Question 1

Monetary policy that seeks to minimize the business cycle in the AS/AD model involves:

Accepted Answer

A) contractionary monetary policy throughout the business cycle. 
B) expansionary monetary policy throughout the business cycle. 
C) contractionary monetary policy when the economy is above trend growth and expansionary policy when the economy is below trend growth. 
D) expansionary monetary policy when the economy is above trend growth and contractionary policy when the economy is below trend growth. 
A) contractionary monetary policy throughout the business cycle. 
B) expansionary monetary policy throughout the business cycle. 
C) contractionary monetary policy when the economy is above trend growth and expansionary policy when the economy is below trend growth. 
D) expansionary monetary policy when the economy is above trend growth and contractionary policy when the economy is below trend growth.

Question 2

The Federal Reserve controls the long-term interest rate.

Accepted Answer

A) True 
 B)False

Question 3

Suppose a contractionary monetary policy raises nominal interest rates. If this is the case, it follows that the contractionary monetary policy must have:

Accepted Answer

A) reduced expected inflation. 
B) increased expected inflation. 
C) increased expected inflation more than it reduced real interest rates. 
D) increased real interest rates more than it reduced expected inflation. 
A) reduced expected inflation. 
B) increased expected inflation. 
C) increased expected inflation more than it reduced real interest rates. 
D) increased real interest rates more than it reduced expected inflation.

Question 4

During a recession, policy makers who use the AS/AD model would probably recommend an open market:

Accepted Answer

A) sale of government securities that reduces interest rates. 
B) purchase of government securities that reduces interest rates. 
C) sale of government securities that raises interest rates. 
D) purchase of government securities that raises interest rates. 
A) sale of government securities that reduces interest rates. 
B) purchase of government securities that reduces interest rates. 
C) sale of government securities that raises interest rates. 
D) purchase of government securities that raises interest rates.

Question 5

Monetary policy is one of the two main macroeconomic tools governments use to control the aggregate economy. The other is:

Accepted Answer

A) fiscal policy. 
B) foreign policy. 
C) trade policy. 
D) immigration policy. 
A) fiscal policy. 
B) foreign policy. 
C) trade policy. 
D) immigration policy.

Question 6

According to the Taylor Rule, if current inflation is 2.5 percent, the target inflation rate is 2 percent, and output is 1 percent above potential, the Fed should target the federal funds rate at 5.25 percent.

Accepted Answer

A) True 
 B)False

Question 7

If nominal income increases by 4 percent and the price level increases by 3 percent, real income must:

Accepted Answer

A) increase by 7 percent. 
B) increase by 1 percent. 
C) decrease by 1 percent. 
D) decrease by 7 percent. 
A) increase by 7 percent. 
B) increase by 1 percent. 
C) decrease by 1 percent. 
D) decrease by 7 percent.

Question 8

When the Fed sells bonds, the money supply:

Accepted Answer

A) expands. 
B) contracts. 
C) sometimes rises and sometimes falls. 
D) Selling bonds does not affect the money supply. 
A) expands. 
B) contracts. 
C) sometimes rises and sometimes falls. 
D) Selling bonds does not affect the money supply.

Question 9

The distinction between real and nominal interest rates:

Accepted Answer

A) makes it easier to assess the impact of monetary policy. 
B) makes it harder to assess the impact of monetary policy. 
C) does not affect the assessment of monetary policy since nominal interest rates are observable. 
D) does not affect the assessment of monetary policy since real interest rates are observable. 
A) makes it easier to assess the impact of monetary policy. 
B) makes it harder to assess the impact of monetary policy. 
C) does not affect the assessment of monetary policy since nominal interest rates are observable. 
D) does not affect the assessment of monetary policy since real interest rates are observable.

Question 10

In the short run, if the Fed undertakes expansionary monetary policy, the effect will be to shift the:

Accepted Answer

A) AD curve out to the right. 
B) AD curve in to the left. 
C) SAS curve up. 
D) SAS curve down. 
A) AD curve out to the right. 
B) AD curve in to the left. 
C) SAS curve up. 
D) SAS curve down.

Question 11

Which is not something the Fed can do directly to conduct monetary policy?

Accepted Answer

A) Change the exchange rate 
B) Change the reserve requirement 
C) Change the discount rate 
D) Execute open market operations 
A) Change the exchange rate 
B) Change the reserve requirement 
C) Change the discount rate 
D) Execute open market operations

Question 12

Suppose the reserve requirement is 5 percent. How much would reserves need to be initially increased to eventually increase the money supply by 1,000?

Accepted Answer

A) 25 
B) 50 
C) 250 
D) 500 
A) 25 
B) 50 
C) 250 
D) 500

Question 13

Central banks are responsible for:

Accepted Answer

A) both monetary policy and fiscal policy. 
B) monetary policy but not fiscal policy. 
C) fiscal policy but not monetary policy. 
D) neither monetary policy nor fiscal policy. 
A) both monetary policy and fiscal policy. 
B) monetary policy but not fiscal policy. 
C) fiscal policy but not monetary policy. 
D) neither monetary policy nor fiscal policy.

Question 14

In the United States monetary policy is:

Accepted Answer

A) also known as fiscal policy. 
B) undertaken by the Treasury. 
C) undertaken by the Fed. 
D) also known as global policy. 
A) also known as fiscal policy. 
B) undertaken by the Treasury. 
C) undertaken by the Fed. 
D) also known as global policy.

Question 15

If saving exceeds investment, the appropriate countercyclical monetary policy would be:

Accepted Answer

A) an increase in the reserve requirement. 
B) a cut in the discount rate. 
C) an open market sale of government bonds. 
D) an increase in the federal funds rate. 
A) an increase in the reserve requirement. 
B) a cut in the discount rate. 
C) an open market sale of government bonds. 
D) an increase in the federal funds rate.

Question 16

How does monetary policy work in the context of the AS/AD model?

Accepted Answer

In the AD/AS model,monetary policy works

Question 17

According to the AS/AD model, a reduction in the money supply is appropriate:

Accepted Answer

A) when saving is less than investment. 
B) when saving is greater than investment. 
C) when saving equals investment. 
D) whatever the level of saving and investment. 
A) when saving is less than investment. 
B) when saving is greater than investment. 
C) when saving equals investment. 
D) whatever the level of saving and investment.

Question 18

If the federal funds rate rises above the Fed's target range, the Fed could take:

Accepted Answer

A) a defensive action and sell government bonds. 
B) a defensive action and buy government bonds. 
C) an offensive action and sell government bonds. 
D) an offensive action and buy government bonds. 
A) a defensive action and sell government bonds. 
B) a defensive action and buy government bonds. 
C) an offensive action and sell government bonds. 
D) an offensive action and buy government bonds.

Question 19

The standard discussion of monetary policy is based on the assumption that the:

Accepted Answer

A) entire yield curve shifts up when the Fed sells government bonds. 
B) entire yield curve shifts down when the Fed sells government bonds. 
C) yield curve becomes inverted when the Fed buys government bonds. 
D) yield curve becomes steeper when the Fed buys government bonds. 
A) entire yield curve shifts up when the Fed sells government bonds. 
B) entire yield curve shifts down when the Fed sells government bonds. 
C) yield curve becomes inverted when the Fed buys government bonds. 
D) yield curve becomes steeper when the Fed buys government bonds.

Question 20

Define the discount rate,and explain how it can be used as a tool for the conduct of monetary policy.

Accepted Answer

The discount rate is the rate the Fed ch

Exam 29: Monetary Policy

Monetary policy that seeks to minimize the business cycle in the AS/AD model involves:

The Federal Reserve controls the long-term interest rate.

Suppose a contractionary monetary policy raises nominal interest rates. If this is the case, it follows that the contractionary monetary policy must have:

During a recession, policy makers who use the AS/AD model would probably recommend an open market:

Monetary policy is one of the two main macroeconomic tools governments use to control the aggregate economy. The other is:

According to the Taylor Rule, if current inflation is 2.5 percent, the target inflation rate is 2 percent, and output is 1 percent above potential, the Fed should target the federal funds rate at 5.25 percent.

If nominal income increases by 4 percent and the price level increases by 3 percent, real income must:

When the Fed sells bonds, the money supply:

The distinction between real and nominal interest rates:

In the short run, if the Fed undertakes expansionary monetary policy, the effect will be to shift the:

Which is not something the Fed can do directly to conduct monetary policy?

Suppose the reserve requirement is 5 percent. How much would reserves need to be initially increased to eventually increase the money supply by 1,000?

Central banks are responsible for:

In the United States monetary policy is:

If saving exceeds investment, the appropriate countercyclical monetary policy would be:

How does monetary policy work in the context of the AS/AD model?

According to the AS/AD model, a reduction in the money supply is appropriate:

If the federal funds rate rises above the Fed's target range, the Fed could take:

The standard discussion of monetary policy is based on the assumption that the:

Define the discount rate,and explain how it can be used as a tool for the conduct of monetary policy.

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

Taxation and Government Intervention

Market Failure Versus Government Failure

Comparative Advantage, Exchange Rates, and Globalization

International Trade Policy

Production and Cost Analysis I

Production and Cost Analysis II

Perfect Competition

Monopoly and Monopolistic Competition

Oligopoly and Antitrust Policy

Real-World Competition and Technology

Work and the Labor Market

Who Gets What the Distribution of Income

The Logic of Individual Choice: the Foundation of Supply and Demand

Game Theory, Strategic Decision Making, and Behavioral Economics

Thinking Like a Modern Economist

Behavioral Economics and Modern Economic Policy

Microeconomic Policy, Economic Reasoning, and Beyond

Economic Growth, Business Cycles, and Unemployment

Measuring and Describing the Aggregate Economy

The Keynesian Short-Run Policy Model: Demand-Side Policies

The Classical Long-Run Policy Model: Growth and Supply-Side Policies

The Financial Sector and the Economy

Financial Crises, Panics, and Unconventional Monetary Policy

Deficits and Debt: the Austerity Debate

The Fiscal Policy Dilemma

Jobs and Unemployment

Inflation, Deflation, and Macro Policy

International Financial Policy

Macro Policy in a Global Setting

Structural Stagnation and Globalization

Macro Policy in Developing Countries

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