Question 1

Ceteris paribus, an increase in the money supply will lower short-term interest rates.

Accepted Answer

A) True 
 B)False

Question 2

When the Fed uses contractionary policy

Accepted Answer

A)  the price level rises higher than it would if the Fed did not pursue policy. 
B)  the price level rises less than it would if the Fed did not pursue policy. 
C)  it does not change the price level. 
D)  it causes inflation. 
A)  the price level rises higher than it would if the Fed did not pursue policy. 
B)  the price level rises less than it would if the Fed did not pursue policy. 
C)  it does not change the price level. 
D)  it causes inflation.

Question 3

Figure 26-11  
-Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

Accepted Answer

A)  unemployment rates higher than what would occur if no policy had been pursued. 
B)  inflation higher than what would occur if no policy had been pursued. 
C)  real GDP lower than what would occur if no policy had been pursued. 
D)  short-term interest rates higher than what would occur if no policy had been pursued. 
A)  unemployment rates higher than what would occur if no policy had been pursued. 
B)  inflation higher than what would occur if no policy had been pursued. 
C)  real GDP lower than what would occur if no policy had been pursued. 
D)  short-term interest rates higher than what would occur if no policy had been pursued.

Question 4

Suppose that the economy is producing above potential GDP and the Fed implements the correct change in monetary policy, but not until after the economy has passed the peak of the boom. Then

Accepted Answer

A)  the Fed's contractionary policy may result in too large of a decrease in GDP. 
B)  the Fed's contractionary policy may result in too small of an increase in GDP. 
C)  the Fed's expansionary policy may result in too small of a decrease in GDP. 
D)  the Fed's expansionary policy may result in too large of an increase in GDP. 
A)  the Fed's contractionary policy may result in too large of a decrease in GDP. 
B)  the Fed's contractionary policy may result in too small of an increase in GDP. 
C)  the Fed's expansionary policy may result in too small of a decrease in GDP. 
D)  the Fed's expansionary policy may result in too large of an increase in GDP.

Question 5

Present two arguments as to why the Fed should adopt inflation targeting as a framework for monetary policy.

Accepted Answer

Any two of the following three reasons a

Question 6

The rate of interest banks charge other banks for overnight loans of reserves is the

Accepted Answer

A)  discount rate. 
B)  prime rate. 
C)  federal funds rate. 
D)  real rate. 
A)  discount rate. 
B)  prime rate. 
C)  federal funds rate. 
D)  real rate.

Question 7

Falling interest rates can

Accepted Answer

A)  increase a firm's stock price, which causes firms to issue more stock shares, and thus increases funds for investment. 
B)  raise the cost of borrowing for firms and decrease investment. 
C)  raise the cost of buying new homes and fewer new homes will be purchased. 
D)  lower the cost of buying new homes and fewer new homes will be purchased. 
A)  increase a firm's stock price, which causes firms to issue more stock shares, and thus increases funds for investment. 
B)  raise the cost of borrowing for firms and decrease investment. 
C)  raise the cost of buying new homes and fewer new homes will be purchased. 
D)  lower the cost of buying new homes and fewer new homes will be purchased.

Question 8

The Taylor rule helps explain the relationship between the Fed's ________ and ________.

Accepted Answer

A)  money supply target; economic conditions 
B)  money supply target; the federal funds target 
C)  federal funds target; the monetary growth rule 
D)  federal funds target; economic conditions 
A)  money supply target; economic conditions 
B)  money supply target; the federal funds target 
C)  federal funds target; the monetary growth rule 
D)  federal funds target; economic conditions

Question 9

In recent years, a monetary growth rule has fallen out of favor because

Accepted Answer

A)  it is believed that active monetary policy destabilizes the economy and makes the business cycle worse. 
B)  the growth rate of GDP has been highly unstable. 
C)  the close relationship between movements in M1 and movements in real GDP has become weaker. 
D)  the growth rate of M1 has become more stable. 
A)  it is believed that active monetary policy destabilizes the economy and makes the business cycle worse. 
B)  the growth rate of GDP has been highly unstable. 
C)  the close relationship between movements in M1 and movements in real GDP has become weaker. 
D)  the growth rate of M1 has become more stable.

Question 10

The Fed uses a "core" price index, one that excludes food and energy prices to measure inflation. It does so because

Accepted Answer

A)  food and energy have inelastic demand curves and consumers will buy them regardless of their price. 
B)  it wants to avoid the blame for high gasoline prices causing inflation. 
C)  food and energy prices have wide swings that are not related to the causes of general inflation. 
D)  food and energy prices do not change all that much during the short run, so are irrelevant to the calculation of inflation. 
A)  food and energy have inelastic demand curves and consumers will buy them regardless of their price. 
B)  it wants to avoid the blame for high gasoline prices causing inflation. 
C)  food and energy prices have wide swings that are not related to the causes of general inflation. 
D)  food and energy prices do not change all that much during the short run, so are irrelevant to the calculation of inflation.

Question 11

According to the Taylor rule, does the target for the federal funds rate respond differently for an increase in inflation caused by an increase in aggregate demand and for an increase in inflation caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the federal funds rate changes.

Accepted Answer

The target for the federal funds rate re

Question 12

The Fed can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates.

Accepted Answer

A) True 
 B)False

Question 13

The Taylor rule predicted a federal funds rate which was ________ that set when Paul Volcker was chairman of the Fed, and a rate which was ________ that set when Arthur Burns chaired the Fed.

Accepted Answer

A)  greater than; equal to 
B)  greater than; less than 
C)  less than; equal to 
D)  less than; greater than 
A)  greater than; equal to 
B)  greater than; less than 
C)  less than; equal to 
D)  less than; greater than

Question 14

Despite saving Lehman Brothers from failing, the Fed and the Treasury decided to allow Bear Stearns to go bankrupt, which it did in September, 2008.

Accepted Answer

A) True 
 B)False

Question 15

In 2008, the Treasury and Federal Reserve took several actions in response to the deepening financial crisis. One action was the Treasury's move to have the federal government take control of

Accepted Answer

A)  the Federal Deposit Insurance Corporation (FDI
C) . 
B)  Fannie Mae and Freddie Mac. 
C)  JPMorgan Chase. 
D)  Lehman Brothers. 
A)  the Federal Deposit Insurance Corporation (FDI
C) . 
B)  Fannie Mae and Freddie Mac. 
C)  JPMorgan Chase. 
D)  Lehman Brothers.

Question 16

When housing prices fell as they did beginning in 2006 following the housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.

Accepted Answer

A)  tightened; easier 
B)  tightened; harder 
C)  eased; easier 
D)  eased; harder 
A)  tightened; easier 
B)  tightened; harder 
C)  eased; easier 
D)  eased; harder

Question 17

Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often

Accepted Answer

A)  raises interest rates during recessions. 
B)  lowers interest rates during recessions. 
C)  lowers income taxes during recessions. 
D)  sells Treasury bills to help the housing market. 
A)  raises interest rates during recessions. 
B)  lowers interest rates during recessions. 
C)  lowers income taxes during recessions. 
D)  sells Treasury bills to help the housing market.

Question 18

A financial asset is considered a security if

Accepted Answer

A)  the owner of the security receives dividends and realizes a capital gain when the asset is sold. 
B)  it can be sold in a secondary market. 
C)  its value increases after it is sold in a primary market. 
D)  its value is secure; that is, the owner will not suffer a financial loss when the asset is sold. 
A)  the owner of the security receives dividends and realizes a capital gain when the asset is sold. 
B)  it can be sold in a secondary market. 
C)  its value increases after it is sold in a primary market. 
D)  its value is secure; that is, the owner will not suffer a financial loss when the asset is sold.

Question 19

The money demand curve, with the interest rate on the vertical axis, has a

Accepted Answer

A)  positive slope. 
B)  negative slope. 
C)  zero slope. 
D)  positive slope for low levels of money demand, and a negative slope for high levels of money demand. 
A)  positive slope. 
B)  negative slope. 
C)  zero slope. 
D)  positive slope for low levels of money demand, and a negative slope for high levels of money demand.

Question 20

Monetary policy refers to the actions the Federal Reserve takes to manage

Accepted Answer

A)  the money supply and income tax rates to pursue its economic objectives. 
B)  the money supply and interest rates to pursue its economic objectives. 
C)  income tax rates and interest rates to pursue its economic objectives. 
D)  government spending and income tax rates to pursue its economic objectives. 
A)  the money supply and income tax rates to pursue its economic objectives. 
B)  the money supply and interest rates to pursue its economic objectives. 
C)  income tax rates and interest rates to pursue its economic objectives. 
D)  government spending and income tax rates to pursue its economic objectives.

Exam 26: Monetary Policy

Ceteris paribus, an increase in the money supply will lower short-term interest rates.

When the Fed uses contractionary policy

Figure 26-11 -Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

Suppose that the economy is producing above potential GDP and the Fed implements the correct change in monetary policy, but not until after the economy has passed the peak of the boom. Then

Present two arguments as to why the Fed should adopt inflation targeting as a framework for monetary policy.

The rate of interest banks charge other banks for overnight loans of reserves is the

Falling interest rates can

The Taylor rule helps explain the relationship between the Fed's ________ and ________.

In recent years, a monetary growth rule has fallen out of favor because

The Fed uses a "core" price index, one that excludes food and energy prices to measure inflation. It does so because

The Fed can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates.

The Taylor rule predicted a federal funds rate which was ________ that set when Paul Volcker was chairman of the Fed, and a rate which was ________ that set when Arthur Burns chaired the Fed.

Despite saving Lehman Brothers from failing, the Fed and the Treasury decided to allow Bear Stearns to go bankrupt, which it did in September, 2008.

In 2008, the Treasury and Federal Reserve took several actions in response to the deepening financial crisis. One action was the Treasury's move to have the federal government take control of

When housing prices fell as they did beginning in 2006 following the housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.

Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often

A financial asset is considered a security if

The money demand curve, with the interest rate on the vertical axis, has a

Monetary policy refers to the actions the Federal Reserve takes to manage

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters

The Taylor rule helps explain the relationship between the Fed's and .

The Taylor rule predicted a federal funds rate which was that set when Paul Volcker was chairman of the Fed, and a rate which was that set when Arthur Burns chaired the Fed.

When housing prices fell as they did beginning in 2006 following the housing market bubble, most banks and other lenders the requirement for borrowers, making it for potential home buyers to obtain mortgages.