Deck 11: Monetary Policy and the Fed
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Deck 11: Monetary Policy and the Fed
1
Which of the following are monetary policy goals?
I.maintain high interest rates
II.keep unemployment rates low
III.reduce the size of the banking sector
IV.prevent high rates of inflation
A)I, II, III, and IV
B)I, II, and III
C)II, III, and IV
D)II and IV
I.maintain high interest rates
II.keep unemployment rates low
III.reduce the size of the banking sector
IV.prevent high rates of inflation
A)I, II, III, and IV
B)I, II, and III
C)II, III, and IV
D)II and IV
D
2
According to the text, in many respects, the single most powerful economic policymaker in the United States is
A)Congress.
B)the Federal Reserve.
C)the President.
D)the Supreme Court.
A)Congress.
B)the Federal Reserve.
C)the President.
D)the Supreme Court.
B
3
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Exhibit: The Bond Market
(Exhibit: The Bond Market)
If the Fed wants to achieve the results shown in Panel (a)
, it should
A)raise the discount rate.
B)increase reserve requirements.
C)sell government bonds in the open market.
D)buy government bonds in the open market.
Exhibit: The Bond Market

(Exhibit: The Bond Market)
If the Fed wants to achieve the results shown in Panel (a)
, it should
A)raise the discount rate.
B)increase reserve requirements.
C)sell government bonds in the open market.
D)buy government bonds in the open market.
D
4
The major tools of monetary policy available to the Federal Reserve System are
A)reserve requirements, margin regulations, and moral suasion.
B)reserve requirements, open-market operations, and the discount rate.
C)open-market operations, margin regulations, and moral suasion.
D)the discount rate, margin regulations, and moral suasion.
A)reserve requirements, margin regulations, and moral suasion.
B)reserve requirements, open-market operations, and the discount rate.
C)open-market operations, margin regulations, and moral suasion.
D)the discount rate, margin regulations, and moral suasion.
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5
If the Fed purchases federal government bonds on the open market, bank reserves will
A)decrease leading to a decrease in the money supply.
B)increase leading to a decrease in the money supply.
C)increase leading to an increase in the money supply.
D)decrease leading to an increase in the money supply.
A)decrease leading to a decrease in the money supply.
B)increase leading to a decrease in the money supply.
C)increase leading to an increase in the money supply.
D)decrease leading to an increase in the money supply.
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6
If the Fed buys government bonds through open-market operations, it will
A)increase the demand for bonds in the bond market.
B)decrease the demand for bonds in the bond market.
C)increase the supply of bonds in the bond market.
D)decrease the supply of bonds in the bond market.
A)increase the demand for bonds in the bond market.
B)decrease the demand for bonds in the bond market.
C)increase the supply of bonds in the bond market.
D)decrease the supply of bonds in the bond market.
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7
Suppose the economy experiences a recessionary gap.Expansionary monetary policy will
A)increase interest rates and increase exchange rates.
B)increase interest rates and decrease exchange rates.
C)decrease interest rates and increase exchange rates.
D)decrease interest rates and decrease exchange rates.
A)increase interest rates and increase exchange rates.
B)increase interest rates and decrease exchange rates.
C)decrease interest rates and increase exchange rates.
D)decrease interest rates and decrease exchange rates.
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8
The monetary policy tool that involves the buying and selling of government bonds is
A)moral suasion.
B)reserve requirements.
C)the discount rate.
D)open-market operations.
A)moral suasion.
B)reserve requirements.
C)the discount rate.
D)open-market operations.
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9
In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy.These measures include all of the following except
A)buying mortgage-backed securities.
B)buying long-term Treasury bills.
C)creating other new credit facilities to make credit more easily available to households and small businesses.
D)lowering the reserve requirement to encourage banks to create loans.
A)buying mortgage-backed securities.
B)buying long-term Treasury bills.
C)creating other new credit facilities to make credit more easily available to households and small businesses.
D)lowering the reserve requirement to encourage banks to create loans.
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10
The congressional act that established the U.S.central banking system in 1913 was the
A)Federal Reserve Act.
B)Gramm-Rudman Act.
C)Employment Act.
D)Humphrey-Hawkins Act.
A)Federal Reserve Act.
B)Gramm-Rudman Act.
C)Employment Act.
D)Humphrey-Hawkins Act.
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11
Suppose the economy experiences a recessionary gap.Expansionary monetary policy will
A)increase investment and increase interest rates.
B)increase investment and decrease interest rates.
C)decrease investment and increase interest rates.
D)decrease investment and decrease interest rates.
A)increase investment and increase interest rates.
B)increase investment and decrease interest rates.
C)decrease investment and increase interest rates.
D)decrease investment and decrease interest rates.
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12
Suppose the economy experiences a recessionary gap.Expansionary monetary policy will
A)increase real GDP and increase the price level.
B)increase real GDP and decrease the price level.
C)decrease real GDP and increase the price level.
D)decrease real GDP and decrease the price level.
A)increase real GDP and increase the price level.
B)increase real GDP and decrease the price level.
C)decrease real GDP and increase the price level.
D)decrease real GDP and decrease the price level.
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13
Which of the following is a tool used by the Fed in the conduct of monetary policy?
A)changes in the prime rate
B)issuing new government bonds and retiring old ones
C)buying and selling corporate bonds
D)buying and selling federal government bonds
A)changes in the prime rate
B)issuing new government bonds and retiring old ones
C)buying and selling corporate bonds
D)buying and selling federal government bonds
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14
Historical actions indicate that the Fed's primary goal of monetary policy over the past 30 years has been to
A)maintain high interest rates.
B)keep employment rates low.
C)limit the availability of consumer credit.
D)prevent high rates of inflation.
A)maintain high interest rates.
B)keep employment rates low.
C)limit the availability of consumer credit.
D)prevent high rates of inflation.
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15
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Exhibit: The Bond Market
(Exhibit: The Bond Market)
Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a)
.What happens to the interest rate?
A)It will increase.
B)It will decrease.
C)It remains unchanged.
D)Short-term interest rates will decrease but long-term interest rates will increase.
Exhibit: The Bond Market

(Exhibit: The Bond Market)
Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a)
.What happens to the interest rate?
A)It will increase.
B)It will decrease.
C)It remains unchanged.
D)Short-term interest rates will decrease but long-term interest rates will increase.
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16
The first official statement of goals for macroeconomic performance in the United States came with the passage of the
A)Federal Reserve Act of 1913.
B)Employment Act of 1946.
C)Great Depression Act of 1933.
D)Full Employment and Balanced Growth Act of 1978.
A)Federal Reserve Act of 1913.
B)Employment Act of 1946.
C)Great Depression Act of 1933.
D)Full Employment and Balanced Growth Act of 1978.
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17
The congressional act passed in 1978 that established specific numerical goals for the unemployment rate and the inflation rate to be achieved by 1983 was the
A)Federal Reserve Act.
B)Gramm-Rudman Act.
C)Employment Act.
D)Humphrey-Hawkins Act.
A)Federal Reserve Act.
B)Gramm-Rudman Act.
C)Employment Act.
D)Humphrey-Hawkins Act.
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18
Toward the end of 2008, the U.S.economy was characterized by all of the following except
A)credit tightening by banks.
B)rising inflation.
C)falling real GDP.
D)an unprecedented federal funds rate below 1%.
A)credit tightening by banks.
B)rising inflation.
C)falling real GDP.
D)an unprecedented federal funds rate below 1%.
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19
Suppose the economy experiences a recessionary gap.Expansionary monetary policy will
A)increase interest rates and increase the bond prices.
B)increase interest rates and decrease the bond prices
C)decrease interest rates and increase the bond prices
D)decrease interest rates and decrease the bond prices
A)increase interest rates and increase the bond prices.
B)increase interest rates and decrease the bond prices
C)decrease interest rates and increase the bond prices
D)decrease interest rates and decrease the bond prices
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20
The congressional act passed in 1946 that contained the first official statement of goals for economic performance in the United States was the
A)Federal Reserve Act.
B)Gramm-Rudman Act.
C)Employment Act.
D)Humphrey-Hawkins Act.
A)Federal Reserve Act.
B)Gramm-Rudman Act.
C)Employment Act.
D)Humphrey-Hawkins Act.
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21
Use the following to answer questions
Exhibit: The Bond Market
(Exhibit: The Bond Market)
Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b)
.As a result, the interest rate
A)increases and investment increases.
B)increases and investment decreases.
C)decreases and investment increases.
D)decreases and investment decreases.
Exhibit: The Bond Market

(Exhibit: The Bond Market)
Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b)
.As a result, the interest rate
A)increases and investment increases.
B)increases and investment decreases.
C)decreases and investment increases.
D)decreases and investment decreases.
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22
Use the following to answer questions
Exhibit: Monetary Policy 1
(Exhibit: Monetary Policy 1)
To shift the demand curve from D1 to D2, the Fed will be
A)buying bonds in the open market which decrease the money supply.
B)selling bonds in the open market which decrease the money supply.
C)buying bonds in the open market which increases the money supply.
D)selling bonds in the open market which increases the money supply.
Exhibit: Monetary Policy 1

(Exhibit: Monetary Policy 1)
To shift the demand curve from D1 to D2, the Fed will be
A)buying bonds in the open market which decrease the money supply.
B)selling bonds in the open market which decrease the money supply.
C)buying bonds in the open market which increases the money supply.
D)selling bonds in the open market which increases the money supply.
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23
When the Fed buys bonds in the open market, we can expect the
A)exchange rate to rise and interest rates to fall.
B)exchange rate and interest rates to rise.
C)exchange rate to fall and interest rates to rise.
D)exchange rate and interest rates to fall.
A)exchange rate to rise and interest rates to fall.
B)exchange rate and interest rates to rise.
C)exchange rate to fall and interest rates to rise.
D)exchange rate and interest rates to fall.
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24
Use the following to answer questions
Exhibit: Monetary Policy 1
(Exhibit: Monetary Policy 1)
By shifting the demand curve from D1 to D2, the Fed is attempting to
A)contract the economy by increasing interest rates.
B)expand the economy by increasing interest rates.
C)contract the economy by decreasing interest rates.
D)expand the economy by decreasing interest rates.
Exhibit: Monetary Policy 1

(Exhibit: Monetary Policy 1)
By shifting the demand curve from D1 to D2, the Fed is attempting to
A)contract the economy by increasing interest rates.
B)expand the economy by increasing interest rates.
C)contract the economy by decreasing interest rates.
D)expand the economy by decreasing interest rates.
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25
Use the following to answer questions
Exhibit: The Bond Market
(Exhibit: The Bond Market)
Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a)
.As a result, the interest rate
A)increases and investment increases.
B)increases and investment decreases.
C)decreases and investment increases.
D)decreases and investment decreases.
Exhibit: The Bond Market

(Exhibit: The Bond Market)
Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a)
.As a result, the interest rate
A)increases and investment increases.
B)increases and investment decreases.
C)decreases and investment increases.
D)decreases and investment decreases.
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26
When the Fed buys bonds in the open market, in the product market (the aggregate demand- aggregate supply model)
,
A)real GDP will fall and the price level will rise.
B)real GDP and the price level will rise.
C)real GDP and the price level will fall.
D)real GDP will rise and the price level will fall.
,
A)real GDP will fall and the price level will rise.
B)real GDP and the price level will rise.
C)real GDP and the price level will fall.
D)real GDP will rise and the price level will fall.
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27
When the Fed sells bonds in the open market, we can expect the
A)exchange rate to rise and interest rates to fall.
B)exchange rate and interest rates to rise.
C)exchange rate to fall and interest rates to rise.
D)exchange rate and interest rates to fall.
A)exchange rate to rise and interest rates to fall.
B)exchange rate and interest rates to rise.
C)exchange rate to fall and interest rates to rise.
D)exchange rate and interest rates to fall.
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28
When the Fed buys bonds in the open market, we can expect
A)bond prices and interest rates to fall.
B)bond prices to rise and interest rates to fall.
C)bond prices to fall and interest rates to rise.
D)bond prices and interest rates to rise.
A)bond prices and interest rates to fall.
B)bond prices to rise and interest rates to fall.
C)bond prices to fall and interest rates to rise.
D)bond prices and interest rates to rise.
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29
When the Fed sells bonds in the open market, we can expect
A)investment and net exports to rise.
B)investment to rise and net exports to fall.
C)investment to fall and net exports to rise.
D)investment and net exports to fall.
A)investment and net exports to rise.
B)investment to rise and net exports to fall.
C)investment to fall and net exports to rise.
D)investment and net exports to fall.
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30
Use the following to answer questions
Exhibit: Monetary Policy 2
(Exhibit: Monetary Policy 2)
By shifting the supply curve from S1 to S2, the Fed is attempting to
A)expand the economy by increasing interest rates.
B)contract the economy by increasing interest rates.
C)contract the economy by decreasing interest rates.
D)expand the economy by decreasing interest rates.
Exhibit: Monetary Policy 2

(Exhibit: Monetary Policy 2)
By shifting the supply curve from S1 to S2, the Fed is attempting to
A)expand the economy by increasing interest rates.
B)contract the economy by increasing interest rates.
C)contract the economy by decreasing interest rates.
D)expand the economy by decreasing interest rates.
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31
Use the following to answer questions
Exhibit: The Bond Market
(Exhibit: The Bond Market)
Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b)
.What happens to the interest rate?
A)It increases.
B)It decreases.
C)It remains unchanged.
D)Short-term interest rates will increase but long-term interest rates will decrease.
Exhibit: The Bond Market

(Exhibit: The Bond Market)
Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b)
.What happens to the interest rate?
A)It increases.
B)It decreases.
C)It remains unchanged.
D)Short-term interest rates will increase but long-term interest rates will decrease.
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32
Use the following to answer questions
Exhibit: Effects of Monetary Policy
(Exhibit: Effects of Monetary Policy)
Suppose the economy is initially at Y1 in Panel (a)
.It is experiencing
A)an inflationary gap.
B)a recessionary gap.
C)an actual unemployment rate that is less than the natural unemployment rate.
D)a situation that warrants a decrease in the money supply.
Exhibit: Effects of Monetary Policy

(Exhibit: Effects of Monetary Policy)
Suppose the economy is initially at Y1 in Panel (a)
.It is experiencing
A)an inflationary gap.
B)a recessionary gap.
C)an actual unemployment rate that is less than the natural unemployment rate.
D)a situation that warrants a decrease in the money supply.
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33
Use the following to answer questions
Exhibit: Monetary Policy 2
(Exhibit: Monetary Policy 2)
By shifting the supply curve from S1 to S2, the Fed will be
A)buying bonds in the open market which decreases the money supply.
B)selling bonds in the open market which decreases the money supply.
C)buying bonds in the open market which increases the money supply.
D)selling bonds in the open market which increases the money supply.
Exhibit: Monetary Policy 2

(Exhibit: Monetary Policy 2)
By shifting the supply curve from S1 to S2, the Fed will be
A)buying bonds in the open market which decreases the money supply.
B)selling bonds in the open market which decreases the money supply.
C)buying bonds in the open market which increases the money supply.
D)selling bonds in the open market which increases the money supply.
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34
When the Fed sells bonds in the open market, in the product market (the aggregate demand- aggregate supply model)
,
A)real GDP will fall and the price level will rise.
B)real GDP and the price level will rise.
C)real GDP and the price level will fall.
D)real GDP will rise and the price level will fall.
,
A)real GDP will fall and the price level will rise.
B)real GDP and the price level will rise.
C)real GDP and the price level will fall.
D)real GDP will rise and the price level will fall.
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35
If the Fed sells government bonds, bank reserves will
A)decrease leading to a decrease in the money supply.
B)increase leading to a decrease in the money supply.
C)increase leading to an increase in the money supply.
D)decrease leading to an increase in the money supply.
A)decrease leading to a decrease in the money supply.
B)increase leading to a decrease in the money supply.
C)increase leading to an increase in the money supply.
D)decrease leading to an increase in the money supply.
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36
Use the following to answer questions
Exhibit: The Bond Market
(Exhibit: The Bond Market)
If the Fed wants to achieve the results shown in Panel (b)
, it should
A)lower the discount rate.
B)decrease margin requirements.
C)decrease reserve requirements.
D)sell government bonds in the open market.
Exhibit: The Bond Market

(Exhibit: The Bond Market)
If the Fed wants to achieve the results shown in Panel (b)
, it should
A)lower the discount rate.
B)decrease margin requirements.
C)decrease reserve requirements.
D)sell government bonds in the open market.
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37
When the Fed sells bonds in the open market, we can expect
A)bond prices and interest rates to fall.
B)bond prices to rise and interest rates to fall.
C)bond prices to fall and interest rates to rise.
D)bond prices and interest rates to rise.
A)bond prices and interest rates to fall.
B)bond prices to rise and interest rates to fall.
C)bond prices to fall and interest rates to rise.
D)bond prices and interest rates to rise.
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38
Use the following to answer questions
Exhibit: Monetary Policy 1
(Exhibit: Monetary Policy 1)
By shifting the demand curve from D1 to D2, the Fed is exercising
A)contractionary monetary policy to lower interest rates.
B)expansionary monetary policy to lower interest rates.
C)contractionary monetary policy to increase interest rates.
D)expansionary monetary policy to increase interest rates.
Exhibit: Monetary Policy 1

(Exhibit: Monetary Policy 1)
By shifting the demand curve from D1 to D2, the Fed is exercising
A)contractionary monetary policy to lower interest rates.
B)expansionary monetary policy to lower interest rates.
C)contractionary monetary policy to increase interest rates.
D)expansionary monetary policy to increase interest rates.
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39
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Exhibit: Monetary Policy 2
(Exhibit: Monetary Policy 2)
By shifting the supply curve from S1 to S2, the Fed is exercising
A)expansionary monetary policy in order to lower interest rates.
B)expansionary monetary policy in order to increase interest rates.
C)contractionary monetary policy in order to increase interest rates.
D)contractionary monetary policy in order to lower interest rates.
Exhibit: Monetary Policy 2

(Exhibit: Monetary Policy 2)
By shifting the supply curve from S1 to S2, the Fed is exercising
A)expansionary monetary policy in order to lower interest rates.
B)expansionary monetary policy in order to increase interest rates.
C)contractionary monetary policy in order to increase interest rates.
D)contractionary monetary policy in order to lower interest rates.
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40
When the Fed buys bonds in the open market, we can expect
A)investment and net exports to rise.
B)investment will rise and net exports to fall.
C)investment will fall and net exports to rise.
D)investment and net exports fall.
A)investment and net exports to rise.
B)investment will rise and net exports to fall.
C)investment will fall and net exports to rise.
D)investment and net exports fall.
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41
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Exhibit: Effects of Monetary Policy
(Exhibit: Effects of Monetary Policy)
If the Fed acts to close the output gap in Panel (a)
, it would
A)sell government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and lower the interest rate.
B)buy government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and increase the interest rate.
C)buy government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and lower the interest rate.
D)sell government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and increase the interest rate.
Exhibit: Effects of Monetary Policy

(Exhibit: Effects of Monetary Policy)
If the Fed acts to close the output gap in Panel (a)
, it would
A)sell government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and lower the interest rate.
B)buy government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and increase the interest rate.
C)buy government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and lower the interest rate.
D)sell government bonds which will lead to the shift in demand for bonds in Panel (b).This action will raise the price of bonds and increase the interest rate.
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42
If inflation is a threat, then the Fed will be expected to engage in
A)expansionary monetary policy.
B)contractionary monetary policy.
C)policies to increase the money supply.
D)policies to lower the rate of interest.
A)expansionary monetary policy.
B)contractionary monetary policy.
C)policies to increase the money supply.
D)policies to lower the rate of interest.
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43
If inflation is a threat, then the Fed will conduct monetary policy aimed at
A)increasing the interest rate which then will shift aggregate demand to the right.
B)decreasing the interest rate which then will shift aggregate demand to the right.
C)decreasing the interest rate which then will shift aggregate demand to the left.
D)increasing the interest rate which then will shift aggregate demand to theleft.
A)increasing the interest rate which then will shift aggregate demand to the right.
B)decreasing the interest rate which then will shift aggregate demand to the right.
C)decreasing the interest rate which then will shift aggregate demand to the left.
D)increasing the interest rate which then will shift aggregate demand to theleft.
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44
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Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point c,
A)it is in a recessionary gap.
B)it is at natural level of employment.
C)the level of employment is greater than the natural level of employment.
D)the unemployment rate is negative.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point c,
A)it is in a recessionary gap.
B)it is at natural level of employment.
C)the level of employment is greater than the natural level of employment.
D)the unemployment rate is negative.
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45
Use the following to answer questions
Exhibit: Effects of Monetary Policy
(Exhibit: Effects of Monetary Policy)
If a nonintervention policy were adopted in Panel (a)
,
A)the aggregate demand curve would have eventually shifted as shown.
B)the short-run aggregate supply curve would have eventually shifted to the left and restored full employment.
C)the short-run aggregate supply curve would have eventually shifted to the right and restored full employment.
D)both the aggregate demand curve and the short-run aggregate supply curve would have eventually shifted to the left.
Exhibit: Effects of Monetary Policy

(Exhibit: Effects of Monetary Policy)
If a nonintervention policy were adopted in Panel (a)
,
A)the aggregate demand curve would have eventually shifted as shown.
B)the short-run aggregate supply curve would have eventually shifted to the left and restored full employment.
C)the short-run aggregate supply curve would have eventually shifted to the right and restored full employment.
D)both the aggregate demand curve and the short-run aggregate supply curve would have eventually shifted to the left.
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46
If the economy experiences an inflationary gap, a contractionary monetary policy will
A)increase investment and increase interest rates.
B)increase investment and decrease interest rates.
C)decrease investment and increase interest rates.
D)decrease investment and decrease interest rates.
A)increase investment and increase interest rates.
B)increase investment and decrease interest rates.
C)decrease investment and increase interest rates.
D)decrease investment and decrease interest rates.
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47
Which of the following result from a change in the money supply brought about by an open market purchase?
A)lower interest rate, higher exchange rate, decreased demand for investment and net exports
B)higher interest rate, higher exchange rate, increased demand for investment and decreased demand for net exports
C)lower interest rate, lower exchange rate, increased demand for investment and net exports
D)higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports
A)lower interest rate, higher exchange rate, decreased demand for investment and net exports
B)higher interest rate, higher exchange rate, increased demand for investment and decreased demand for net exports
C)lower interest rate, lower exchange rate, increased demand for investment and net exports
D)higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports
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48
If the economy experiences an inflationary gap, a contractionary monetary policy will
A)increase real GDP and increase the price level.
B)increase real GDP and decrease the price level.
C)decrease real GDP and increase the price level.
D)decrease real GDP and decrease the price level.
A)increase real GDP and increase the price level.
B)increase real GDP and decrease the price level.
C)decrease real GDP and increase the price level.
D)decrease real GDP and decrease the price level.
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49
Which of the following result from a change in the money supply brought about by an open market sale?
A)lower interest rate, higher exchange rate, decreased demand for investment and net exports
B)higher interest rate, higher exchange rate, decreased demand for investment and decreased demand for net exports
C)lower interest rate, lower exchange rate, increased demand for investment and net exports
D)higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports
A)lower interest rate, higher exchange rate, decreased demand for investment and net exports
B)higher interest rate, higher exchange rate, decreased demand for investment and decreased demand for net exports
C)lower interest rate, lower exchange rate, increased demand for investment and net exports
D)higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports
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50
Use the following to answer questions
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point a,
A)employment is greater than the natural level of employment.
B)it is at the natural level of employment.
C)it is in a recessionary gap.
D)the unemployment rate is negative.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point a,
A)employment is greater than the natural level of employment.
B)it is at the natural level of employment.
C)it is in a recessionary gap.
D)the unemployment rate is negative.
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51
Use the following to answer questions
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point c, the Federal Reserve can close the output gap by buying bonds.In the bond market,
A)the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B)the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C)the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D)the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point c, the Federal Reserve can close the output gap by buying bonds.In the bond market,
A)the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B)the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C)the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D)the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.
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52
Holding all else constant, higher interest rates in the United States would
A)decrease the demand for U.S.dollars in the foreign exchange market.In turn, this will lead to a decrease in the exchange rate, and subsequently, U.S.net exports would rise.
B)increase the demand for U.S.dollars in the foreign exchange market.In turn, this will lead to an increase in the exchange rate, and subsequently, U.S.net exports would fall.
C)increase the demand for U.S.dollars in the foreign exchange market.In turn, this will lead to a decrease in the exchange rate, and subsequently, U.S.net exports would rise.
D)decrease the demand for U.S.dollars in the foreign exchange market.In turn, this will lead to an increase in the exchange rate, and subsequently, U.S.net exports would fall.
A)decrease the demand for U.S.dollars in the foreign exchange market.In turn, this will lead to a decrease in the exchange rate, and subsequently, U.S.net exports would rise.
B)increase the demand for U.S.dollars in the foreign exchange market.In turn, this will lead to an increase in the exchange rate, and subsequently, U.S.net exports would fall.
C)increase the demand for U.S.dollars in the foreign exchange market.In turn, this will lead to a decrease in the exchange rate, and subsequently, U.S.net exports would rise.
D)decrease the demand for U.S.dollars in the foreign exchange market.In turn, this will lead to an increase in the exchange rate, and subsequently, U.S.net exports would fall.
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53
Use the following to answer questions
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point c, the Federal Reserve can close the output gap
A)by pursuing an expansionary monetary policy to raise the interest rate and increase short-run aggregate supply.
B)by pursuing a contractionary monetary policy to drive down the interest rate and increase aggregate demand.
C)by pursuing an expansionary monetary policy to drive down the interest rate and increase aggregate demand.
D)by pursuing a contractionary monetary policy to raise the interest rate and short-run aggregate supply.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point c, the Federal Reserve can close the output gap
A)by pursuing an expansionary monetary policy to raise the interest rate and increase short-run aggregate supply.
B)by pursuing a contractionary monetary policy to drive down the interest rate and increase aggregate demand.
C)by pursuing an expansionary monetary policy to drive down the interest rate and increase aggregate demand.
D)by pursuing a contractionary monetary policy to raise the interest rate and short-run aggregate supply.
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54
Use the following to answer questions
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point c, an open market purchase would cause
A)a shift of the short-run aggregate supply curve from AS1 to AS2.
B)a shift of the short-run aggregate supply curve from AS2 to AS1.
C)a shift of the aggregate demand curve from AD1 to AD2.
D)a shift of the aggregate demand curve from AD2 to AD1.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point c, an open market purchase would cause
A)a shift of the short-run aggregate supply curve from AS1 to AS2.
B)a shift of the short-run aggregate supply curve from AS2 to AS1.
C)a shift of the aggregate demand curve from AD1 to AD2.
D)a shift of the aggregate demand curve from AD2 to AD1.
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55
If the economy experiences an inflationary gap, a contractionary monetary policy will
A)increase interest rates and increase the bond prices.
B)increase interest rates and decrease the bond prices.
C)decrease interest rates and increase the bond prices.
D)decrease interest rates and decrease the bond prices.
A)increase interest rates and increase the bond prices.
B)increase interest rates and decrease the bond prices.
C)decrease interest rates and increase the bond prices.
D)decrease interest rates and decrease the bond prices.
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56
Use the following to answer questions
Exhibit: Effects of Monetary Policy
(Exhibit: Effects of Monetary Policy)
In Panel (b)
, assume that the price of bonds rises from P1 to P2.Now, in Panel (c)
, the higher price of bonds will
A)reduce the demand for and increase the supply of dollars and cause the exchange rate to increase.
B)reduce the demand for and increase the supply of dollars and cause the exchange rate to rise.
C)increase the demand for and reduce the supply of dollars and cause the exchange rate to increase.
D)reduce the demand for and increase the supply of dollars and cause the exchange rate to fall.
Exhibit: Effects of Monetary Policy

(Exhibit: Effects of Monetary Policy)
In Panel (b)
, assume that the price of bonds rises from P1 to P2.Now, in Panel (c)
, the higher price of bonds will
A)reduce the demand for and increase the supply of dollars and cause the exchange rate to increase.
B)reduce the demand for and increase the supply of dollars and cause the exchange rate to rise.
C)increase the demand for and reduce the supply of dollars and cause the exchange rate to increase.
D)reduce the demand for and increase the supply of dollars and cause the exchange rate to fall.
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57
Use the following to answer questions
Exhibit: Effects of Monetary Policy
(Exhibit: Effects of Monetary Policy)
The shift in the demand for bonds from D1 to D2, in Panel (b)
Will result in a
A)lower interest rate and no change in investment.
B)higher interest rate and lower investment.
C)lower interest rate and higher investment.
D)higher interest rate and higher investment.
Exhibit: Effects of Monetary Policy

(Exhibit: Effects of Monetary Policy)
The shift in the demand for bonds from D1 to D2, in Panel (b)
Will result in a
A)lower interest rate and no change in investment.
B)higher interest rate and lower investment.
C)lower interest rate and higher investment.
D)higher interest rate and higher investment.
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58
If the economy experiences an inflationary gap, a contractionary monetary policy will
A)increase interest rates and increase exchange rates.
B)increase interest rates and decrease exchange rates.
C)decrease interest rates and increase exchange rates.
D)decrease interest rates and decrease exchange rates.
A)increase interest rates and increase exchange rates.
B)increase interest rates and decrease exchange rates.
C)decrease interest rates and increase exchange rates.
D)decrease interest rates and decrease exchange rates.
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59
Use the following to answer questions
Exhibit: Effects of Monetary Policy
(Exhibit: Effects of Monetary Policy)
Which of the following actions by the Fed could have caused the movement from AD1 to AD2 in Panel (a)
?
A)selling government bonds in the open market
B)buying government bonds in the open market
C)increasing the discount rate
D)increasing the federal funds rate
Exhibit: Effects of Monetary Policy

(Exhibit: Effects of Monetary Policy)
Which of the following actions by the Fed could have caused the movement from AD1 to AD2 in Panel (a)
?
A)selling government bonds in the open market
B)buying government bonds in the open market
C)increasing the discount rate
D)increasing the federal funds rate
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60
Contractionary monetary policy by the Fed could include
A)lowering the discount rate.
B)decreasing government transfer payments.
C)decreasing reserve requirements.
D)selling government securities in the open market.
A)lowering the discount rate.
B)decreasing government transfer payments.
C)decreasing reserve requirements.
D)selling government securities in the open market.
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61
The lag between the time at which a policy is put in place and the time that policy affects the economy is called
A)the recognition lag.
B)the impact lag.
C)the implementation lag.
D)the theoretical lag.
A)the recognition lag.
B)the impact lag.
C)the implementation lag.
D)the theoretical lag.
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62
Which of the following is perhaps the greatest obstacle facing the Fed in discharging monetary policy?
A)the difficulties involved in regulating the complex structure of financial institutions
B)the problem of monetary policy lags
C)the problem of identifying a monetary measure that is closely linked to real GDP
D)the problem of coordinating monetary and fiscal policy
A)the difficulties involved in regulating the complex structure of financial institutions
B)the problem of monetary policy lags
C)the problem of identifying a monetary measure that is closely linked to real GDP
D)the problem of coordinating monetary and fiscal policy
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63
Following the U.S.financial crisis in 2008, some observers assert that the policies of Fed Chairman Greenspan contributed to the crisis.Which of the following is a criticism of Greenspan's policies?
I.The very low interest rates used to fight the 2001 recession were maintained for too long, leading to the real estate bubble.
II.The Fed provided real estate developers with liquidity to encourage property development and offered tax breaks to first-time home buyers, which in turn fueled the real estate bubble.
III.The Fed did not promote appropriate regulations to deal with the new financial instruments that were created in the early 2000s.
A)I and II only.
B)I and III only.
C)II and III only.
D)I, II, and III.
I.The very low interest rates used to fight the 2001 recession were maintained for too long, leading to the real estate bubble.
II.The Fed provided real estate developers with liquidity to encourage property development and offered tax breaks to first-time home buyers, which in turn fueled the real estate bubble.
III.The Fed did not promote appropriate regulations to deal with the new financial instruments that were created in the early 2000s.
A)I and II only.
B)I and III only.
C)II and III only.
D)I, II, and III.
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64
Which of the following statements about the structure of the Fed is an advantage from the perspective of conducting monetary policy?
A)The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work very closely with other political institutions.
B)The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work relatively independently of other political institutions.
C)The two policymaking bodies of the Fed are small to allow deliberations in private and they work relatively independently of other political institutions.
D)The two policymaking bodies of the Fed are small to allow members to work closely with other political institutions.
A)The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work very closely with other political institutions.
B)The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work relatively independently of other political institutions.
C)The two policymaking bodies of the Fed are small to allow deliberations in private and they work relatively independently of other political institutions.
D)The two policymaking bodies of the Fed are small to allow members to work closely with other political institutions.
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65
On October 12, 1987, the Dow Jones Industrial Average plunged 508 points, wiping out more than $500 billion in a few hours.How did the Fed respond to this drastic fall in the stock market index?
A)The Fed responded precisely as it did when faced with a similar situation in 1929, that is, it deemed that no action was necessary.
B)To encourage the business community to invest in the stock market, the Fed announced that it will sell federal securities to raise the interest rate.
C)In an attempt to ward off a recession, the Fed announced that it will provide adequate liquidity, by buying federal securities.
D)The Fed provided long-term loans to those corporations that experienced significant decreases in their stock value.
A)The Fed responded precisely as it did when faced with a similar situation in 1929, that is, it deemed that no action was necessary.
B)To encourage the business community to invest in the stock market, the Fed announced that it will sell federal securities to raise the interest rate.
C)In an attempt to ward off a recession, the Fed announced that it will provide adequate liquidity, by buying federal securities.
D)The Fed provided long-term loans to those corporations that experienced significant decreases in their stock value.
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66
Use the following to answer questions
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point b, the Federal Reserve can close the output gap
A)by pursuing an expansionary monetary policy to raise the interest rate and decrease short-run aggregate supply.
B)by pursuing a contractionary monetary policy to drive down the interest rate and decrease aggregate demand.
C)by pursuing an expansionary monetary policy to drive down the interest rate and decrease short-run aggregate supply.
D)by pursuing a contractionary monetary policy to raise the interest rate and reduce aggregate demand.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point b, the Federal Reserve can close the output gap
A)by pursuing an expansionary monetary policy to raise the interest rate and decrease short-run aggregate supply.
B)by pursuing a contractionary monetary policy to drive down the interest rate and decrease aggregate demand.
C)by pursuing an expansionary monetary policy to drive down the interest rate and decrease short-run aggregate supply.
D)by pursuing a contractionary monetary policy to raise the interest rate and reduce aggregate demand.
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67
The shortest of the three lags for monetary policy is
A)the impact lag.
B)the implementation lag.
C)the government lag.
D)the recognition lag.
A)the impact lag.
B)the implementation lag.
C)the government lag.
D)the recognition lag.
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68
The lag in realizing that a macroeconomic problem exists is called
A)the recognition lag.
B)the implementation lag.
C)the impact lag.
D)the market lag.
A)the recognition lag.
B)the implementation lag.
C)the impact lag.
D)the market lag.
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69
Which of the following explains why the monetary policy implementation lag is relatively short?
I.The FOMC meets several times a year and policymakers are easily able to confer in between meetings.
II.Open market operations, one of the Fed's policy instruments can be put into effect
Immediately.
III.The Chairman of the Fed works in close collaboration with the President.
IV.Most financial institutions are member banks and will not hesitate to put into effect any new monetary policy.
A)I
B)I and II
C)I, II, and III
D)I, II, III, and IV
I.The FOMC meets several times a year and policymakers are easily able to confer in between meetings.
II.Open market operations, one of the Fed's policy instruments can be put into effect
Immediately.
III.The Chairman of the Fed works in close collaboration with the President.
IV.Most financial institutions are member banks and will not hesitate to put into effect any new monetary policy.
A)I
B)I and II
C)I, II, and III
D)I, II, III, and IV
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70
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Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point b, the Federal Reserve can close the output gap by selling bonds.In the bond market,
A)the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B)the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C)the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D)the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point b, the Federal Reserve can close the output gap by selling bonds.In the bond market,
A)the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B)the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C)the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D)the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.
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71
The delay between the time a policy is enacted and the time the policy has its effect on the economy is called
A)the impact lag.
B)the implementation lag.
C)the government lag.
D)the recognition lag.
A)the impact lag.
B)the implementation lag.
C)the government lag.
D)the recognition lag.
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72
What are the two policy-making bodies of the Federal Reserve?
A)the Board of Governors and the U.S.Congress
B)the Board of Governors and the Federal Open Market Committee
C)the Board of Governors and the Presidents' office
D)the Federal Open Market Committee and the U.S.Congress
A)the Board of Governors and the U.S.Congress
B)the Board of Governors and the Federal Open Market Committee
C)the Board of Governors and the Presidents' office
D)the Federal Open Market Committee and the U.S.Congress
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73
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Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point b,
A)the unemployment rate is negative.
B)the unemployment rate is zero.
C)the level of employment is greater than the natural level of employment.
D)it is at the natural level of employment.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
If the economy is at point b,
A)the unemployment rate is negative.
B)the unemployment rate is zero.
C)the level of employment is greater than the natural level of employment.
D)it is at the natural level of employment.
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74
What are the three types of monetary policy lags?
A)the recognition lag, the identification lag, and the implementation lag
B)the recognition lag, the inflation lag, and the impact lag
C)the recognition lag, the implementation lag, and the government lag
D)the recognition lag, the implementation lag, and the impact lag
A)the recognition lag, the identification lag, and the implementation lag
B)the recognition lag, the inflation lag, and the impact lag
C)the recognition lag, the implementation lag, and the government lag
D)the recognition lag, the implementation lag, and the impact lag
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75
The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called
A)the impact lag.
B)the implementation lag.
C)the government lag.
D)the recognition lag.
A)the impact lag.
B)the implementation lag.
C)the government lag.
D)the recognition lag.
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76
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Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
Assume that the economy is at point b.A decrease in the money supply would cause
A)a shift of the aggregate demand curve from AD1 to AD2.
B)a shift of the aggregate demand curve from AD2 to AD1.
C)a shift of the short-run aggregate supply curve from AS1 to AS2.
D)a shift of the short-run aggregate supply curve from AS2 to AS1.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
Assume that the economy is at point b.A decrease in the money supply would cause
A)a shift of the aggregate demand curve from AD1 to AD2.
B)a shift of the aggregate demand curve from AD2 to AD1.
C)a shift of the short-run aggregate supply curve from AS1 to AS2.
D)a shift of the short-run aggregate supply curve from AS2 to AS1.
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77
The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the
A)impact lag.
B)recognition lag.
C)implementation lag.
D)theory lag.
A)impact lag.
B)recognition lag.
C)implementation lag.
D)theory lag.
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78
Use the following to answer questions
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
Long-run equilibrium positions occur at points
A)a and d.
B)a and b.
C)c and d.
D)b and d.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
Long-run equilibrium positions occur at points
A)a and d.
B)a and b.
C)c and d.
D)b and d.
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79
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Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
Short-run but not long-run equilibrium positions occur at points
A)a and b.
B)b and c.
C)c and d.
D)a and c.
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply

(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply)
Short-run but not long-run equilibrium positions occur at points
A)a and b.
B)b and c.
C)c and d.
D)a and c.
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80
The delay between the time at which an event occurs and the time at which policymakers become aware of it is called
A)the impact lag.
B)the implementation lag.
C)the government lag.
D)the recognition lag.
A)the impact lag.
B)the implementation lag.
C)the government lag.
D)the recognition lag.
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