Question 1

Which of the following monetary policies reduces aggregate demand and output?

Accepted Answer

A) A cut in the federal funds rate 
B) An open market sale of government securities 
C) A cut in the discount rate 
D) A cut in the reserve requirement 
A) A cut in the federal funds rate 
B) An open market sale of government securities 
C) A cut in the discount rate 
D) A cut in the reserve requirement

Question 2

Assuming the Fed is following the Taylor Rule, if inflation is 3 percent, target inflation is 2 percent, and output is 1 percent above potential, what would you predict would be the Fed funds rate target?

Accepted Answer

A) 4 percent 
B) 5 percent 
C) 5.5 percent 
D) 6 percent 
A) 4 percent 
B) 5 percent 
C) 5.5 percent 
D) 6 percent

Question 3

Suppose the money multiplier in the United States is 2.5. If the Fed wants to reduce the money supply by 1,000 it should:

Accepted Answer

A) buy government securities worth 250. 
B) buy government securities worth 400. 
C) sell government securities worth 250. 
D) sell government securities worth 400. 
A) buy government securities worth 250. 
B) buy government securities worth 400. 
C) sell government securities worth 250. 
D) sell government securities worth 400.

Question 4

An increase in the federal funds rate is a signal that the Fed wants a tighter monetary policy.

Accepted Answer

A) True 
 B)False

Question 5

If the federal funds rate is at its target 3.5 percent, inflation is 1.5 percent, and target inflation is 2.5 percent. If the Taylor rule is accurate, the output was:

Accepted Answer

A) 1 percent below potential. 
B) 1 percent above potential. 
C) 1.5 percent below potential. 
D) 1.5 percent above potential. 
A) 1 percent below potential. 
B) 1 percent above potential. 
C) 1.5 percent below potential. 
D) 1.5 percent above potential.

Question 6

The federal funds rate is the interest rate the:

Accepted Answer

A) government charges banks for Fed funds. 
B) Fed charges banks for Fed funds. 
C) banks charge individual investors for Fed funds. 
D) banks charge each other in the Fed funds market. 
A) government charges banks for Fed funds. 
B) Fed charges banks for Fed funds. 
C) banks charge individual investors for Fed funds. 
D) banks charge each other in the Fed funds market.

Question 7

What is a central bank? What are its distinguishing characteristics and primary functions?

Accepted Answer

A central bank is a banker's bank.A cent

Question 8

Although rarely used, which of the following is an instrument the Fed has to conduct monetary policy?

Accepted Answer

A) The corporate income tax 
B) The tax on unearned income 
C) The discount rate 
D) The interest rate on Treasury bonds 
A) The corporate income tax 
B) The tax on unearned income 
C) The discount rate 
D) The interest rate on Treasury bonds

Question 9

Demonstrate graphically and explain verbally (using the AS/AD model)the effect of the Fed's sale of government bonds when the economy is below potential.

Accepted Answer

The diagram: @#IMG-DLM& The explanation
The econom

Question 10

To decrease the nation's money supply, the Fed can:

Accepted Answer

A) decrease the reserve requirement. 
B) decrease the discount rate. 
C) increase the discount rate. 
D) buy bonds. 
A) decrease the reserve requirement. 
B) decrease the discount rate. 
C) increase the discount rate. 
D) buy bonds.

Question 11

One year, the lead sentence in a Wall Street Journal article read, "Tight job markets, rising wages, and the economy's continued strength put more pressure on the Federal Reserve to raise short-term interest rates." If the Fed responded to this pressure, it would adopt:

Accepted Answer

A) a contractionary monetary policy that reduces output. 
B) a contractionary monetary policy that raises output. 
C) an expansionary monetary policy that reduces output. 
D) an expansionary monetary policy that raises output. 
A) a contractionary monetary policy that reduces output. 
B) a contractionary monetary policy that raises output. 
C) an expansionary monetary policy that reduces output. 
D) an expansionary monetary policy that raises output.

Question 12

Explain how the Fed uses the discount rate to influence the money supply.

Accepted Answer

Since 2003,the Federal Reserve sets the

Question 13

Briefly explain what goes on in a typical FOMC meeting.

Accepted Answer

At the beginning of the meeting,a summar

Question 14

When people expect higher inflation, usually nominal interest rates will:

Accepted Answer

A) fall. 
B) rise. 
C) remain unchanged. 
D) move erratically. 
A) fall. 
B) rise. 
C) remain unchanged. 
D) move erratically.

Question 15

Suppose the federal funds rate rises by 0.5 percent. If the Taylor rule is correct, this might be because output is:

Accepted Answer

A) 1 percentage point below potential output. 
B) 0.5 percentage points below potential output. 
C) 0.5 percentage points above potential output. 
D) 1 percentage point above potential output. 
A) 1 percentage point below potential output. 
B) 0.5 percentage points below potential output. 
C) 0.5 percentage points above potential output. 
D) 1 percentage point above potential output.

Question 16

Banks can borrow reserves from each other through:

Accepted Answer

A) the Fed funds market. 
B) the Federal Open Market Committee. 
C) open market purchases. 
D) secondary reserves. 
A) the Fed funds market. 
B) the Federal Open Market Committee. 
C) open market purchases. 
D) secondary reserves.

Question 17

Suppose you are a lender and you expect inflation to be 4 percent over the next year because inflation was 4 percent in the last year. If you want to earn a real return of 2 percent on any loans you make, you will set the interest rate on your loans equal to:

Accepted Answer

A) 2 percent. 
B) 4 percent. 
C) 6 percent. 
D) 10 percent. 
A) 2 percent. 
B) 4 percent. 
C) 6 percent. 
D) 10 percent.

Question 18

Monetary regimes:

Accepted Answer

A) do not set policy on the basis of a predetermined framework. 
B) rely on the discretion of monetary policy officials. 
C) use predetermined rules to set monetary policy. 
D) produce greater variation in expected inflation than individual monetary policies. 
A) do not set policy on the basis of a predetermined framework. 
B) rely on the discretion of monetary policy officials. 
C) use predetermined rules to set monetary policy. 
D) produce greater variation in expected inflation than individual monetary policies.

Question 19

Just prior to the year 2000, the Fed was concerned that people would make larger than normal bank withdrawals out of fear of what was called the "Y2K computer bug." Fearing that this would disrupt the banking system, the Fed wanted to use a defensive action to prevent any such disruption. This would take the form of open market bond:

Accepted Answer

A) sales that would prevent the federal funds rate from increasing. 
B) sales that would prevent the federal funds rate from decreasing. 
C) purchases that would prevent the federal funds rate from increasing. 
D) purchases that would prevent the federal funds rate from decreasing. 
A) sales that would prevent the federal funds rate from increasing. 
B) sales that would prevent the federal funds rate from decreasing. 
C) purchases that would prevent the federal funds rate from increasing. 
D) purchases that would prevent the federal funds rate from decreasing.

Question 20

The liquidity trap is often compared to:

Accepted Answer

A) pushing on a string. 
B) pulling on a string. 
C) pushing banks into a hole filled with liquid. 
D) pulling banks into a hole filled with liquid. 
A) pushing on a string. 
B) pulling on a string. 
C) pushing banks into a hole filled with liquid. 
D) pulling banks into a hole filled with liquid.

Exam 29: Monetary Policy

Which of the following monetary policies reduces aggregate demand and output?

Assuming the Fed is following the Taylor Rule, if inflation is 3 percent, target inflation is 2 percent, and output is 1 percent above potential, what would you predict would be the Fed funds rate target?

Suppose the money multiplier in the United States is 2.5. If the Fed wants to reduce the money supply by 1,000 it should:

An increase in the federal funds rate is a signal that the Fed wants a tighter monetary policy.

If the federal funds rate is at its target 3.5 percent, inflation is 1.5 percent, and target inflation is 2.5 percent. If the Taylor rule is accurate, the output was:

The federal funds rate is the interest rate the:

What is a central bank? What are its distinguishing characteristics and primary functions?

Although rarely used, which of the following is an instrument the Fed has to conduct monetary policy?

Demonstrate graphically and explain verbally (using the AS/AD model)the effect of the Fed's sale of government bonds when the economy is below potential.

To decrease the nation's money supply, the Fed can:

One year, the lead sentence in a Wall Street Journal article read, "Tight job markets, rising wages, and the economy's continued strength put more pressure on the Federal Reserve to raise short-term interest rates." If the Fed responded to this pressure, it would adopt:

Explain how the Fed uses the discount rate to influence the money supply.

Briefly explain what goes on in a typical FOMC meeting.

When people expect higher inflation, usually nominal interest rates will:

Suppose the federal funds rate rises by 0.5 percent. If the Taylor rule is correct, this might be because output is:

Banks can borrow reserves from each other through:

Suppose you are a lender and you expect inflation to be 4 percent over the next year because inflation was 4 percent in the last year. If you want to earn a real return of 2 percent on any loans you make, you will set the interest rate on your loans equal to:

Monetary regimes:

The liquidity trap is often compared to:

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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