest rate, and decreases aggregate demand.
C)increases other short-term interest rates, decreases investment, and decreases aggregate demand.
D)lowers other sort-term interest rate, raises the real interest rate, and increases aggregate demand.
E)lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand.

Question 38

-If the Fed raises the federal funds rate, eventually the

A)AD curve shifts leftward and real GDP decreases.
B)AS curve shifts leftward and real GDP decreases.
C)AS curve shifts rightward and real GDP increases.
D)AD curve shifts rightward and real GDP increases.
E)AD curve shifts rightward and real GDP decreases.

Question 39

The interest rate banks charge each other on loans of reserves is called the

A)discount rate.
B)real interest rate.
C)coupon rate.
D)required reserve rate.
E)federal funds rate.

Question 40

-
The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland lowers the target federal funds rate by 1 percentage point, the central bank will conduct an open market of_{--------------------} government securities of _{--------------------}to_{--------------------} the supply of reserves.

A)sale; $25 billion; increase
B)purchase; $25 billion; decrease
C)sale; $75 billion; decrease
D)purchase; $75 billion; increase
E)purchase; $25 billion; increase

Question 41

When the Fed worries about inflation, it_{--------------------} the federal funds rate and, in the short run, _{--------------------}the real interest rate.

A)raises; raises
B)does not change; the Fed raises
C)raises; lowers
D)lowers; raises
E)lowers; lowers

Question 42

When the Fed lowers the federal funds rate, which of the following economic variables responds most rapidly?

A)other short-term interest rates
B)the long-term real interest rate
C)the inflation rate
D)the supply of loanable funds
E)consumption expenditure

Question 43

If the Fed is concerned about a possible recession, it_{--------------------} the federal funds rate, which_{--------------------} the quantity of reserves and_{--------------------} the amount of bank loans.

A)raises; decreases; decreases
B)lowers; increases; increases
C)lowers; decreases; decreases
D)raises; increases; increases
E)lowers; increases; decreases

Question 44

If the Fed fears a recession, it

A)sells government securities.
B)decreases aggregate demand.
C)buys government securities.
D)decreases the quantity of money.
E)decreases aggregate supply.

Question 45

To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors

A)the GDP price deflator.
B)the core PCE deflator inflation rate.
C)the producer price index.
D)the CPI.
E)the core GDP deflator inflation rate.

Question 46

-

The economy is at the equilibrium shown as point a in the above figure. To restore the economy to potential GDP, the Fed should

A)sell government securities and thereby decrease aggregate demand.
B)sell government securities and thereby increase aggregate demand.
C)buy government securities and thereby increase aggregate demand.
D)buy government securities and thereby decrease aggregate demand.
E)buy government securities and thereby increase aggregate supply.

Question 47

-If the Fed lowers the federal funds rate, which of the following will NOT happen?

A)aggregate demand increases
B)real GDP increases
C)the real interest rate falls
D)other short-term interest rates fall
E)the price level falls

Question 48

$\begin{array} { c c c } \hline \begin{array} { c } \text { Price level } \\\text { (GDP deflator, } \\\text { 2005 = 100) }\end{array} & \begin{array} { c } \text { Aggregate supply } \\\text { (billions of } \\\text { 2005 dollars) }\end{array} & \begin{array} { c } \text { Aggregate demand } \\\text { (billions of } \\\text { 2005 dollars) }\end{array} \\\hline 30 & 28 & 16 \\25 & 25 & 19 \\20 & 22 & 22 \\15 & 19 & 25 \\10 & 16 & 28 \\\hline\end{array}$
Using the data in the above table, if potential GDP for this economy is $25 billion, then at the present moment real GDP is

A)less than potential GDP.
B)not comparable to potential GDP.
C)at the full-employment level of output.
D)greater than potential GDP.
E)equal to potential GDP.

Question 49

-

The economy is at the equilibrium shown at point a in the above figure. If the Fed

A)buys government securities, the economy moves to an equilibrium at point b.
B)sells government securities, the economy moves to an equilibrium at point b.
C)sells government securities, the economy moves to an equilibrium at point c.
D)buys government securities, the economy moves to an equilibrium at point c.
E)None of the above are correct because the economy will remain at point a if the Fed buys or if the Fed sells government securities.

Question 50

A change in monetary policy affects

A)consumption expenditure, productivity, and net exports.
B)consumption expenditure, government expenditures on goods and services, and net exports.
C)consumption expenditure, investment, and net exports.
D)government expenditures on goods and services because it affects the government's budget balance.
E)investment, government expenditures on goods and services, and net exports.

Question 51

If the Fed increases the quantity of reserves, a new equilibrium is reached by a

A)movement up the demand for reserves curve.
B)movement down the demand for reserves curve.
C)rightward shift of the demand for reserves curve.
D)leftward shift of the demand for reserves curve.
E)None of the above answers is correct.

Question 52

When the Fed_{--------------------}_, the U.S. foreign exchange rate falls.

A)increases the size of the multiplier
B)raises the interest rate
C)raises taxes on interest income
D)sells government securities
E)buys government securities

Question 53

Discretionary monetary policy is defined as policy

A)that is pursued regardless of the current state of the economy.
B)for which the markets make all decisions.
C)that responds to a changing economy with predetermined rules.
D)that is based on the judgments of policymakers.
E)for which the policymaker always publicizes the policy as extensively as possible because its effectiveness depends on the public's knowledge of the policy.

Question 54

Maintaining the growth of the money supply at a constant rate is an example of

A)a money targeting rule.
B)an inflation targeting rule.
C)a money demand rule.
D)a nominal GDP targeting rule.
E)discretionary policy.

Question 55

Consumer confidence in the economy falls, and as a result, aggregate demand decreases. As real
GDP falls below potential GDP, if the Fed followed Friedman's k-percent rule, the Fed would

A)increase government expenditures.
B)continue allowing the quantity of money to grow at "k" percent.
C)increase the quantity of money more than usual.
D)lower the federal funds rate.
E)raise the federal funds rate.

Question 56

Which of the following is NOT an effect from a change in the federal funds rate?

A)change in the quantity of money
B)change in government expenditures
C)change in the real interest rate
D)change in aggregate demand
E)change in investment

Question 57

When the Fed lowers the federal funds rate, which of the following economic variables responds most slowly?

A)other short-term interest rates
B)the long-term real interest rate
C)the inflation rate
D)consumption expenditure
E)the supply of loanable funds

Question 58

A hike in the federal funds rate results in_{--------------------} in the real interest rate which leads to a_{--------------------} in investment.

A)a decrease; an increase
B)an increase; a decrease
C)an increase; an increase
D)a decrease; a decrease
E)a decrease; no change

Question 59

Which of the following is a monetary policy goal?
I. keeping the inflation rate low
Ii. attaining maximum employment
Iii. keeping the long-term interest rate at a moderate level

A)i and iii
B)i only
C)iii only
D)i, ii, and iii
E)ii only

Question 60

The Fed raises the interest rate when it

A)wants to encourage bank lending.
B)fears recession.
C)fears inflation.
D)wants to increase the quantity of money.
E)cannot change the quantity of money.

Question 61

If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate _{--------------------}and the quantity of reserves_{--------------------} .

A)falls; increases
B)rises; decreases
C)rises; does not change
D)rises; increases
E)falls; decreases

Question 62

The federal funds rate is_{--------------------}of the Fed.

A)an objective
B)a technique
C)a goal
D)a monetary policy rule
E)the monetary policy instrument

Question 63

The rightward shift of the RS curve will lead to a_{--------------------} in the real interest rate,_{--------------------} in investment, and_{--------------------} in aggregate demand.

A)fall; an increase; a decrease
B)rise; a decrease; a decrease
C)rise; an increase; a decrease
D)rise; an increase; an increase
E)fall; an increase; an increase

Question 64

The Taylor rule is an example of

A)a targeting rule focused on the monetary base.
B)an instrument rule based on M1.
C)a targeting rule focused on the federal funds rate.
D)an instrument rule focused on the monetary base.
E)an instrument rule focused on the federal funds rate.

Question 65

When the Fed raises the federal funds rate, the exchange rate_{--------------------}and net exports_{--------------------}

A)does not change; does not change
B)increases; increases
C)increases; decreases
D)does not change; decreases
E)decreases; decreases

Question 66

When the output gap is positive, it represents_{--------------------} gap, and when it is negative, it represents _{--------------------}Gap.

A)an inflationary; a recessionary
B)an employment; an unemployment
C)an inflationary; an employment
D)a recessionary; an inflationary
E)None of the above answers is correct.

Question 67

To pursue its monetary policy goals, the Fed could use
I. a nominal GDP targeting rule.
Ii. a money targeting rule.
Iii. an inflation targeting rule.

A)i only
B)i and ii
C)ii only
D)iii only
E)i, ii, and iii

Question 68

In late 2007, the Fed began a series of cuts in the federal funds rate. Because the core inflation rate was about two percent, the most likely reason for these interest rate cuts was

A)to reduce the natural unemployment rate.
B)to increase the real interest rate.
C)to raise the price of the dollar in the foreign exchange market.
D)to encourage households to save more money.
E)to avoid a recession.

Question 69

The main goals of monetary policy include all of the following EXCEPT

A)attaining the maximum sustainable growth of potential GDP.
B)keeping the long term nominal interest rate equal to the real interest rate plus the inflation rate.
C)keeping the inflation rate low.
D)keeping the unemployment rate close to the natural unemployment rate.
E)keeping the long-term interest rate at a moderate level.

Question 70

When the Fed raises the federal funds rate, the consumption expenditure_{--------------------} and investment_{--------------------}
.

A)does not change; does not change
B)does not change; decreases
C)decreases; decreases
D)increases; increases
E)increases; decreases

Question 71

The FOMC is concerned about inflation and has_{--------------------} the federal funds rate. Due to substitution effects, other _{--------------------}interest rates will _{--------------------}almost immediately.

A)decreased; short-term; decrease
B)decreased; long-term; decrease
C)increased; short-term; decrease
D)increased; short-term; increase
E)increased; long-term; increase

Question 72

If the Fed raises the federal funds rate,

A)exports increase and imports decrease.
B)real GDP increases.
C)exports decrease and imports increase.
D)in the short run the interest rate falls.
E)investment increases.

Question 73

If the Fed wants to fight inflation, it will_{--------------------}the federal funds rate in order to _{--------------------}

A)raise; decrease aggregate supply
B)raise; increase aggregate supply
C)raise; decrease aggregate demand
D)lower; decrease aggregate demand
E)lower; increase aggregate supply

Question 74

In order to raise the federal funds rate, the Fed_{--------------------} government securities in open market operations, so that banks' reserves _{--------------------} and the quantity of money _{--------------------} .

A)sells; increase; decreases
B)buys; increase; decreases
C)sells; decrease; decreases
D)buys; decrease; increases
E)buys; increase; increases

Question 75

Which of the following is a potential monetary policy instrument for the Fed?

A)federal funds rate
B)inflation rate
C)real interest rate
D)loanable funds
E)profit rates

Question 76

If the Fed wants to fight recession, it will_{--------------------}the federal funds rate in order to _{--------------------}

A)lower; increase aggregate demand
B)lower; increase aggregate supply
C)raise; decrease aggregate supply
D)raise; increase aggregate supply
E)raise; increase aggregate demand

Question 77

When real GDP is greater than potential GDP, there is_{--------------------}which leads the inflation rate to_{--------------------}
.

A)a recessionary gap; fall
B)an inflationary gap; fall
C)an inflationary gap; rise
D)a recessionary gap; rise
E)a recessionary gap; remain stable

Question 78

To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors the_{--------------------}; to determine whether the goal of maximum employment is being achieved, the Federal Reserve monitors_{--------------------} .

A)CPI; the gap between nominal GDP and real GDP
B)core CPI inflation rate; the natural unemployment rate
C)core GDP deflator inflation rate; the natural unemployment rate
D)GDP price deflator; real GDP
E)core PCE deflator inflation rate; the output gap

Question 79

If the Fed sells government securities, in the short run the nominal interest rate_{--------------------} and the real interest rate_{--------------------}.

A)does not change; rises
B)rises; does not change
C)rises; falls
D)rises; rises
E)falls; falls

Question 80

If the Federal Reserve lowers the Federal funds rate,

A)other short-term interest rates rise.
B)other short-term interest rates fall.
C)the price level falls.
D)net exports decreases.
E)Both answers A and C are correct.