Question 1

Central bank independence guarantees that there will be no monetary policy mistakes.

Accepted Answer

A) True 
 B)False

Question 2

The table below shows the percentage difference between real and potential GDP and the rate of inflation for the years 1999 through 2003. If there were a presidential election in the year 2000, would these data support the view that there was a political business cycle during this period?

Accepted Answer

Yes. Notice that an expansion

Question 3

A constant money growth rule

Accepted Answer

A) leads to higher inflation. 
B) keeps interest rates stable. 
C) prevents the demand for money from shifting. 
D) does not work well because the demand for money is too volatile. 
E) works better than an interest rate rule because the demand for money is too volatile. 
A) leads to higher inflation. 
B) keeps interest rates stable. 
C) prevents the demand for money from shifting. 
D) does not work well because the demand for money is too volatile. 
E) works better than an interest rate rule because the demand for money is too volatile.

Question 4

The Fed's interest rate decisions depend on the level of

Accepted Answer

A) investment and the level of inflation. 
B) investment and the level of potential GDP. 
C) real GDP and the level of potential GDP. 
D) potential GDP and the level of inflation. 
E) inflation and the output gap. 
A) investment and the level of inflation. 
B) investment and the level of potential GDP. 
C) real GDP and the level of potential GDP. 
D) potential GDP and the level of inflation. 
E) inflation and the output gap.

Question 5

How does the institutional setup of the Federal Reserve contribute to its independence?

Accepted Answer

First, the Federal Reserve is not under

Question 6

When the actual and target rate of inflation are equal, the Fed will change interest rates only if it wants to change the target rate of inflation.

Accepted Answer

A) True 
 B)False

Question 7

In an attempt to avert the worst consequences of the financial crisis of 2007 and 2008, the Fed cut the interest rate all the way to zero during the crisis, requiring that it find other ways to stimulate the economy.

Accepted Answer

A) True 
 B)False

Question 8

Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the short run we would expect

Accepted Answer

A) a decrease in the rate of inflation. 
B) an increase in the rate of inflation. 
C) a higher real rate of interest. 
D) lower unemployment. 
E) a higher nominal interest rate. 
A) a decrease in the rate of inflation. 
B) an increase in the rate of inflation. 
C) a higher real rate of interest. 
D) lower unemployment. 
E) a higher nominal interest rate.

Question 9

The most important feature of a central bank is

Accepted Answer

A) the size of the money supply it controls. 
B) its ability to set fiscal policy. 
C) its operating budget. 
D) its independence from government. 
E) its net worth. 
A) the size of the money supply it controls. 
B) its ability to set fiscal policy. 
C) its operating budget. 
D) its independence from government. 
E) its net worth.

Question 10

Currency-the amount of coins and bills in circulation-is the main liability of the Fed.

Accepted Answer

A) True 
 B)False

Question 11

Time inconsistency arises when the government

Accepted Answer

A) does not explicitly state its long-term goals. 
B) does not know how to achieve its long-term goals. 
C) is willing to deviate from its long-term goals for the sake of short-run gain. 
D) often changes its long-term goals. 
E) adheres to its long-term goals. 
A) does not explicitly state its long-term goals. 
B) does not know how to achieve its long-term goals. 
C) is willing to deviate from its long-term goals for the sake of short-run gain. 
D) often changes its long-term goals. 
E) adheres to its long-term goals.

Question 12

Which of the following would cause the Fed to raise interest rates even though the rate of inflation is equal to the target rate?

Accepted Answer

A) An increase in household wealth 
B) An increase in potential GDP 
C) An increase in imports 
D) A reduction in government purchases 
E) A reduction in business confidence 
A) An increase in household wealth 
B) An increase in potential GDP 
C) An increase in imports 
D) A reduction in government purchases 
E) A reduction in business confidence

Question 13

Describe the relationship between demand shocks and monetary policy.

Accepted Answer

Demand shocks shift the AD curve to the

Question 14

The original Phillips curve argued that there was a long-run tradeoff between inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 15

When the Fed increases the interest rate,

Accepted Answer

A) money supply is unaffected. 
B) money demand is unaffected. 
C) money demand shifts left, and money supply shifts right. 
D) money demand shifts left, and money supply is unaffected. 
E) money demand and money supply shift left. 
A) money supply is unaffected. 
B) money demand is unaffected. 
C) money demand shifts left, and money supply shifts right. 
D) money demand shifts left, and money supply is unaffected. 
E) money demand and money supply shift left.

Question 16

The Fed changes the federal funds rate by

Accepted Answer

A) directing banks to charge each other a new rate. 
B) asking banks to charge each other a new rate. 
C) asking Congress to make the change. 
D) increasing or decreasing the supply of reserves in the overnight market. 
E) directing banks to charge consumers a new rate. 
A) directing banks to charge each other a new rate. 
B) asking banks to charge each other a new rate. 
C) asking Congress to make the change. 
D) increasing or decreasing the supply of reserves in the overnight market. 
E) directing banks to charge consumers a new rate.

Question 17

The Fed's monetary policy was one of the possible factors leading to the Great Inflation in the 1970s and the housing price boom in the mid-2000s.

Accepted Answer

A) True 
 B)False

Question 18

One of the main liabilities on the Fed's balance sheet is reserves. Which of the following is the best definition of that item?

Accepted Answer

A) Reserves represent foreign currencies held at the Fed. 
B) Reserves are deposits that banks hold at the Fed. 
C) Reserves represent gold and other precious metals held at the Fed. 
D) Reserves represent loans that the Fed has made to other countries. 
E) None of these is an appropriate definition. 
A) Reserves represent foreign currencies held at the Fed. 
B) Reserves are deposits that banks hold at the Fed. 
C) Reserves represent gold and other precious metals held at the Fed. 
D) Reserves represent loans that the Fed has made to other countries. 
E) None of these is an appropriate definition.

Question 19

Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the long run we would expect

Accepted Answer

A) a higher real rate of interest. 
B) lower real interest rates. 
C) no change in the real rate of interest. 
D) a decline in unemployment. 
E) a decline in potential GDP. 
A) a higher real rate of interest. 
B) lower real interest rates. 
C) no change in the real rate of interest. 
D) a decline in unemployment. 
E) a decline in potential GDP.

Question 20

Explain why the Fed adjusts monetary policy in response to both inflation and the output gap.

Accepted Answer

The Fed adjusts monetary policy to maint

Exam 27: Monetary Policy

Central bank independence guarantees that there will be no monetary policy mistakes.

The table below shows the percentage difference between real and potential GDP and the rate of inflation for the years 1999 through 2003. If there were a presidential election in the year 2000, would these data support the view that there was a political business cycle during this period?

A constant money growth rule

The Fed's interest rate decisions depend on the level of

How does the institutional setup of the Federal Reserve contribute to its independence?

When the actual and target rate of inflation are equal, the Fed will change interest rates only if it wants to change the target rate of inflation.

In an attempt to avert the worst consequences of the financial crisis of 2007 and 2008, the Fed cut the interest rate all the way to zero during the crisis, requiring that it find other ways to stimulate the economy.

Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the short run we would expect

The most important feature of a central bank is

Currency-the amount of coins and bills in circulation-is the main liability of the Fed.

Time inconsistency arises when the government

Which of the following would cause the Fed to raise interest rates even though the rate of inflation is equal to the target rate?

Describe the relationship between demand shocks and monetary policy.

The original Phillips curve argued that there was a long-run tradeoff between inflation and unemployment.

When the Fed increases the interest rate,

The Fed changes the federal funds rate by

The Fed's monetary policy was one of the possible factors leading to the Great Inflation in the 1970s and the housing price boom in the mid-2000s.

One of the main liabilities on the Fed's balance sheet is reserves. Which of the following is the best definition of that item?

Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the long run we would expect

Explain why the Fed adjusts monetary policy in response to both inflation and the output gap.

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

Filters