Question 1

If the Fed's primary goal is price stability which macroeconomic variable should it target?

Accepted Answer

A)  the price level itself or a particular rate of change in the price level 
B)  the growth rate of money supply 
C)  the real money supply 
D)  real GDP 
A)  the price level itself or a particular rate of change in the price level 
B)  the growth rate of money supply 
C)  the real money supply 
D)  real GDP

Question 2

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called

Accepted Answer

A)  the impact lag. 
B)  the implementation lag. 
C)  the government lag. 
D)  the recognition lag. 
A)  the impact lag. 
B)  the implementation lag. 
C)  the government lag. 
D)  the recognition lag.

Question 3

Use the following to answer questions .
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply  
-(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point b, the Federal Reserve can close the output gap

Accepted Answer

A)  by pursuing an expansionary monetary policy to raise the interest rate and decrease short-run aggregate supply. 
B)  by pursuing a contractionary monetary policy to drive down the interest rate and decrease aggregate demand. 
C)  by pursuing an expansionary monetary policy to drive down the interest rate and decrease short-run aggregate supply. 
D)  by pursuing a contractionary monetary policy to raise the interest rate and reduce aggregate demand. 
A)  by pursuing an expansionary monetary policy to raise the interest rate and decrease short-run aggregate supply. 
B)  by pursuing a contractionary monetary policy to drive down the interest rate and decrease aggregate demand. 
C)  by pursuing an expansionary monetary policy to drive down the interest rate and decrease short-run aggregate supply. 
D)  by pursuing a contractionary monetary policy to raise the interest rate and reduce aggregate demand.

Question 4

If inflation is a threat, the Fed is likely to engage in a contractionary monetary policy.

Accepted Answer

A) True 
 B)False

Question 5

Suppose inflationary pressures are building up in an economy. Is this economy likely to experience a recessionary gap or an inflationary gap? Explain how the Fed could use monetary policy to combat inflation. A complete answer must include an explanation of the policy tools that can be used and their effects on the money supply, interest rates, and aggregate demand. Use a diagram of LRAS, SRAS, and AD to illustrate your answer.

Accepted Answer

When inflationary pressures are building

Question 6

Use the following to answer questions .
Exhibit: Monetary Policy and Rational Expectations  
-(Exhibit: Monetary Policy and Rational Expectations) Suppose the economy is operating at point a. Some people observe that an expansionary monetary policy will increase the money supply and ultimately drive the price level to the equilibrium at

Accepted Answer

A)  d. They rationally adjust their behavior and the aggregate demand curve shifts to the left and d becomes the new equilibrium point. 
B)  b. They rationally adjust their behavior and the aggregate demand curve shifts to the left and b becomes the new equilibrium point. 
C)  d. They rationally adjust their behavior and the short-run aggregate supply curve shifts to the left and d becomes the new equilibrium point. 
D)  c. They rationally adjust their behavior and the short-run aggregate supply curve shifts to the left and d becomes the new equilibrium point. 
A)  d. They rationally adjust their behavior and the aggregate demand curve shifts to the left and d becomes the new equilibrium point. 
B)  b. They rationally adjust their behavior and the aggregate demand curve shifts to the left and b becomes the new equilibrium point. 
C)  d. They rationally adjust their behavior and the short-run aggregate supply curve shifts to the left and d becomes the new equilibrium point. 
D)  c. They rationally adjust their behavior and the short-run aggregate supply curve shifts to the left and d becomes the new equilibrium point.

Question 7

Use the following to answer questions .
Exhibit: Monetary Policy and Rational Expectations  
-(Exhibit: Monetary Policy and Rational Expectations) If the economy is initially operating at point a and there are no rational expectations, an expansionary monetary policy would move the short-run equilibrium from

Accepted Answer

A)  a to b. 
B)  a to c. 
C)  b to a. 
D)  c to a. 
A)  a to b. 
B)  a to c. 
C)  b to a. 
D)  c to a.

Question 8

Suppose money supply (M) = $500, price level (P) = 2, and real GDP (Y) = $1,000. Calculate the value of velocity using the equation of exchange.

Accepted Answer

A)  1 
B)  2 
C)  4 
D)  5 
A)  1 
B)  2 
C)  4 
D)  5

Question 9

If inflation is a threat, then the Fed will conduct monetary policy aimed at

Accepted Answer

A)  increasing the interest rate which then will shift aggregate demand to the right. 
B)  decreasing the interest rate which then will shift aggregate demand to the right. 
C)  decreasing the interest rate which then will shift aggregate demand to the left. 
D)  increasing the interest rate which then will shift aggregate demand to theleft. 
A)  increasing the interest rate which then will shift aggregate demand to the right. 
B)  decreasing the interest rate which then will shift aggregate demand to the right. 
C)  decreasing the interest rate which then will shift aggregate demand to the left. 
D)  increasing the interest rate which then will shift aggregate demand to theleft.

Question 10

Which of the following result from a change in the money supply brought about by an open market sale?

Accepted Answer

A)  lower interest rate, higher exchange rate, decreased demand for investment and net exports 
B)  higher interest rate, higher exchange rate, decreased demand for investment and decreased demand for net exports 
C)  lower interest rate, lower exchange rate, increased demand for investment and net exports 
D)  higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports 
A)  lower interest rate, higher exchange rate, decreased demand for investment and net exports 
B)  higher interest rate, higher exchange rate, decreased demand for investment and decreased demand for net exports 
C)  lower interest rate, lower exchange rate, increased demand for investment and net exports 
D)  higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports

Question 11

The federal funds rate is set directly by the Fed.

Accepted Answer

A) True 
 B)False

Question 12

Use the following to answer questions .
Exhibit: Effects of Monetary Policy  
-(Exhibit: Effects of Monetary Policy) In Panel (b), assume that the price of bonds rises from P1 to P2. Now, in Panel (c), the higher price of bonds will

Accepted Answer

A)  reduce the demand for and increase the supply of dollars and cause the exchange rate to increase. 
B)  reduce the demand for and increase the supply of dollars and cause the exchange rate to rise. 
C)  increase the demand for and reduce the supply of dollars and cause the exchange rate to increase. 
D)  reduce the demand for and increase the supply of dollars and cause the exchange rate to fall. 
A)  reduce the demand for and increase the supply of dollars and cause the exchange rate to increase. 
B)  reduce the demand for and increase the supply of dollars and cause the exchange rate to rise. 
C)  increase the demand for and reduce the supply of dollars and cause the exchange rate to increase. 
D)  reduce the demand for and increase the supply of dollars and cause the exchange rate to fall.

Question 13

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the following except

Accepted Answer

A)  buying mortgage-backed securities. 
B)  buying long-term Treasury bills. 
C)  creating other new credit facilities to make credit more easily available to households and small businesses. 
D)  lowering the reserve requirement to encourage banks to create loans. 
A)  buying mortgage-backed securities. 
B)  buying long-term Treasury bills. 
C)  creating other new credit facilities to make credit more easily available to households and small businesses. 
D)  lowering the reserve requirement to encourage banks to create loans.

Question 14

The Fed can raise the target for the federal funds rate by selling government bonds in the open market.

Accepted Answer

A) True 
 B)False

Question 15

Use the following to answer questions .
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply  
-(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) Assume that the economy is at point b. A decrease in the money supply would cause

Accepted Answer

A)  a shift of the aggregate demand curve from AD1 to AD2. 
B)  a shift of the aggregate demand curve from AD2 to AD1. 
C)  a shift of the short-run aggregate supply curve from AS1 to AS2. 
D)  a shift of the short-run aggregate supply curve from AS2 to AS1. 
A)  a shift of the aggregate demand curve from AD1 to AD2. 
B)  a shift of the aggregate demand curve from AD2 to AD1. 
C)  a shift of the short-run aggregate supply curve from AS1 to AS2. 
D)  a shift of the short-run aggregate supply curve from AS2 to AS1.

Question 16

Use the following to answer questions .
Exhibit: The Bond Market  
-(Exhibit: The Bond Market) Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b). What happens to the interest rate?

Accepted Answer

A)  It increases. 
B)  It decreases. 
C)  It remains unchanged. 
D)  Short-term interest rates will increase but long-term interest rates will decrease. 
A)  It increases. 
B)  It decreases. 
C)  It remains unchanged. 
D)  Short-term interest rates will increase but long-term interest rates will decrease.

Question 17

What are the three types of monetary policy lags?

Accepted Answer

A)  the recognition lag, the identification lag, and the implementation lag 
B)  the recognition lag, the inflation lag, and the impact lag 
C)  the recognition lag, the implementation lag, and the government lag 
D)  the recognition lag, the implementation lag, and the impact lag 
A)  the recognition lag, the identification lag, and the implementation lag 
B)  the recognition lag, the inflation lag, and the impact lag 
C)  the recognition lag, the implementation lag, and the government lag 
D)  the recognition lag, the implementation lag, and the impact lag

Question 18

The delay between the time a policy is enacted and the time the policy has its effect on the economy is called

Accepted Answer

A)  the impact lag. 
B)  the implementation lag. 
C)  the government lag. 
D)  the recognition lag. 
A)  the impact lag. 
B)  the implementation lag. 
C)  the government lag. 
D)  the recognition lag.

Question 19

If the Fed sells government bonds, bank reserves will

Accepted Answer

A)  decrease leading to a decrease in the money supply. 
B)  increase leading to a decrease in the money supply. 
C)  increase leading to an increase in the money supply. 
D)  decrease leading to an increase in the money supply. 
A)  decrease leading to a decrease in the money supply. 
B)  increase leading to a decrease in the money supply. 
C)  increase leading to an increase in the money supply. 
D)  decrease leading to an increase in the money supply.

Question 20

If velocity is constant, which of the following results flow from the quantity equation?

Accepted Answer

A)  Nominal GDP could change only if there were a change in the money supply. 
B)  In the short run, nominal GDP could change only if there were a change in the money supply and in the long run, nominal GDP could change only if there were a change in the money supply. 
C)  In the short run, nominal GDP could change only if there were a change in the money supply but in the long run, nominal GDP is affected by changes in any component of GDP. 
D)  In the short run, nominal GDP is affected by changes in any component of GDP but in the long run, nominal GDP could change only if there were a change in the money supply. 
A)  Nominal GDP could change only if there were a change in the money supply. 
B)  In the short run, nominal GDP could change only if there were a change in the money supply and in the long run, nominal GDP could change only if there were a change in the money supply. 
C)  In the short run, nominal GDP could change only if there were a change in the money supply but in the long run, nominal GDP is affected by changes in any component of GDP. 
D)  In the short run, nominal GDP is affected by changes in any component of GDP but in the long run, nominal GDP could change only if there were a change in the money supply.

If the Fed's primary goal is price stability which macroeconomic variable should it target?

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called

Use the following to answer questions . Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply -(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point b, the Federal Reserve can close the output gap

If inflation is a threat, the Fed is likely to engage in a contractionary monetary policy.

Suppose money supply (M) = $500, price level (P) = 2, and real GDP (Y) = $1,000. Calculate the value of velocity using the equation of exchange.

If inflation is a threat, then the Fed will conduct monetary policy aimed at

Which of the following result from a change in the money supply brought about by an open market sale?

The federal funds rate is set directly by the Fed.

Use the following to answer questions . Exhibit: Effects of Monetary Policy -(Exhibit: Effects of Monetary Policy) In Panel (b), assume that the price of bonds rises from P₁ to P₂. Now, in Panel (c), the higher price of bonds will

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the following except

The Fed can raise the target for the federal funds rate by selling government bonds in the open market.

Use the following to answer questions . Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply -(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) Assume that the economy is at point b. A decrease in the money supply would cause

Use the following to answer questions . Exhibit: The Bond Market -(Exhibit: The Bond Market) Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b). What happens to the interest rate?

What are the three types of monetary policy lags?

The delay between the time a policy is enacted and the time the policy has its effect on the economy is called

If the Fed sells government bonds, bank reserves will

If velocity is constant, which of the following results flow from the quantity equation?

Economics: the Study of Choice

Demand and Supply

Applications of Supply and Demand

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Filters

Exam 11: Monetary Policy and the Fed

If the Fed's primary goal is price stability which macroeconomic variable should it target?

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called

Use the following to answer questions . Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply -(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point b, the Federal Reserve can close the output gap

If inflation is a threat, the Fed is likely to engage in a contractionary monetary policy.

Suppose money supply (M) = $500, price level (P) = 2, and real GDP (Y) = $1,000. Calculate the value of velocity using the equation of exchange.

If inflation is a threat, then the Fed will conduct monetary policy aimed at

Which of the following result from a change in the money supply brought about by an open market sale?

The federal funds rate is set directly by the Fed.

Use the following to answer questions . Exhibit: Effects of Monetary Policy -(Exhibit: Effects of Monetary Policy) In Panel (b), assume that the price of bonds rises from P1 to P2. Now, in Panel (c), the higher price of bonds will

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the following except

The Fed can raise the target for the federal funds rate by selling government bonds in the open market.

Use the following to answer questions . Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply -(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) Assume that the economy is at point b. A decrease in the money supply would cause

Use the following to answer questions . Exhibit: The Bond Market -(Exhibit: The Bond Market) Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b). What happens to the interest rate?

What are the three types of monetary policy lags?

The delay between the time a policy is enacted and the time the policy has its effect on the economy is called

If the Fed sells government bonds, bank reserves will

If velocity is constant, which of the following results flow from the quantity equation?

Economics: the Study of Choice

Demand and Supply

Applications of Supply and Demand

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Filters

Use the following to answer questions . Exhibit: Effects of Monetary Policy -(Exhibit: Effects of Monetary Policy) In Panel (b), assume that the price of bonds rises from P₁ to P₂. Now, in Panel (c), the higher price of bonds will