Question 1

Describe how the Fed uses open market operations to change short-term and long-term interest rates.

Accepted Answer

The Fed tries to achieve a target level for the federal funds rate by using open market operations.If it wants to lower the federal funds rate,it will buy Treasury bills using open market operations.This purchase will inject the banking system with reserves.The increased supply of reserves will lower the overnight loan rate on these reserves,which is called the federal funds rate.Changes in the federal funds rate will usually result in changes in the interest rates on other short-term financial assets such as Treasury bills,and eventually affect longer-term rates such as the rate of corporate bonds and mortgages.However,the effect on these longer-term rates is usually smaller than the impact on short-term rates and occurs with a lag.

Question 2

Which of the following are goals of monetary policy?

Accepted Answer

A) maximizing the value of the dollar relative to other currencies, economic growth, and high employment 
B) price stability, maximizing the value of the dollar relative to other currencies, and high employment 
C) price stability, economic growth, and high employment 
D) price stability, economic growth, and maximizing the value of the dollar relative to other currencies 
A) maximizing the value of the dollar relative to other currencies, economic growth, and high employment 
B) price stability, maximizing the value of the dollar relative to other currencies, and high employment 
C) price stability, economic growth, and high employment 
D) price stability, economic growth, and maximizing the value of the dollar relative to other currencies C

Question 3

Figure 17-6
  
-Refer to Figure 17-6.In the figure above,if the economy is at point A,the appropriate monetary policy by the Federal Reserve would be to

Accepted Answer

A) lower interest rates. 
B) raise interest rates. 
C) lower income taxes. 
D) raise income taxes. 
A) lower interest rates. 
B) raise interest rates. 
C) lower income taxes. 
D) raise income taxes. A

Question 4

Consider the Taylor rule for the target of the federal funds rate.Suppose the equilibrium real federal funds rate is 2 percent,the target rate of inflation is 3 percent,the current inflation rate is 3 percent,real GDP equals potential real GDP,and the weights are 1/2 for the inflation gap and the output gap.Using the Taylor rule,what does the target for the federal funds rate equal? Next,if the Federal Reserve lowered the target for the inflation rate to 1 percent,how much would the target for the federal funds rate change?

Accepted Answer

The federal funds target rate would equa

Question 5

Inflation targeting is a framework for carrying out monetary policy whereby

Accepted Answer

A) the central bank adopts a rigid target for inflation and ignores declines in output. 
B) the central bank commits to achieving a publicly announced level of inflation. 
C) the central bank commits to achieving a target level of inflation which is never announced publicly. 
D) the central bank commits to a monetary growth rule. 
A) the central bank adopts a rigid target for inflation and ignores declines in output. 
B) the central bank commits to achieving a publicly announced level of inflation. 
C) the central bank commits to achieving a target level of inflation which is never announced publicly. 
D) the central bank commits to a monetary growth rule.

Question 6

Suppose that the Federal Reserve Open Market Committee adheres to the ideas expressed by ________.If the economy moves into a recession,the Fed would recommend that the federal funds target rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation.

Accepted Answer

A) the gold standard 
B) the monetarist school of thought 
C) inflation targeting 
D) the Taylor Rule 
A) the gold standard 
B) the monetarist school of thought 
C) inflation targeting 
D) the Taylor Rule

Question 7

When calculating GDP,the Bureau of Economic Analysis releases its "advanced estimate" of a quarter's GDP approximately

Accepted Answer

A) three months before the quarter has ended. 
B) one month after the quarter has ended. 
C) three months after the quarter has ended. 
D) one year after the quarter has ended. 
A) three months before the quarter has ended. 
B) one month after the quarter has ended. 
C) three months after the quarter has ended. 
D) one year after the quarter has ended.

Question 8

What problems can high inflation rates cause for the economy?

Accepted Answer

The problems that inflation ca

Question 9

The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008.What event led the Fed to make these reductions in the federal funds rate?

Accepted Answer

A) It was in response to reductions in the discount rate, which was also lowered seven times over the same time period. 
B) The chairman of the Federal Reserve System persuaded members of the Federal Open Market Committee to lower interest rates in order to reduce the price of oil in international markets. 
C) During this period there was a substantial reduction in the demand for housing. 
D) Several large investment banks failed during this time period. 
A) It was in response to reductions in the discount rate, which was also lowered seven times over the same time period. 
B) The chairman of the Federal Reserve System persuaded members of the Federal Open Market Committee to lower interest rates in order to reduce the price of oil in international markets. 
C) During this period there was a substantial reduction in the demand for housing. 
D) Several large investment banks failed during this time period.

Question 10

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.

Accepted Answer

A) True 
 B)False

Question 11

Figure 17-12
  
-Refer to Figure 17-12.In the dynamic AD-AS model,if the economy is at point A in year 1 and is expected to go to point B in year 2,the Federal Reserve would most likely

Accepted Answer

A) increase interest rates. 
B) decrease interest rates. 
C) not change interest rates. 
D) increase the inflation rate. 
A) increase interest rates. 
B) decrease interest rates. 
C) not change interest rates. 
D) increase the inflation rate.

Question 12

Suppose the Fed increases the money supply.Which of the following is true?

Accepted Answer

A) At the original interest rate, the quantity of money demanded is equal to the quantity of money supplied. 
B) At the original interest rate, the quantity of money demanded is less than the quantity of money supplied. 
C) At the original interest rate, the quantity of money demanded is greater than the quantity of money supplied. 
D) The interest rate must rise for the money market to clear. 
A) At the original interest rate, the quantity of money demanded is equal to the quantity of money supplied. 
B) At the original interest rate, the quantity of money demanded is less than the quantity of money supplied. 
C) At the original interest rate, the quantity of money demanded is greater than the quantity of money supplied. 
D) The interest rate must rise for the money market to clear.

Question 13

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 14

An advantage of the personal consumption expenditures price index (PCE)over the Consumer Price Index (CPI)as a measure of inflation is that the PCE

Accepted Answer

A) includes the prices of more consumer goods and services. 
B) includes the prices of consumer goods, but not consumer services. 
C) includes the prices of consumer services, but not consumer goods. 
D) is a fixed market-basket price index that does not allow the mix of products to change each year. 
A) includes the prices of more consumer goods and services. 
B) includes the prices of consumer goods, but not consumer services. 
C) includes the prices of consumer services, but not consumer goods. 
D) is a fixed market-basket price index that does not allow the mix of products to change each year.

Question 15

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 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

Which of the following will lead to a decrease in the equilibrium interest rate in the economy?

Accepted Answer

A) an increase in the price level 
B) a sale of government securities by the Fed 
C) a decrease in GDP 
D) an increase in the discount rate 
E) an increase in the reserve requirement 
A) an increase in the price level 
B) a sale of government securities by the Fed 
C) a decrease in GDP 
D) an increase in the discount rate 
E) an increase in the reserve requirement

Question 18

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 19

An increase in interest rates

Accepted Answer

A) decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports. 
B) decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports. 
C) decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. 
D) increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. 
A) decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports. 
B) decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports. 
C) decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. 
D) increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports.

Question 20

The main goal of monetary policy for recent Fed Chairmen has been to maintain high employment in labor markets.

Accepted Answer

A) True 
 B)False

Describe how the Fed uses open market operations to change short-term and long-term interest rates.

Which of the following are goals of monetary policy?

Figure 17-6 -Refer to Figure 17-6.In the figure above,if the economy is at point A,the appropriate monetary policy by the Federal Reserve would be to

Inflation targeting is a framework for carrying out monetary policy whereby

Suppose that the Federal Reserve Open Market Committee adheres to the ideas expressed by ________.If the economy moves into a recession,the Fed would recommend that the federal funds target rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation.

When calculating GDP,the Bureau of Economic Analysis releases its "advanced estimate" of a quarter's GDP approximately

What problems can high inflation rates cause for the economy?

The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008.What event led the Fed to make these reductions in the federal funds rate?

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.

Figure 17-12 -Refer to Figure 17-12.In the dynamic AD-AS model,if the economy is at point A in year 1 and is expected to go to point B in year 2,the Federal Reserve would most likely

Suppose the Fed increases the money supply.Which of the following is true?

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.

An advantage of the personal consumption expenditures price index (PCE)over the Consumer Price Index (CPI)as a measure of inflation is that the PCE

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.

Which of the following will lead to a decrease in the equilibrium interest rate in the economy?

Falling interest rates can

An increase in interest rates

The main goal of monetary policy for recent Fed Chairmen has been to maintain high employment in labor markets.

Economics: Foundations and Models

Trade-Offs, comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Market Efficiency and Market Failure

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Consumer Choice and Elasticity

Technology, production, and Costs

Firms in Perfectly Competitive Markets

Monopoly and Antitrust Policy

Monopolistic Competition and Oligopoly

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Aggregate Demand and Aggregate Supply Analysis

Money, banks, and the Federal Reserve System

Fiscal Policy

Comparative Advantage, international Trade, and Exchange Rates

Filters

Exam 17: Monetary Policy

Describe how the Fed uses open market operations to change short-term and long-term interest rates.

Which of the following are goals of monetary policy?

Figure 17-6 -Refer to Figure 17-6.In the figure above,if the economy is at point A,the appropriate monetary policy by the Federal Reserve would be to

Inflation targeting is a framework for carrying out monetary policy whereby

Suppose that the Federal Reserve Open Market Committee adheres to the ideas expressed by ________.If the economy moves into a recession,the Fed would recommend that the federal funds target rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation.

When calculating GDP,the Bureau of Economic Analysis releases its "advanced estimate" of a quarter's GDP approximately

What problems can high inflation rates cause for the economy?

The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008.What event led the Fed to make these reductions in the federal funds rate?

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.

Figure 17-12 -Refer to Figure 17-12.In the dynamic AD-AS model,if the economy is at point A in year 1 and is expected to go to point B in year 2,the Federal Reserve would most likely

Suppose the Fed increases the money supply.Which of the following is true?

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.

An advantage of the personal consumption expenditures price index (PCE)over the Consumer Price Index (CPI)as a measure of inflation is that the PCE

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.

Which of the following will lead to a decrease in the equilibrium interest rate in the economy?

Falling interest rates can

An increase in interest rates

The main goal of monetary policy for recent Fed Chairmen has been to maintain high employment in labor markets.

Economics: Foundations and Models

Trade-Offs, comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Market Efficiency and Market Failure

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Consumer Choice and Elasticity

Technology, production, and Costs

Firms in Perfectly Competitive Markets

Monopoly and Antitrust Policy

Monopolistic Competition and Oligopoly

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Aggregate Demand and Aggregate Supply Analysis

Money, banks, and the Federal Reserve System

Fiscal Policy

Comparative Advantage, international Trade, and Exchange Rates

Filters

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.