Deck 23: The Challenges of Monetary Policy

Question 1

The school of thought that was born during the Great Depression of the 1930s, which said the level of aggregate demand determined the level of output, was led by

A)Milton Friedman.
B)John Maynard Keynes.
C)John Kenneth Galbraith.
D)Paul Samuelson.

Answer 1

B

Question 2

The problem, according to Keynes, was that

A)aggregate demand was not as important as aggregate supply.
B)the level of aggregate demand was rarely an amount that would achieve full employment and stable prices.
C)inflation was everywhere and always a monetary phenomena.
D)supply was always too great.

Answer 2

B

Question 3

The buildup of the economy associated with World War II

A)seemed to validate Keynesian theory.
B)put a stop to Keynesian theory.
C)found the lack of inflation to be a surprise.
D)continued the unemployment problem through World War II (1941-1946).

Answer 3

A

Question 4

A condition of concurrent high unemployment and high inflation is called

A)accommodation.
B)stop-go policy cycle.
C)stagflation.
D)a supply shock.

Question 5

A recession is typically characterized by

A)increases in output
B)increases in unemployment
C)increases in the growth rate of prices
D)All of the above are correct.

Question 6

Which of the following have played major roles in economic contractions and expansions since the early 1970s?

A)a flexible exchange rate system that replaced a fixed exchange rate system
B)increased globalization
C)increased response by the Fed to demand and supply shocks
D)All of the above are correct.

Question 7

Growth of aggregate supply over time is determined by the growth of

A)capital.
B)labor force.
C)productivity.
D)All of the above are correct.

Question 8

What determines the growth of capital, labor, and productivity?

A)the amount of resources devoted to research and development
B)growth of population
C)educational attainment and health of workers
D)All of the above are correct.

Question 9

Which of the following affects the willingness of firms to invest and the willingness of households to work and save?

A)the government's tax policy
B)the government's foreign policy
C)sustainable growth policy
D)long-run growth of output policy

Question 10

An unstable economic environment

A)can be characterized by a series of inflationary booms.
B)can be characterized by a series of deflationary recessions.
C)is likely to inhibit long-run growth.
D)All of the above are correct.

Question 11

Why are economists concerned with unemployment as measured by the unemployment rate?

A)when the unemployment rate is high, wages tend to rise
B)if the nation is to reach its full economic potential then all individuals must have the opportunity to become productive employed members of society
C)output that could have been produced in the previous year by those who were unemployed is forever lost
D)All of the above are correct.
E)Both b and c are correct.

Question 12

If the prices of all goods and services double, and wages and salaries do likewise, how are individuals and the nation as a whole affected?

A)There is no effect on real output.
B)The inflation rate is doubled.
C)Real wages fall.
D)All of the above are correct.

Question 13

Inflation redistributes income

A)from workers to firms.
B)from lenders to borrowers.
C)from the poor to the rich.
D)All of the above may be correct.

Question 14

Which of the following was the first act that mandated the federal government to pursue policies to achieve full employment, stable prices, and adequate growth?

A)the Employment Act of 1946
B)the Federal Reserve Act of 1913
C)the Humphrey-Hawkins Act of 1978
D)the McFadden Act of 1927

Question 15

Which of the following acts followed the Employment Act of 1946 in mandating that the government pursue policies to achieve full employment and stable prices?

A)the Financial Institutions Recovery, Reform , and Enforcement Act of 1989
B)the Garn-St. Germain Act of 1982
C)the Humphrey-Hawkins Act of 1978
D)Gramm-Leach-Bliley Act of 1999

Question 16

To be unemployed, an individual must be

A)in the labor force.
B)at least 16 years old and not working.
C)actively seeking a job.
D)All of the above are correct.

Question 17

Any event that shifts the short-run aggregate supply curve is called

A)accommodation.
B)stop-go policy cycle.
C)stagflation.
D)a supply shock.

Question 18

Which of the following choices best explains why full employment is an important goal of monetary policy?

A)For a nation to reach its economic potential, individuals must be given an opportunity to become productive (employed) members of society.
B)For a nation to maintain price stability, full employment must be attained first.
C)Full employment ensures that a nation's external balance will be satisfactory.
D)Full employment is a condition for politicians to be elected.

Question 19

Which of the following is false?

A)Starting from full employment, an unexpected drop in aggregate demand causes a demand-induced recession.
B)If policymakers do nothing in response to an unexpected drop in aggregate demand, the short-run aggregate supply curve eventually shifts to the right as firms and workers adjust their price expectations downward.
C)If policymakers do nothing in response to an unexpected drop in aggregate demand, the economy eventually returns to full employment at a higher price level.
D)In response to a drop in aggregate demand, if policymakers choose to boost demand through fiscal or monetary policy, then the economy returns to full employment at the original price level.

Question 20

In looking at the cyclical pattern of the recessions and expansions since the Great Depression, researchers are in general agreement that the biggest cause of the ups and downs was which of the following?

A)shocks to the aggregate supply curve
B)policy errors by the Federal government
C)too much illiteracy
D)fluctuations in aggregate demand

Question 21

The productivity of capital is thought to depend on which of the following?

A)the amount of support for research and development
B)the size of the labor force
C)natural resources
D)personal income

Question 22

From the economic perspective, the willingness of firms to invest and the willingness of households to work or save depend largely on which of the following?

A)what philosophies are taught in school
B)the nature of the people in a particular geographic area
C)the government's tax policy and the economic outlook
D)the availability of government subsides

Question 23

An unstable economic environment will likely cause which of the following?

A)inflationary booms and deflationary recessions
B)aggregate demand and supply in steady equilibrium
C)secular trends easy to predict
D)long-run growth due to the excitement of change

Question 24

Price stability means

A)zero inflation.
B)low inflation.
C)regulated inflation.
D)an inflation rate equal to the prime interest rate.

Question 25

When real output has fallen below its natural level and prices have risen, the economy is experiencing

A)demand-pull inflation.
B)cost-push inflation.
C)a simultaneous recession and inflation.
D)Both b and c are correct.

Question 26

Supply-shocks can

A)be beneficial.
B)be detrimental.
C)cause rising prices and higher unemployment.
D)All of the above are correct.

Question 27

Unemployment is a concern to the nation because

A)if the economy is to reach its full potential, all individuals should be given the opportunity to work.
B)the government budget should be balanced and the more workers that work, the greater the taxes collected.
C)unemployment will cause a trade deficit.
D)riot control costs money.

Question 28

Output that could have been produced last year by those resources that were unemployed

A)has to be made up by producing more this year.
B)demands a sense of trust that a recovery cycle will double output in the following year.
C)adds to long-run cost because of the need for retraining.
D)is lost forever and can never be made up.

Question 29

The Fed and other central banks have seen a decline in their ability to control domestic economies because of all of the following except that

A)the banking system share of intermediation is declining.
B)banks have found ways to attract deposits that are not subject to reserve requirements.
C)global forces are more important than ever before.
D)the power of the IMF has increased.

Question 30

Which of the following equations best explains the relationships among inflation, taxes, interest, and real after-tax returns?

A)nominal interest rate - Expected inflation rate - Taxes = Real after-tax return
B)expected inflation rate - Nominal interest rate - Taxes = Real after-tax return
C)nominal interest rate - Expected inflation rate = Real after-tax return - Taxes
D)real after-tax return - Expected inflation rate - Taxes = Nominal interest rate

Question 31

If the Fed establishes goals for inflation and growth that are very different from other countries,

A)flexible exchange rates will return to fixed rates.
B)there will be substantial fluctuations in exchange rates.
C)much of the risk of international trading will be eliminated.
D)the action by the Fed will be investigated by Congress.

Question 32

The initial effect of an unexpected fall in aggregate demand is an unanticipated rise in which of the following?

A)cash flow
B)borrowing
C)the sale of corporate bonds
D)inventories

Question 33

A recession is often defined as a

A)production period where output is declining for three consecutive months.
B)year in which output in any two quarters is lower than the previous year.
C)year of low prices.
D)fall in real GDP lasting at least two consecutive quarters.

Question 34

Because the focus of monetary and fiscal policy tends on the average to be on the short run, it has most often been which of the following?

A)expansionary
B)contractionary
C)steady, actually almost stagnant
D)up and down like a smooth wave

Question 35

What could the Fed do to offset an unexpected increase in aggregate demand?

A)It could lower the discount rate.
B)It could raise interest rates.
C)It could lower reserve requirements.
D)It could reduce aggregate demand by buying securities in the open market.

Question 36

Which of the following is a true statement regarding price patterns in recent years?

A)The inflation rate has accelerated in recessions.
B)The inflation rate has decelerated in expansions.
C)The inflation rate was very high throughout the 1990s.
D)In late 2008 and early 2009, there were strong deflationary pressures from the housing market and bankruptcies of retail firms in general.

Question 37

Steady non-inflationary growth can be achieved by which of the following?

A)when aggregate demand increases by the same relative amount as long run-aggregate supply increases
B)when the increase in long run aggregate supply equals the increase in aggregate demand at the current price level
C)when the long run aggregate supply curve shifts rightward by the same percent as the aggregate demand curve
D)All of the above are correct.

Question 38

In the long run, the growth in real GDP is determined by

A)fiscal policy.
B)monetary policy.
C)both fiscal and monetary policy.
D)the growth of labor, capital, and productivity.

Question 39

The goals of monetary policy include all of the following except

A)sustainable economic growth.
B)full employment.
C)stable prices.
D)a balanced federal budget.

Question 40

Which of the following is true?

A)Achieving full employment, stable prices and a satisfactory external balance in the short run facilitates the achievement of sustainable economic growth in the long run.
B)Sustainable economic growth is determined by the growth and productivity of the labor force only.
C)Inflation increases the real value of money balances held.
D)Increases in inflation increase real after-tax returns.

Question 41

If the real interest rate rises relative to foreign rates, then

A)appreciation of the dollar is likely.
B)capital inflows could increase.
C)net exports could fall.
D)All of the above are correct.

Question 42

Which of the following is false?

A)As the U.S. economy becomes more globalized, monetary policymakers must be aware of the international effects of policy.
B)If monetary policymakers establish policy goals for inflation and growth that are widely divergent from other countries, substantial fluctuations in exchange rates can result.
C)U.S. policymakers have always been more concerned about inflation while German policymakers are more concerned about unemployment.
D)Fluctuations in exchange rates greatly increase the exchange rate risks of international trade and finance.

Question 43

Which of the following is false?

A)To be unemployed, one must be in the labor force.
B)A retired person is unemployed.
C)The labor force is the employed plus the unemployed.
D)The unemployment rate is the number unemployed divided by the labor force.

Question 44

If the nominal interest rate is 6 percent, the inflation rate is 4 percent and if the tax rate is 20 percent, what is the real after tax return?

A)1.8 percent
B).8 percent
C)2 percent
D)the real after-tax return is impossible to calculate from the information given.

Question 45

If the nominal interest rate is 6 percent, the inflation rate is 5 percent and if the tax rate is 30 percent, what is the real after tax return?

A)1.8 percent
B)-.8 percent
C)2 percent
D).8 percent

Question 46

If market participants expect the Fed to increase aggregate demand in response to a drop in aggregate demand, then,

A)the job of policymakers will be much easier.
B)input prices will respond much more quickly than otherwise.
C)if the Fed does nothing, the decrease in input prices that cause short run aggregate supply to shift rightward will take longer.
D)markets will automatically move to equilibrium very quickly.

Question 47

Which of the following causes the aggregate demand curve to shift?

A)Changes in the amount of labor
B)Changes in the amount of capital
C)Changes in technology
D)fiscal and monetary policies

Question 48

Which of the following shifts the short-run aggregate supply curve to the right?

A)increases in aggregate demand
B)increases in input prices
C)an adverse supply shock
D)decreases in input prices

Question 49

If the Fed increases demand in response to an adverse supply shock, then

A)the unemployment will get worse but the inflation better.
B)the unemployment and inflation rates will both fall.
C)the unemployment rate will go down but the inflation rate will go up.
D)nothing will happen because an adverse shock shifts the supply curve.

Question 50

When policymakers increase aggregate demand in response to an adverse supply shock, this is referred to as

A)accommodation.
B)full employment policy.
C)stagflation policy.
D)supply shock policy.

Question 51

How often does the Humphrey-Hawkins Act of 1978 require the Fed to report to Congress?

A)reporting to Congress is not a requirement of the act
B)at the end of every quarter (March, June, September, and December)
C)two times a year (February and July)
D)annually (in June)

Question 52

During the Great Depression of the 1930s, unemployment averaged more than

A)5 percent.
B)10 percent.
C)15 percent.
D)20 percent.

Question 53

During the Great Depression of the 1930s, prices fell on the average by more than

A)5 percent.
B)10 percent.
C)50 percent.
D)25 percent.

Question 54

In the 1970s, the economy was plagued with both high unemployment and high inflation. This was known as which of the following?

A)inflation
B)deflation
C)stagflation
D)recession

Question 55

A fall in the overall price level is which of the following?

A)inflation
B)deflation
C)stagflation
D)recession

Question 56

From the early 1970s on, the world economy experienced which of the following?

A)a new isolationism
B)decreased trade
C)a breakdown of trade barriers and an increase in international trade
D)a fixed exchange rate

Question 57

Since the early 1970s, the United States has experienced increased volatility of which of the following?

A)exchange rates
B)deflation
C)stagflation
D)All of the above are correct.

Question 58

Which of the following in not a goal of monetary policy?

A)economic growth
B)full employment
C)stable prices
D)raising enough tax revenue to prevent a government deficit

Question 59

The average piece of the economic pie per person is computed by dividing __________ by the population.

A)per capita nominal GDP
B)per capita real GDP
C)real GDP
D)nominal GDP

Question 60

The growth of aggregate supply is determined by all of the following except

A)national defense.
B)the growth of capital.
C)the growth of the labor force.
D)the growth of productivity.

Question 61

Which of the following is not a goal of monetary policy?

A)sustainable economic growth with price stability
B)lower taxes so as not to distort business decision-making
C)full employment with price stability
D)a satisfactory external balance consistent with domestic policy objectives

Question 62

Among other things, anti-inflationary policies include

A)lowering taxes.
B)cutting government spending.
C)lowering interest rates.
D)cutting the discount rate.

Question 63

Full employment and a noninflationary environment help to

A)promote sporadic spurts in growth.
B)achieve maximum sustainable growth.
C)cause stagnation.
D)cause inflation.

Question 64

How do adverse supply shocks affect economic performance?

A)They increase both real prices and real output.
B)They increase prices and decrease real output.
C)They increase real output and decrease prices.
D)None of the above is correct.

Question 65

If the expected inflation rate is 4 percent for next year, then

A)a return of 4 percent will give a real return of 1 percent.
B)a return of 8 percent will give a real return of 4 percent.
C)a return of 3 percent will give a return of negative 2 percent.
D)None of the above is correct.

Question 66

Firms using standard accounting procedures base depreciation allowance on historical cost of equipment rather than replacement cost. Inflation then causes which of the following?

A)depreciation allowances to be too small to replace capital goods that are wearing out
B)lower taxes, which partially compensates the firms
C)easier decision-making
D)firms replacing machinery more easily from their surplus funds

Question 67

Research has shown that as inflation rises,

A)the overall economic environment becomes more steady.
B)exports will rise as foreign countries draw on inflated U.S. bank holdings.
C)relative prices become more volatile and difficult to predict.
D)relative prices tend to become easier to predict.

Question 68

Relative to the rest of the world, inflation in the United States will cause which of the following?

A)Prices of U.S. goods will become relatively lower than prices of similar goods in other countries.
B)Foreign demand for U.S. goods will be less than without the inflation.
C)U.S. firms will get a larger share of the world markets.
D)The Fed will likely lower interest rates.

Question 69

If the Fed starts on a program of monetary restraint to control inflation, then

A)the growth rate of the United States economy will increase.
B)the dollar could depreciate.
C)prices will rise.
D)real interest rates could rise relative to foreign interest rates.

Question 70

In the 2009, most professional estimates of sustainable employment levels suggest an unemployment rate of around

A)3 percent.
B)4-4.5 percent.
C)10 percent.
D)2-3 percent.

Question 71

One of the key objectives of many monetary policymakers is which of the following?

A)price stability
B)high unemployment
C)the speed with which the economy comes out of a recession
D)a balanced federal budget

Question 72

The potential long-run growth rate for real GDP per year is estimated to be which of the following?

A)less than 2 percent
B)2.5 to 3 percent
C)5 percent
D)One of the areas where there is little consensus.

Question 73

Anti-inflationary fiscal policies include which of the following?

A)cutting government spending
B)raising taxes
C)raising interest rates
D)Both a and b are correct.

Question 74

What will happen in the long run if there is an unexpected increase in aggregate demand and the Fed does nothing?

A)Both output and prices will be higher.
B)Only the price level will increase; real output will return to its natural level.
C)A recession will occur and the aggregate demand curve will shift back to its starting position.
D)The aggregate supply curve will shift rightward; this will return price to its initial level and further increase real output.

Question 75

Which of the following would not cause an adverse-supply shock?

A)a decrease in the price of oil
B)major crop failures
C)earthquakes
D)floods

Question 76

If input prices are higher than firms expect,

A)output prices will have to go lower to get the firms to produce.
B)demand will likely increase.
C)the aggregate supply curve will shift to the left.
D)the supply curve will shift the right.

Question 77

Ceteris paribus, an increase in input prices may cause which of the following?

A)cost-push inflation
B)demand-pull inflation
C)an increase in production
D)employment to grow

Question 78

When an input price of an item such as crude petroleum decreases, the effect may lead to which of the following?

A)cost-push inflation
B)demand-pull deflation
C)an adverse shock
D)a beneficial shock

Question 79

What causes the long-run aggregate supply curve to shift?

A)changes in the amount of labor
B)changes in the amount of capital
C)changes in technology
D)All of the above are correct.