Question 1

Which of the following is not considered one of the main assets on the balance sheet of the Fed?

Accepted Answer

A) Government securities. 
B) Private securities. 
C) Loans to banks. 
D) Currency. 
E) Loans to other financial institutions. 
A) Government securities. 
B) Private securities. 
C) Loans to banks. 
D) Currency. 
E) Loans to other financial institutions.

Question 2

What happens to the Fed's balance sheet when it buys $10 billion in government securities?

Accepted Answer

A) The left-hand side of the Fed's balance sheet increases by $10 billion. 
B) The left-hand side of the Fed's balance sheet decreases by $10 billion. 
C) The right-hand side of the Fed's balance sheet decreases by $10 billion. 
D) Both the right-hand and left-hand sides of the Fed's balance sheet decrease by $10 billion. 
E) None of these. 
A) The left-hand side of the Fed's balance sheet increases by $10 billion. 
B) The left-hand side of the Fed's balance sheet decreases by $10 billion. 
C) The right-hand side of the Fed's balance sheet decreases by $10 billion. 
D) Both the right-hand and left-hand sides of the Fed's balance sheet decrease by $10 billion. 
E) None of these.

Question 3

Currency-the amount of coins and bills in circulation-is part of the money supply.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is true?

Accepted Answer

A) The Fed can accurately measure real GDP. 
B) The Fed can accurately measure potential GDP. 
C) Monetary policy is subject to fewer uncertainties than fiscal policy. 
D) The Fed can reliably predict the interest responsiveness of consumption and investment. 
E) The AD-IA model illustrates the various issues the Fed needs to consider when it conducts monetary policy. 
A) The Fed can accurately measure real GDP. 
B) The Fed can accurately measure potential GDP. 
C) Monetary policy is subject to fewer uncertainties than fiscal policy. 
D) The Fed can reliably predict the interest responsiveness of consumption and investment. 
E) The AD-IA model illustrates the various issues the Fed needs to consider when it conducts monetary policy.

Question 5

Some economists have argued that the recent financial crisis has forced the world's central banks to surrender some of their independence.

Accepted Answer

A) True 
 B)False

Question 6

The Phillips curve reflects a

Accepted Answer

A) positive correlation between the inflation rate and the unemployment rate. 
B) negative correlation between the inflation rate and the unemployment rate. 
C) positive correlation between the inflation rate and the exchange rate. 
D) negative correlation between the inflation rate and government spending. 
E) positive correlation between interest rates and the unemployment rate. 
A) positive correlation between the inflation rate and the unemployment rate. 
B) negative correlation between the inflation rate and the unemployment rate. 
C) positive correlation between the inflation rate and the exchange rate. 
D) negative correlation between the inflation rate and government spending. 
E) positive correlation between interest rates and the unemployment rate.

Question 7

If the Fed believes there has been a positive wealth effect, it will want to

Accepted Answer

A) raise interest rates to reduce inflationary pressure. 
B) raise interest rates to reduce prices. 
C) lower interest rates to increase potential GDP. 
D) lower interest rates to offset the increase in wealth. 
E) raise interest rates to encourage saving and investment. 
A) raise interest rates to reduce inflationary pressure. 
B) raise interest rates to reduce prices. 
C) lower interest rates to increase potential GDP. 
D) lower interest rates to offset the increase in wealth. 
E) raise interest rates to encourage saving and investment.

Question 8

Which of the following would cause the Fed to lower interest rates?

Accepted Answer

A) A decrease in taxes 
B) A decrease in imports 
C) A decrease in investment 
D) An increase in wealth 
E) A decrease in saving 
A) A decrease in taxes 
B) A decrease in imports 
C) A decrease in investment 
D) An increase in wealth 
E) A decrease in saving

Question 9

If the interest rate on bank CDs increases, the opportunity cost of holding money increases.

Accepted Answer

A) True 
 B)False

Question 10

Quantitative easing is one way to stimulate the economy when the interest rate hits zero.

Accepted Answer

A) True 
 B)False

Question 11

An increase in the output gap will shift the monetary policy rule line to the right.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following policies that the Fed followed after 2014?

Accepted Answer

A) To unwind expansionary policy measures and try to return to a normal stance of policy. 
B) To get the economy out of a recession. 
C) To stimulate the U.S.financial and banking systems. 
D) To lower interest rate in an attempt to stimulate economic growth. 
E) None of these. 
A) To unwind expansionary policy measures and try to return to a normal stance of policy. 
B) To get the economy out of a recession. 
C) To stimulate the U.S.financial and banking systems. 
D) To lower interest rate in an attempt to stimulate economic growth. 
E) None of these.

Question 13

If money demand increases, wealth must have increased.

Accepted Answer

A) True 
 B)False

Question 14

A situation in which a zero interest rate has been reached, and yet the Fed continues to increase the money supply by increasing reserves, is known as

Accepted Answer

A) a liquidity trap. 
B) an asymptotic limit. 
C) quantitative easing. 
D) a liquidity expansion. 
E) None of these. 
A) a liquidity trap. 
B) an asymptotic limit. 
C) quantitative easing. 
D) a liquidity expansion. 
E) None of these.

Question 15

Quantitative easing in 2009 and 2010 was criticized for its likely effect on

Accepted Answer

A) bringing down GDP growth. 
B) raising the unemployment rate further. 
C) causing high inflation. 
D) raising the value of the U.S.dollar against other currencies. 
E) lowering interest rates further. 
A) bringing down GDP growth. 
B) raising the unemployment rate further. 
C) causing high inflation. 
D) raising the value of the U.S.dollar against other currencies. 
E) lowering interest rates further.

Question 16

Explain why increases or decreases in the monetary base will eventually lead to increases or decreases in the money supply.

Accepted Answer

Currency is part of the money supply and

Question 17

Which of the following gives the Fed a credibility problem?

Accepted Answer

A) Ricardian equivalence 
B) Sticky prices 
C) Rational expectations 
D) Disinflation 
E) Time inconsistency 
A) Ricardian equivalence 
B) Sticky prices 
C) Rational expectations 
D) Disinflation 
E) Time inconsistency

Question 18

Exhibit 27-1  
-Exhibit 27-1 is an example of

Accepted Answer

A) how real GDP reacts to changes in the interest rate. 
B) an aggregate demand curve. 
C) how potential GDP reacts to changes in inflation. 
D) the Fed's monetary policy rule. 
E) how real GDP reacts to changes in inflation. 
A) how real GDP reacts to changes in the interest rate. 
B) an aggregate demand curve. 
C) how potential GDP reacts to changes in inflation. 
D) the Fed's monetary policy rule. 
E) how real GDP reacts to changes in inflation.

Question 19

If the Fed is worried about increasing inflation and decides to raise the interest rate, real GDP will

Accepted Answer

A) remain above potential GDP if consumption is more responsive to changes in interest rates than the Fed expected. 
B) come in below potential if potential GDP is higher than the Fed expected. 
C) come in above potential GDP if some other factor acts to shift the AD curve to the left. 
D) come in below potential if investment is less responsive to changes in interest rates than the Fed expected. 
E) quickly return to potential GDP as the AD curve shifts to the left. 
A) remain above potential GDP if consumption is more responsive to changes in interest rates than the Fed expected. 
B) come in below potential if potential GDP is higher than the Fed expected. 
C) come in above potential GDP if some other factor acts to shift the AD curve to the left. 
D) come in below potential if investment is less responsive to changes in interest rates than the Fed expected. 
E) quickly return to potential GDP as the AD curve shifts to the left.

Question 20

If the British government intends to raise the value of the British pound, it should

Accepted Answer

A) sell pounds in the foreign exchange markets. 
B) buy pounds in the foreign exchange markets. 
C) buy pounds in one foreign exchange market and then sell those pounds in another foreign exchange market. 
D) buy foreign currencies, such as the euro, in the foreign exchange markets. 
E) lower the British interest rates. 
A) sell pounds in the foreign exchange markets. 
B) buy pounds in the foreign exchange markets. 
C) buy pounds in one foreign exchange market and then sell those pounds in another foreign exchange market. 
D) buy foreign currencies, such as the euro, in the foreign exchange markets. 
E) lower the British interest rates.

Exam 27: Monetary Policy

Which of the following is not considered one of the main assets on the balance sheet of the Fed?

What happens to the Fed's balance sheet when it buys $10 billion in government securities?

Currency-the amount of coins and bills in circulation-is part of the money supply.

Which of the following is true?

Some economists have argued that the recent financial crisis has forced the world's central banks to surrender some of their independence.

The Phillips curve reflects a

If the Fed believes there has been a positive wealth effect, it will want to

Which of the following would cause the Fed to lower interest rates?

If the interest rate on bank CDs increases, the opportunity cost of holding money increases.

Quantitative easing is one way to stimulate the economy when the interest rate hits zero.

An increase in the output gap will shift the monetary policy rule line to the right.

Which of the following policies that the Fed followed after 2014?

If money demand increases, wealth must have increased.

A situation in which a zero interest rate has been reached, and yet the Fed continues to increase the money supply by increasing reserves, is known as

Quantitative easing in 2009 and 2010 was criticized for its likely effect on

Explain why increases or decreases in the monetary base will eventually lead to increases or decreases in the money supply.

Which of the following gives the Fed a credibility problem?

Exhibit 27-1 -Exhibit 27-1 is an example of

If the Fed is worried about increasing inflation and decides to raise the interest rate, real GDP will

If the British government intends to raise the value of the British pound, it should

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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