Question 1

Increases in the price level

Accepted Answer

A)  increase the opportunity cost of holding money. 
B)  decrease the opportunity cost of holding money. 
C)  increase the quantity of money needed for buying and selling. 
D)  decrease the quantity of money needed for buying and selling. 
A)  increase the opportunity cost of holding money. 
B)  decrease the opportunity cost of holding money. 
C)  increase the quantity of money needed for buying and selling. 
D)  decrease the quantity of money needed for buying and selling.

Question 2

Rising prices erode the value of money as a ________ and as a ________.

Accepted Answer

A)  unit of barter; unit of account 
B)  store of value; unit of liquidity 
C)  medium of exchange; store of value 
D)  store of value; unit of barter 
A)  unit of barter; unit of account 
B)  store of value; unit of liquidity 
C)  medium of exchange; store of value 
D)  store of value; unit of barter

Question 3

Which of the following is not an argument against inflation targeting?

Accepted Answer

A)  Inflation targeting reduces the flexibility of the Fed to pursue other policy goals. 
B)  Inflation targeting assumes that the Fed can accurately forecast future inflation rates. 
C)  Inflation targeting makes monetary policy ineffective because the targets are publicly announced. 
D)  Inflation targeting holds the Fed accountable for an inflation goal, but may make it less likely the Fed will achieve other goals. 
A)  Inflation targeting reduces the flexibility of the Fed to pursue other policy goals. 
B)  Inflation targeting assumes that the Fed can accurately forecast future inflation rates. 
C)  Inflation targeting makes monetary policy ineffective because the targets are publicly announced. 
D)  Inflation targeting holds the Fed accountable for an inflation goal, but may make it less likely the Fed will achieve other goals.

Question 4

By the 2000s, an important change in the mortgage market had occurred when ________ became significant participants in the secondary market for mortgages.

Accepted Answer

A)  investment banks 
B)  Federal Reserve Banks 
C)  commercial banks 
D)  savings banks 
A)  investment banks 
B)  Federal Reserve Banks 
C)  commercial banks 
D)  savings banks

Question 5

By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ________ and "Alt-A" borrowers ________.

Accepted Answer

A)  with flawed credit histories; who did not document their incomes 
B)  who borrowed money at rates below the prime interest rate; who had AAA credit ratings 
C)  who borrowed more than 120 percent of the value of the house; with no proof of U.S. citizenship 
D)  who purchased homes in depressed housing markets; who purchased homes which were repossessed by government agencies. 
A)  with flawed credit histories; who did not document their incomes 
B)  who borrowed money at rates below the prime interest rate; who had AAA credit ratings 
C)  who borrowed more than 120 percent of the value of the house; with no proof of U.S. citizenship 
D)  who purchased homes in depressed housing markets; who purchased homes which were repossessed by government agencies.

Question 6

Table 26-3
  
-Refer to Table 26-3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should

Accepted Answer

A)  buy Treasury securities. 
B)  sell Treasury securities. 
C)  decrease the required reserve ratio. 
D)  decrease income taxes. 
A)  buy Treasury securities. 
B)  sell Treasury securities. 
C)  decrease the required reserve ratio. 
D)  decrease income taxes.

Question 7

In October 2008, Congress passed the Troubled Asset Relief Program (TARP), under which the Treasury provided ________ to banks in exchange for ________.

Accepted Answer

A)  bonds; cash 
B)  lines of credit; loan guarantees 
C)  funds; stock 
D)  financial advice; promises to expand mortgage lending 
A)  bonds; cash 
B)  lines of credit; loan guarantees 
C)  funds; stock 
D)  financial advice; promises to expand mortgage lending

Question 8

The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________.

Accepted Answer

A)  goals; targets 
B)  goals; tools 
C)  targets; goals 
D)  targets; tools 
A)  goals; targets 
B)  goals; tools 
C)  targets; goals 
D)  targets; tools

Question 9

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve

Accepted Answer

A)  does not try to eliminate recessions, but instead focuses on preventing inflation. 
B)  can fine tune the economy and realistically hope to keep the economy from experiencing recessions. 
C)  cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be. 
D)  cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions. 
A)  does not try to eliminate recessions, but instead focuses on preventing inflation. 
B)  can fine tune the economy and realistically hope to keep the economy from experiencing recessions. 
C)  cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be. 
D)  cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions.

Question 10

Table 26-1
  
-Refer to Table 26-1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2019 if the Fed does not use monetary policy. Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2019?

Accepted Answer

A)  The trading desk should sell Treasury securities. 
B)  The Fed should lower the target for the federal funds rate. 
C)  The Fed should pursue contractionary policy. 
D)  The Fed should lower capital gains taxes. 
A)  The trading desk should sell Treasury securities. 
B)  The Fed should lower the target for the federal funds rate. 
C)  The Fed should pursue contractionary policy. 
D)  The Fed should lower capital gains taxes.

Question 11

A borrower defaults on a loan when he stops making payments on the loan.

Accepted Answer

A) True 
 B)False

Question 12

Figure 26-3  
-Refer to Figure 26-3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will

Accepted Answer

A)  buy Treasury bills. 
B)  sell Treasury bills. 
C)  neither buy nor sell Treasury bills. 
D)  want to hold more money. 
A)  buy Treasury bills. 
B)  sell Treasury bills. 
C)  neither buy nor sell Treasury bills. 
D)  want to hold more money.

Question 13

If the Fed buys Treasury bills, this will shift the

Accepted Answer

A)  money supply curve to the right. 
B)  money supply curve to the left. 
C)  money demand curve to the right. 
D)  money demand curve to the left. 
A)  money supply curve to the right. 
B)  money supply curve to the left. 
C)  money demand curve to the right. 
D)  money demand curve to the left.

Question 14

An argument in favor of the Federal Reserve adopting inflation targeting is that in the long run, the Fed can have an impact on inflation but not on real GDP.

Accepted Answer

A) True 
 B)False

Question 15

If the Fed lowers its target for the federal funds rate, this indicates that

Accepted Answer

A)  the Fed is pursuing an expansionary monetary policy. 
B)  the Fed is pursuing a contractionary monetary policy. 
C)  the Fed is attempting to combat inflation. 
D)  the Fed is concerned that the growth in aggregate demand will exceed potential GDP. 
A)  the Fed is pursuing an expansionary monetary policy. 
B)  the Fed is pursuing a contractionary monetary policy. 
C)  the Fed is attempting to combat inflation. 
D)  the Fed is concerned that the growth in aggregate demand will exceed potential GDP.

Question 16

Inflation targeting has been adopted by the central banks of several countries including the European Central Bank.

Accepted Answer

A) True 
 B)False

Question 17

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the economy will induce the Federal Reserve to conduct a contractionary monetary policy. Briefly explain the condition of the economy and what the Federal Reserve is attempting to do.

Accepted Answer

The Federal Reserve conducts a contracti

Question 18

Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

Accepted Answer

A)  oil prices. 
B)  business taxes. 
C)  income tax rates. 
D)  investment spending. 
A)  oil prices. 
B)  business taxes. 
C)  income tax rates. 
D)  investment spending.

Question 19

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

Accepted Answer

A)  increase. 
B)  decrease. 
C)  not change. 
D)  increase if the economy is in a recession. 
A)  increase. 
B)  decrease. 
C)  not change. 
D)  increase if the economy is in a recession.

Question 20

Which of the following is true?

Accepted Answer

A)  The money market model is essentially a model that determines the short-term nominal rate of interest. 
B)  The money market model is essentially a model that determines the short-term real rate of interest. 
C)  The loanable funds model is essentially a model that determines the short-term real rate of interest. 
D)  The loanable funds model is essentially a model that determines the long-term nominal rate of interest. 
A)  The money market model is essentially a model that determines the short-term nominal rate of interest. 
B)  The money market model is essentially a model that determines the short-term real rate of interest. 
C)  The loanable funds model is essentially a model that determines the short-term real rate of interest. 
D)  The loanable funds model is essentially a model that determines the long-term nominal rate of interest.

Exam 26: Monetary Policy

Increases in the price level

Rising prices erode the value of money as a ________ and as a ________.

Which of the following is not an argument against inflation targeting?

By the 2000s, an important change in the mortgage market had occurred when ________ became significant participants in the secondary market for mortgages.

By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ________ and "Alt-A" borrowers ________.

Table 26-3 -Refer to Table 26-3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should

In October 2008, Congress passed the Troubled Asset Relief Program (TARP), under which the Treasury provided ________ to banks in exchange for ________.

The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________.

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve

Table 26-1 -Refer to Table 26-1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2019 if the Fed does not use monetary policy. Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2019?

A borrower defaults on a loan when he stops making payments on the loan.

Figure 26-3 -Refer to Figure 26-3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will

If the Fed buys Treasury bills, this will shift the

An argument in favor of the Federal Reserve adopting inflation targeting is that in the long run, the Fed can have an impact on inflation but not on real GDP.

If the Fed lowers its target for the federal funds rate, this indicates that

Inflation targeting has been adopted by the central banks of several countries including the European Central Bank.

Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

Which of the following is true?

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

Rising prices erode the value of money as a and as a .

By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers and "Alt-A" borrowers .

In October 2008, Congress passed the Troubled Asset Relief Program (TARP), under which the Treasury provided to banks in exchange for .

The Federal Reserve can directly affect its monetary policy , which then affect its monetary policy .

Figure 26-3 -Refer to Figure 26-3. In the figure above, when the money supply shifts from MS₁ to MS₂, at the interest rate of 3 percent households and firms will