Question 1

The Fed conducts monetary policy so as to counteract any positive or negative demand shocks.

Accepted Answer

A) True 
 B)False

Question 2

What is the economic justification for an independent central bank?

Accepted Answer

The major justification is that an indep

Question 3

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

Accepted Answer

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

Question 4

Economists refer to the sum of all currency plus reserves on the Fed's balance sheet liabilities as

Accepted Answer

A) aggregate demand. 
B) implicit power. 
C) the Fed's operating budget. 
D) the monetary base. 
E) the Fed's net worth. 
A) aggregate demand. 
B) implicit power. 
C) the Fed's operating budget. 
D) the monetary base. 
E) the Fed's net worth.

Question 5

Explain why there is no tradeoff between inflation and unemployment in the short run or the long run.

Accepted Answer

In the short run, inflation do

Question 6

If the rest of the world falls into a deep recession, the Fed is likely to raise interest rates.

Accepted Answer

A) True 
 B)False

Question 7

The Phillips curve reflects a positive correlation between inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 8

Quantitative easing refers to the change in

Accepted Answer

A) interest rates. 
B) the amount of money supply. 
C) stock prices. 
D) the number of loans instead of their sizes. 
E) None of these. 
A) interest rates. 
B) the amount of money supply. 
C) stock prices. 
D) the number of loans instead of their sizes. 
E) None of these.

Question 9

Suppose the economy is in a boom in which real GDP is greater than potential GDP. The rate of inflation, however, remains at the target level set by the Fed. Suppose that financial markets are convinced that higher inflation is imminent and, in agreement, the Fed decides to increase interest rates.

Accepted Answer

The answer of Suppose the economy is in a boom...

Question 10

If the Fed determines the amount of money in circulation, the interest rate is determined by the

Accepted Answer

A) required reserve ratio. 
B) currency to deposit ratio. 
C) money multiplier. 
D) monetary base. 
E) demand for money. 
A) required reserve ratio. 
B) currency to deposit ratio. 
C) money multiplier. 
D) monetary base. 
E) demand for money.

Question 11

If a small country, such as Argentina, attempts to fix its currency exchange rate with the United States,

Accepted Answer

A) its inflation rate must be higher than the U.S.inflation rate. 
B) its interest rates will move together with the U.S.interest rates. 
C) its currency value relative to the U.S.dollar will fluctuate over time. 
D) its central bank will have full flexibility in monetary policy actions. 
E) it must restrict the flow of funds with the United States. 
A) its inflation rate must be higher than the U.S.inflation rate. 
B) its interest rates will move together with the U.S.interest rates. 
C) its currency value relative to the U.S.dollar will fluctuate over time. 
D) its central bank will have full flexibility in monetary policy actions. 
E) it must restrict the flow of funds with the United States.

Question 12

A line depicting the relationship between the quantity of money demanded and the interest rate is

Accepted Answer

A) negatively sloped. 
B) positively sloped. 
C) horizontal. 
D) vertical. 
E) horizontal at high interest rates and vertical at low interest rates. 
A) negatively sloped. 
B) positively sloped. 
C) horizontal. 
D) vertical. 
E) horizontal at high interest rates and vertical at low interest rates.

Question 13

The hypothesis of political business cycles asserts that

Accepted Answer

A) politicians can produce a favorable short-run tradeoff between inflation and unemployment to improve their chances of reelection. 
B) economic expansions and contractions are functions of congressional support for the president's economic policy. 
C) political popularity is not a function of the business cycle. 
D) an economic recession takes place before every national election. 
E) political manipulation of the business cycle is an effective way to increase permanent economic growth. 
A) politicians can produce a favorable short-run tradeoff between inflation and unemployment to improve their chances of reelection. 
B) economic expansions and contractions are functions of congressional support for the president's economic policy. 
C) political popularity is not a function of the business cycle. 
D) an economic recession takes place before every national election. 
E) political manipulation of the business cycle is an effective way to increase permanent economic growth.

Question 14

If the Fed has fixed the interest rate,

Accepted Answer

A) it must conduct open market sales when money demand increases. 
B) the money demand will not change. 
C) money supply and money demand will not change. 
D) it must conduct open market sales when money demand decreases. 
E) the money supply will not change. 
A) it must conduct open market sales when money demand increases. 
B) the money demand will not change. 
C) money supply and money demand will not change. 
D) it must conduct open market sales when money demand decreases. 
E) the money supply will not change.

Question 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Explain how the facts justify the conclusion implied by the AD-IA analysis: There is no long-run tradeoff between inflation and unemployment.

Accepted Answer

The facts justify this conclusion. In th

Question 18

The low unemployment rate in the late 1990s resulted in high rates of inflation.

Accepted Answer

A) True 
 B)False

Question 19

Assuming everything else held constant, suppose there is an increase in the demand for money.

Accepted Answer

The answer of Assuming everything else held constant, suppose there...

Question 20

In the past, the Fed has been criticized for increasing interest rates even though the rate of inflation was not rising at the time of the rate increase. Were the Fed's critics correct?

Accepted Answer

Not necessarily. The Fed will increase i

Exam 27: Monetary Policy

The Fed conducts monetary policy so as to counteract any positive or negative demand shocks.

What is the economic justification for an independent central bank?

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

Economists refer to the sum of all currency plus reserves on the Fed's balance sheet liabilities as

Explain why there is no tradeoff between inflation and unemployment in the short run or the long run.

If the rest of the world falls into a deep recession, the Fed is likely to raise interest rates.

The Phillips curve reflects a positive correlation between inflation and unemployment.

Quantitative easing refers to the change in

Suppose the economy is in a boom in which real GDP is greater than potential GDP. The rate of inflation, however, remains at the target level set by the Fed. Suppose that financial markets are convinced that higher inflation is imminent and, in agreement, the Fed decides to increase interest rates.

If the Fed determines the amount of money in circulation, the interest rate is determined by the

If a small country, such as Argentina, attempts to fix its currency exchange rate with the United States,

A line depicting the relationship between the quantity of money demanded and the interest rate is

The hypothesis of political business cycles asserts that

If the Fed has fixed the interest rate,

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

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

Explain how the facts justify the conclusion implied by the AD-IA analysis: There is no long-run tradeoff between inflation and unemployment.

The low unemployment rate in the late 1990s resulted in high rates of inflation.

Assuming everything else held constant, suppose there is an increase in the demand for money.

In the past, the Fed has been criticized for increasing interest rates even though the rate of inflation was not rising at the time of the rate increase. Were the Fed's critics correct?

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Efficiency of Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, Monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, Transfers, and Income Distribution

Public Goods, Externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Economic Growth Around the World

International Trade

International Finance

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