Question 1

Which of the following statements about the Phillips curve is not true?

Accepted Answer

A) It bears its name because of A.W.Phillips, a British economist who first showed that such a correlation existed. 
B) It was originally shown to exist in British data from 1861 to 1957. 
C) The Phillips curve was used in the 1960s and 1970s to justify a monetary policy that included higher inflation. 
D) It reflects a negative correlation between the unemployment rate and the inflation rate. 
E) All of these are true. 
A) It bears its name because of A.W.Phillips, a British economist who first showed that such a correlation existed. 
B) It was originally shown to exist in British data from 1861 to 1957. 
C) The Phillips curve was used in the 1960s and 1970s to justify a monetary policy that included higher inflation. 
D) It reflects a negative correlation between the unemployment rate and the inflation rate. 
E) All of these are true.

Question 2

Monetary policy is subject to fewer "mistakes" than fiscal policy.

Accepted Answer

A) True 
 B)False

Question 3

The "Goldilocks economy" is one in which

Accepted Answer

A) real GDP is below potential GDP. 
B) real GDP is equal to potential GDP. 
C) real GDP is equal to potential GDP, and inflation is equal to the target rate. 
D) inflation is equal to the target rate. 
E) inflation is lower than the target rate. 
A) real GDP is below potential GDP. 
B) real GDP is equal to potential GDP. 
C) real GDP is equal to potential GDP, and inflation is equal to the target rate. 
D) inflation is equal to the target rate. 
E) inflation is lower than the target rate.

Question 4

The current chairperson of the Federal Reserve Board (Fed) is Alan Greenspan.

Accepted Answer

A) True 
 B)False

Question 5

Data from the U.S. economy in the 1960s and 1970s support a long-run tradeoff between inflation and unemployment, whereas data from the 1980s and 1990s do not support such a tradeoff.

Accepted Answer

A) True 
 B)False

Question 6

When the rate of interest falls,

Accepted Answer

A) the opportunity cost of money increases, and the quantity of money demanded declines. 
B) the opportunity cost of money increases, and the quantity of money demanded increases. 
C) the demand for money is unaffected. 
D) the opportunity cost of money decreases, and the quantity of money demanded declines. 
E) the opportunity cost of money decreases, and the quantity of money demanded increases. 
A) the opportunity cost of money increases, and the quantity of money demanded declines. 
B) the opportunity cost of money increases, and the quantity of money demanded increases. 
C) the demand for money is unaffected. 
D) the opportunity cost of money decreases, and the quantity of money demanded declines. 
E) the opportunity cost of money decreases, and the quantity of money demanded increases.

Question 7

Which of the following best explains why independent central banks need to be held accountable?

Accepted Answer

A) Central banks are used to serving politicians. 
B) They would not otherwise be able to pursue the goal of price stability. 
C) Central bank independence can be taken too far. 
D) Central banks are prone to causing political business cycles. 
E) Central banks do not understand political issues. 
A) Central banks are used to serving politicians. 
B) They would not otherwise be able to pursue the goal of price stability. 
C) Central bank independence can be taken too far. 
D) Central banks are prone to causing political business cycles. 
E) Central banks do not understand political issues.

Question 8

As a result of the financial crisis, the Fed has begun buying securities in troubled markets, as it has been trying to provide more credit to the markets and thereby mitigate the crisis. This is known as

Accepted Answer

A) Quantitative easing. 
B) FOMC. 
C) Credit crunching. 
D) Market deepening. 
E) Market thinning. 
A) Quantitative easing. 
B) FOMC. 
C) Credit crunching. 
D) Market deepening. 
E) Market thinning.

Question 9

Explain why the interest rate is the opportunity cost of holding money.

Accepted Answer

If the interest rate on other assets inc

Question 10

Exchange market interventions involve

Accepted Answer

A) fixing the exchange rate through purchases and sales of currency. 
B) fixing the prices of goods in the domestic markets. 
C) fixing the prices of goods imported from foreign countries. 
D) imposing a tariff on all foreign imports. 
E) allowing the currency exchange rate to be determined by the foreign exchange markets. 
A) fixing the exchange rate through purchases and sales of currency. 
B) fixing the prices of goods in the domestic markets. 
C) fixing the prices of goods imported from foreign countries. 
D) imposing a tariff on all foreign imports. 
E) allowing the currency exchange rate to be determined by the foreign exchange markets.

Question 11

What is a liquidity trap?

Accepted Answer

A) A situation in which banks stop lending to one another. 
B) A situation in which further increases in the money supply result in smaller reductions in the interest rate until the interest rate approaches zero. 
C) A situation in which the Fed no longer has the capacity to provide liquidity to the system. 
D) A situation in which the interest rate gets so high that consumers and companies no longer can afford to obtain credit. 
E) None of these. 
A) A situation in which banks stop lending to one another. 
B) A situation in which further increases in the money supply result in smaller reductions in the interest rate until the interest rate approaches zero. 
C) A situation in which the Fed no longer has the capacity to provide liquidity to the system. 
D) A situation in which the interest rate gets so high that consumers and companies no longer can afford to obtain credit. 
E) None of these.

Question 12

The discount window enables the Fed to

Accepted Answer

A) better regulate the banking system. 
B) take action to change interest rates. 
C) be a lender of last resort. 
D) ensure the banking system's profitability. 
E) control the money supply. 
A) better regulate the banking system. 
B) take action to change interest rates. 
C) be a lender of last resort. 
D) ensure the banking system's profitability. 
E) control the money supply.

Question 13

When the Fed increases the federal funds rate,

Accepted Answer

A) all other interest rates are unaffected. 
B) money demand is unaffected. 
C) all other interest rates increase. 
D) all other interest rates decrease. 
E) money demand increases. 
A) all other interest rates are unaffected. 
B) money demand is unaffected. 
C) all other interest rates increase. 
D) all other interest rates decrease. 
E) money demand increases.

Question 14

If money demand is very volatile, the preferred policy is to target the interest rate instead of the money supply.

Accepted Answer

A) True 
 B)False

Question 15

If the Fed wants to cool off the economy, how will it adjust its monetary policy?

Accepted Answer

Interest rates will increase i

Question 16

If the Fed wants to fix the interest rate, how does it guarantee that money demand will equal money supply?

Accepted Answer

The Fed must conduct open mark

Question 17

If the Fed believes that real GDP is above potential GDP, it will

Accepted Answer

A) raise interest rates to shift the AD curve to the left and the IA line downward. 
B) raise interest rates to shift the IA line downward. 
C) raise interest rates to shift the AD curve to the left. 
D) lower interest rates to shift the IA line downward. 
E) lower interest rates to shift the AD curve to the left. 
A) raise interest rates to shift the AD curve to the left and the IA line downward. 
B) raise interest rates to shift the IA line downward. 
C) raise interest rates to shift the AD curve to the left. 
D) lower interest rates to shift the IA line downward. 
E) lower interest rates to shift the AD curve to the left.

Question 18

The buying and selling government securities is the traditional role of central banks as they go about doing open market operations.

Accepted Answer

A) True 
 B)False

Question 19

The table shows the percentage difference between real and potential GDP and the rate of inflation for the years 2006 through 2015. If there was a presidential election in the year 2007, would these data support the view that there was a political business cycle during this period?

Accepted Answer

No. Notice that the gap between real and

Question 20

The Federal Reserve System is part of the Department of the Treasury.

Accepted Answer

A) True 
 B)False

Exam 27: Monetary Policy

Which of the following statements about the Phillips curve is not true?

Monetary policy is subject to fewer "mistakes" than fiscal policy.

The "Goldilocks economy" is one in which

The current chairperson of the Federal Reserve Board (Fed) is Alan Greenspan.

Data from the U.S. economy in the 1960s and 1970s support a long-run tradeoff between inflation and unemployment, whereas data from the 1980s and 1990s do not support such a tradeoff.

When the rate of interest falls,

Which of the following best explains why independent central banks need to be held accountable?

As a result of the financial crisis, the Fed has begun buying securities in troubled markets, as it has been trying to provide more credit to the markets and thereby mitigate the crisis. This is known as

Explain why the interest rate is the opportunity cost of holding money.

Exchange market interventions involve

What is a liquidity trap?

The discount window enables the Fed to

When the Fed increases the federal funds rate,

If money demand is very volatile, the preferred policy is to target the interest rate instead of the money supply.

If the Fed wants to cool off the economy, how will it adjust its monetary policy?

If the Fed wants to fix the interest rate, how does it guarantee that money demand will equal money supply?

If the Fed believes that real GDP is above potential GDP, it will

The buying and selling government securities is the traditional role of central banks as they go about doing open market operations.

The table shows the percentage difference between real and potential GDP and the rate of inflation for the years 2006 through 2015. If there was a presidential election in the year 2007, would these data support the view that there was a political business cycle during this period?

The Federal Reserve System is part of the Department of the Treasury.

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