Deck 17: Monetary Policy

Question 1

The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was

A)fighting inflation.
B)increasing employment.
C)increasing economic growth.
D)increasing regulation of commercial banks.
E)a low current account deficit.

Answer 1

fighting inflation.

Question 2

Toll Brothers,a residential home builder,did well during the recession in 2001 but did not do so well in 2007 after the housing bubble burst.The reason for this is

A)the Fed lowered interest rates in 2001 but raised interest rates in 2007 to help fight inflation.
B)the Fed lowered interest rates in 2001 but did not believe that cutting the interest rate in 2007 would be enough to revive the housing market.
C)the Fed raised interest rates in 2001 but did not believe that cutting the interest rate in 2007 would be enough to revive the housing market.
D)the Fed raised interest rates in 2001 but lowered interest rates in 2007 to revive the housing market.
E)the Fed raised interest rates in 2001 and raised interest rates in 2007 to help fight inflation.

Answer 2

the Fed lowered interest rates in 2001 but did not believe that cutting the interest rate in 2007 would be enough to revive the housing market.

Question 3

An increase in the price level causes

A)the money demand curve to shift to the left.
B)the money demand curve to shift to the right.
C)a movement up along the money demand curve.
D)a movement down along the money demand curve.

Answer 3

the money demand curve to shift to the right.

Question 4

List the Fed's four main monetary goals.

Question 5

The Federal Reserve's two main ________ are the money supply and the interest rate.

A)monetary policy targets
B)policy tools
C)fiscal policy targets
D)fiscal tools

Question 6

The Federal Reserve can directly affect its monetary policy ________,which then affect its monetary policy ________.

A)goals;targets
B)goals;tools
C)targets;goals
D)targets;tools

Question 7

Monetary policy refers to the actions the

A)President and Congress take to manage the money supply and interest rates to pursue their economic objectives.
B)Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives.
C)President and Congress take to manage government spending and taxes to pursue their economic objectives.
D)Federal Reserve takes to manage government spending and taxes to pursue its economic objectives.

Question 8

An increase in the interest rate

A)decreases the opportunity cost of holding money.
B)increases the opportunity cost of holding money.
C)decreases the percentage yield of holding money.
D)increases the percentage yield of holding money.

Question 9

Since World War II,the Federal Reserve has not been involved in carrying out monetary policy.

Question 10

Which of the following would cause the money demand curve to shift to the left?

A)an open market purchase of Treasury securities by the Federal Reserve
B)an increase in the interest rate
C)an increase in the price level
D)a decrease in real GDP

Question 11

What is a banking panic,and what role did banking panics play in the decision by Congress to establish the Federal Reserve?

Question 12

The Federal Reserve System's four monetary policy goals are

A)low government budget deficits,low current account deficits,high employment,and a high foreign exchange value of the dollar.
B)low rate of bank failures,high reserve ratios,price stability,and economic growth.
C)price stability,high employment,economic growth,and stability of financial markets and institutions.
D)price stability,low government budget deficits,low current account deficits,and low rate of bank failures.

Question 13

If the probability of losing your job remains ________,a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time.

A)low;lowers
B)low;raises
C)high;lowers
D)high;raises
E)low;does not change

Question 14

The money demand curve has a

A)negative slope because an increase in the interest rate decreases the quantity of money demanded.
B)positive slope because an increase in the interest rate increases the quantity of money demanded.
C)negative slope because an increase in the price level decreases the quantity of money demanded.
D)positive slope because an increase in the price level increases the quantity of money demanded.

Question 15

During the turmoil in the market for subprime mortgages in 2007 and 2008,the Fed increased the volume of discount loans.The goal of the Fed was to

A)reduce the rate of inflation.
B)stimulate economic growth.
C)reduce unemployment.
D)reassure financial markets and promote financial stability.
E)reduce the current account deficit.

Question 16

One of the monetary policy goals of the Federal Reserve is price stability.

Question 17

Inflation rates during the years 1979-1981 were the highest the United States has ever experienced during peacetime.

Question 18

An increase in the interest rate causes

A)a movement up along the money demand curve.
B)a movement down along the money demand curve.
C)the money demand curve to shift to the left.
D)the money demand curve to shift to the right.

Question 19

When the Federal Reserve System was established in 1913,its main policy goal was

A)encouraging strong economic growth.
B)promoting price stability.
C)preventing bank panics.
D)keeping employment high.

Question 20

The goals of monetary policy tend to be interrelated.For example,when the Fed pursues the goal of ________,it also can achieve the goal of ________ simultaneously.

A)high employment;economic growth
B)high employment;lowering government spending
C)economic growth;a low current account deficit
D)stability of financial markets;a low current account deficit

Question 21

Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency.Using the money demand and money supply model and assuming everything else is held constant,the equilibrium interest rate should

A)increase.
B)decrease.
C)not change.
D)increase,then decrease.

Question 22

An increase in the demand for Treasury bills will

A)increase the price of Treasury bills.
B)increase the interest rate on Treasury bills.
C)increase the opportunity cost of holding money vs.Treasury bills.
D)eventually cause households to hold less money.

Question 23

The Fed can directly lower the inflation rate.

Question 24

Figure 17-3
Refer to Figure 17-3.In the figure above,when the money supply shifts from MS₁ to MS₂,at the interest rate of 3 percent households and firms will

A)buy Treasury bills.
B)sell Treasury bills.
C)neither buy nor sell Treasury bills.
D)want to hold more money.

Question 25

The Fed can increase the federal funds rate by

A)selling Treasury bills,which increases bank reserves.
B)buying Treasury bills,which increases bank reserves.
C)selling Treasury bills,which decreases bank reserves.
D)buying Treasury bills,which decreases bank reserves.

Question 26

Figure 17-2
Refer to Figure 17-2.In the figure above,when the money supply shifts from MS₁ to MS₂,at the interest rate of 3 percent households and firms will

A)buy Treasury bills.
B)sell Treasury bills.
C)neither buy nor sell Treasury bills.
D)want to hold less money.

Question 27

Using the money demand and money supply model,an increase in money demand would cause the equilibrium interest rate to

A)decrease.
B)increase.
C)not change.
D)increase,then decrease.

Question 28

The monetary policy target the Federal Reserve focuses primarily on today is

A)the unemployment rate.
B)M₁.
C)the inflation rate.
D)the interest rate.
E)M₂.

Question 29

The interest rate that banks charge other banks for overnight loans is the

A)prime rate.
B)discount rate.
C)federal funds rate.
D)Treasury bill rate.

Question 30

Figure 17-1
Refer to Figure 17-1.In the figure,the money demand curve would move from MD₁ to MD₂ if

A)real GDP increased.
B)the price level decreased.
C)the interest rate increased.
D)the Federal Reserve sold Treasury securities.

Question 31

When the Federal Reserve decreases the money supply,at the previous equilibrium interest rate households and firms will now want to

A)buy Treasury bills.
B)sell Treasury bills.
C)neither buy nor sell Treasury bills.
D)hold less money.

Question 32

For purposes of monetary policy,the Federal Reserve has targeted the interest rate known as the

A)federal funds rate.
B)Treasury bill rate.
C)discount rate.
D)prime rate.

Question 33

Which of the following will lead to a decrease in the equilibrium interest rate in the economy?

A)an increase in the price level
B)a sale of government securities by the Fed
C)a decrease in GDP
D)an increase in the discount rate
E)an increase in the reserve requirement

Question 34

Using the money demand and money supply model,an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

A)increase.
B)decrease.
C)not change.
D)increase if the economy is in a recession.

Question 35

When the Federal Reserve increases the money supply,at the previous equilibrium interest rate households and firms will now have

A)more money than they want to hold.
B)less money than they want to hold.
C)the amount of money that they want to hold.
D)to sell Treasury bills.

Question 36

Which of the following is true?

A)The money market model is essentially a model that determines the short-term nominal rate of interest.
B)The money market model is essentially a model that determines the short-term real rate of interest.
C)The loanable funds model is essentially a model that determines the short-term real rate of interest.
D)The loanable funds model is essentially a model that determines the long-term nominal rate of interest.

Question 37

An increase in real GDP can shift

A)money demand to the right and decrease the equilibrium interest rate.
B)money demand to the right and increase the equilibrium interest rate.
C)money demand to the left and decrease the equilibrium interest rate.
D)money demand to the left and increase the equilibrium interest rate.

Question 38

Changes in the federal funds rate usually result in

A)changes in both short-term and long-term interest rates with more of an effect on short-term interest rates.
B)changes in both short-term and long-term interest rates with more of an effect on long-term interest rates.
C)changes in both short-term and long-term interest rates with equal effect on both.
D)no change in both short-term and long-term interest rates.

Question 39

The Fed can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates.

Question 40

Using the money demand and money supply model,an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

A)increase.
B)decrease.
C)not change.
D)increase,then decrease.

Question 41

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.

A)increase;more
B)decrease;less
C)decrease;more
D)increase;less
E)increase;similar

Question 42

In response to already low interest rates doing little to stimulate the economy,the Fed announced a new program in September 2011 under which it would purchase long-term Treasury securities while selling an equal amount of shorter-term Treasury securities.This policy was known as

A)inflation targeting.
B)Operation Twist.
C)securities-bubble deflating.
D)quantitative easing.

Question 43

Figure 17-4
Refer to Figure 17-4.In the figure above,if the economy is at point A,the appropriate monetary policy by the Federal Reserve would be to

A)lower interest rates.
B)raise interest rates.
C)lower income taxes.
D)raise income taxes.

Question 44

The situation in which short-term interest rates are pushed to zero,leaving the central bank unable to lower them further is known as

A)the Taylor rule.
B)a liquidity trap.
C)a zero-sum game.
D)an interest rate panic.

Question 45

The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

A)tax rates.
B)real interest rates.
C)nominal interest rates.
D)foreign exchange rates.

Question 46

Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.

Question 47

A monetary policy target is a variable that the Fed can affect directly,which then affects one or more of the Fed's policy goals.

Question 48

An increase in interest rates

A)decreases investment spending on machinery,equipment and factories,but increases consumption spending on durable goods and net exports.
B)decreases investment spending on machinery,equipment and factories,and consumption spending on durable goods,but increases net exports.
C)decreases investment spending on machinery,equipment and factories,consumption spending on durable goods,and net exports.
D)increases investment spending on machinery,equipment and factories,consumption spending on durable goods,and net exports.

Question 49

An increase in the interest rate should ________ the demand for dollars and the value of the dollar,and net exports should ________.

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

Question 50

Expansionary monetary policy refers to the ________ to increase real GDP.

A)government's increasing spending and lowering taxes
B)government's decreasing spending and raising taxes
C)Federal Reserve's increasing the money supply and decreasing interest rates
D)Federal Reserve's decreasing the money supply and increasing interest rates

Question 51

In response to already low interest rates doing little to stimulate the economy,the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low.This policy is known as

A)inflation targeting.
B)contractionary monetary policy.
C)securities-bubble deflating.
D)quantitative easing.

Question 52

Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $800 billion.Suppose the Federal Reserve increases the money supply to $850 billion.At the previous equilibrium interest rate of 5 percent,will households and firms now be holding more money or less money than they want to hold,and will they be buying or selling short-term financial assets? At the new equilibrium interest rate,households and firms will desire to hold the entire $850 billion of the money supply.What causes households and firms to want to hold the additional $50 billion of the money supply?

Question 53

Figure 17-5
Refer to Figure 17-5.Suppose the economy is in a recession and no policy is pursued.Using the static AD-AS model in the figure above,this situation would be depicted as a movement from

A)A to B.
B)B to A.
C)C to B.
D)A to E.
E)C to D.

Question 54

Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve's open market sale of Treasury securities.

Question 55

Figure 17-5
Refer to Figure 17-5.Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy.Using the static AD-AS model in the figure above,this situation would be depicted as a movement from

A)A to B.
B)B to D.
C)C to B.
D)B to C.
E)C to D.

Question 56

Does the money demand curve have a positive slope or a negative slope? Why does it have this slope? Explain why an increase in the variable on the vertical axis of the money demand curve causes either an increase or a decrease in the variable on the horizontal axis of the money demand curve.

Question 57

Figure 17-5
Refer to Figure 17-5.Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy.Using the static AD-AS model in the figure above,this would be depicted as a movement from

A)A to B.
B)B to C.
C)C to B.
D)A to E.
E)C to D.

Question 58

From an initial long-run macroeconomic equilibrium,if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply,then the Federal Reserve would most likely

A)decrease interest rates.
B)increase interest rates.
C)decrease income tax rates.
D)increase income tax rates.

Question 59

Figure 17-5
Refer to Figure 17-5.Suppose the economy is in short-run equilibrium above potential GDP,the unemployment rate is very low,and wages and prices are rising.Using the static AD-AS model in the figure above,the correct Fed policy for this situation would be depicted as a movement from

A)A to B.
B)B to C.
C)C to B.
D)A to E.
E)C to D.

Question 60

Figure 17-5
Refer to Figure 17-5.Suppose the Fed lowers its target for the federal funds rate.Using the static AD-AS model in the figure above,this situation would be depicted as a movement from

A)A to B.
B)B to A.
C)C to B.
D)E to A.
E)C to D.

Question 61

When the Federal Reserve increases the money supply,people spend more because interest rates fall.

Question 62

Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP.Explain what happens to aggregate demand,real GDP,and the price level.

Question 63

Contractionary monetary policy on the part of the Fed results in

A)an increase in the money supply,an increase in interest rates,and an increase in GDP.
B)a decrease in the money supply,an increase in interest rates,and a decrease in GDP.
C)an increase in the money supply,a decrease in interest rates,and an increase in GDP.
D)a decrease in the money supply,a decrease in interest rates,and a decrease in GDP.

Question 64

Figure 17-6
Refer to Figure 17-6.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,the Federal Reserve would most likely

A)increase interest rates.
B)decrease interest rates.
C)not change interest rates.
D)decrease the inflation rate.

Question 65

When the Fed uses contractionary policy,

A)the price level rises higher than it would if the Fed did not pursue policy.
B)the price level rises less than it would if the Fed did not pursue policy.
C)it does not change the price level.
D)it causes inflation.

Question 66

The economy suffered a mild recession in 2001.Despite the recession,home sales and durable goods sales remained high.Which of the following is a plausible explanation?

A)The Fed's pursuit of contractionary policy stimulated these markets.
B)The Fed caused a reduction in the federal funds rate to its lowest level in 40 years.
C)Rising inflation encouraged many to invest in the real estate market.
D)Home building and consumer durable purchases are always high during a recession.

Question 67

Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

A)oil prices.
B)business taxes.
C)income tax rates.
D)investment spending.

Question 68

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve

A)does not try to eliminate recessions,but instead focuses on preventing inflation.
B)can fine tune the economy and realistically hope to keep the economy from experiencing recessions.
C)cannot realistically fine tune the economy,but seeks to keep recessions shorter and milder than they would otherwise be.
D)cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions.

Question 69

Figure 17-6
Refer to Figure 17-6.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,and the Federal Reserve pursues no policy,then at point B

A)there is pressure on wages and prices to rise.
B)the unemployment rate is very,very low.
C)firms are operating above their normal capacity.
D)the economy is below full employment.
E)incomes and profits are rising.

Question 70

Your roommate is having trouble grasping how monetary policy works.Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

A)lowers the interest rate,and firms increase investment spending.
B)causes people to spend more because they know prices will rise in the future.
C)raises the interest rate and consumers decrease spending on durable goods.
D)lowers the interest rate,raises the value of the dollar,lowers the prices of exports,and raises net exports.

Question 71

If the Federal Reserve raises or lowers interest rates too late,it could result in a ________ policy that destabilizes the economy.

A)fiscal
B)budgetary
C)procyclical
D)countercylical

Question 72

If the Fed orders a contractionary monetary policy,describe what will happen to the following variables relative to what would have happened without the policy:
a.The money supply
b.Interest rates
c.Investment
d.Consumption
e.Net Exports
f.The aggregate demand curve
g.Real GDP
h.The price level

Question 73

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.

A)higher;higher
B)higher;lower
C)lower;higher
D)lower;lower

Question 74

When calculating GDP,the Bureau of Economic Analysis revises its quarterly data

A)a total of one time.
B)a total of two times.
C)a total of three times.
D)many times over the next several years.

Question 75

What actions should the Fed take if it believes the economy is about to fall into recession?

Question 76

Expansionary monetary policy refers to the Fed's increasing the money supply and increasing interest rates to increase real GDP.

Question 77

Monetary policy could be procyclical if the Federal Reserve

A)is late recognizing that a recession has begun and conducts expansionary monetary policy.
B)is quick to recognize that a recession has begun and conducts expansionary monetary policy.
C)is late recognizing that a recession has begun and does not conduct expansionary monetary policy.
D)is quick to recognize that a recession has begun and does not conduct expansionary monetary policy.

Question 78

Figure 17-6
Refer to Figure 17-6.In the dynamic model of AD-AS in the figure above,the economy is at point A in year 1 and is expected to go to point B in year 2,and the Federal Reserve pursues policy.This will result in

A)unemployment rates higher than what would occur if no policy had been pursued.
B)inflation higher than what would occur if no policy had been pursued.
C)real GDP lower than what would occur if no policy had been pursued.
D)short-term interest rates higher than what would occur if no policy had been pursued.

Question 79

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

A)use open market operations to buy Treasury bills
B)use open market operations to sell Treasury bills
C)use discount policy to raise the discount rate
D)raise the reserve requirement

Question 80

Changes in interest rates affect all four components of aggregate demand.