Question 1

When the Federal Reserve increases the money supply, people spend more because they now have more money.

Accepted Answer

A) True 
 B)False

Question 2

The monetary policy target the Federal Reserve focuses primarily on today is

Accepted Answer

A)  the unemployment rate. 
B)  M1. 
C)  the inflation rate. 
D)  the interest rate. 
E)  M2. 
A)  the unemployment rate. 
B)  M1. 
C)  the inflation rate. 
D)  the interest rate. 
E)  M2.

Question 3

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the

Accepted Answer

A)  federal funds rate. 
B)  Treasury bill rate. 
C)  discount rate. 
D)  prime rate. 
A)  federal funds rate. 
B)  Treasury bill rate. 
C)  discount rate. 
D)  prime rate.

Question 4

List the Fed's four main monetary goals.

Accepted Answer

1. Price stability
2. High emp

Question 5

By the 2000s, an important market change occurred when investment banks became significant participants in the secondary market for

Accepted Answer

A)  mortgages. 
B)  Treasury securities. 
C)  corporate bonds. 
D)  currency. 
A)  mortgages. 
B)  Treasury securities. 
C)  corporate bonds. 
D)  currency.

Question 6

If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run.

Accepted Answer

A)  reduce; raise 
B)  increase; lower 
C)  increase; raise 
D)  reduce; lower 
A)  reduce; raise 
B)  increase; lower 
C)  increase; raise 
D)  reduce; lower

Question 7

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 ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

Accepted Answer

A)  sub-prime; "Alt-A" 
B)  adjustable rate; shadow-banking 
C)  "credit crunch"; black market 
D)  "fresh-start"; prime rate 
A)  sub-prime; "Alt-A" 
B)  adjustable rate; shadow-banking 
C)  "credit crunch"; black market 
D)  "fresh-start"; prime rate

Question 8

Figure 26-5  
-Refer to Figure 26-5. In the figure above, the movement from point A to point B in the money market would be caused by

Accepted Answer

A)  an increase in the price level. 
B)  a decrease in real GDP. 
C)  an open market sale of Treasury securities by the Federal Reserve. 
D)  an increase in the required reserve ratio by the Federal Reserve. 
A)  an increase in the price level. 
B)  a decrease in real GDP. 
C)  an open market sale of Treasury securities by the Federal Reserve. 
D)  an increase in the required reserve ratio by the Federal Reserve.

Question 9

Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2001 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession?

Accepted Answer

The inflation rate responds differently

Question 10

What is a banking panic, and what role did banking panics play in the decision by Congress to establish the Federal Reserve?

Accepted Answer

When the Fed was founded, its primary re

Question 11

The Fed can increase the federal funds rate by

Accepted Answer

A)  selling Treasury bills, which increases bank reserves. 
B)  buying Treasury bills, which increases bank reserves. 
C)  selling Treasury bills, which decreases bank reserves. 
D)  buying Treasury bills, which decreases bank reserves. 
A)  selling Treasury bills, which increases bank reserves. 
B)  buying Treasury bills, which increases bank reserves. 
C)  selling Treasury bills, which decreases bank reserves. 
D)  buying Treasury bills, which decreases bank reserves.

Question 12

Table 26-2
  
-Refer to Table 26-2. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, which of the following will be higher than if the Fed had taken no action?

Accepted Answer

A)  real GDP and the unemployment rate 
B)  real GDP and the inflation rate 
C)  real GDP and potential GDP 
D)  potential GDP and the inflation rate 
A)  real GDP and the unemployment rate 
B)  real GDP and the inflation rate 
C)  real GDP and potential GDP 
D)  potential GDP and the inflation rate

Question 13

Figure 26-2  
-Refer to Figure 26-2. In the figure above, the movement from point A to point B in the money market would be caused by

Accepted Answer

A)  an increase in the price level. 
B)  a decrease in real GDP. 
C)  an open market sale of Treasury securities by the Federal Reserve. 
D)  a decrease in the required reserve ratio by the Federal Reserve. 
A)  an increase in the price level. 
B)  a decrease in real GDP. 
C)  an open market sale of Treasury securities by the Federal Reserve. 
D)  a decrease in the required reserve ratio by the Federal Reserve.

Question 14

Expansionary monetary policy refers to the Fed's increasing the money supply and increasing interest rates to increase real GDP.

Accepted Answer

A) True 
 B)False

Question 15

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.

Accepted Answer

A)  will be greater than 
B)  will be less than 
C)  will be the same as 
D)  may be greater than or less than 
A)  will be greater than 
B)  will be less than 
C)  will be the same as 
D)  may be greater than or less than

Question 16

Table 26-8
  
-The supporters of a monetary growth rule believe that active monetary policy

Accepted Answer

A)  stabilizes the economy, decreasing the number of recessions and their severity. 
B)  destabilizes the economy, increasing the number of recessions and their severity. 
C)  cannot change the inflation rate. 
D)  cannot change real GDP. 
A)  stabilizes the economy, decreasing the number of recessions and their severity. 
B)  destabilizes the economy, increasing the number of recessions and their severity. 
C)  cannot change the inflation rate. 
D)  cannot change real GDP.

Question 17

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.

Question 18

Since World War II, the Federal Reserve has not been involved in carrying out monetary policy.

Accepted Answer

A) True 
 B)False

Question 19

The money demand curve has a

Accepted Answer

A)  negative slope because an increase in the interest rate decreases the quantity of money demanded. 
B)  positive slope because an increase in the interest rate increases the quantity of money demanded. 
C)  negative slope because an increase in the price level decreases the quantity of money demanded. 
D)  positive slope because an increase in the price level increases the quantity of money demanded. 
A)  negative slope because an increase in the interest rate decreases the quantity of money demanded. 
B)  positive slope because an increase in the interest rate increases the quantity of money demanded. 
C)  negative slope because an increase in the price level decreases the quantity of money demanded. 
D)  positive slope because an increase in the price level increases the quantity of money demanded.

Question 20

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.

Exam 26: Monetary Policy

When the Federal Reserve increases the money supply, people spend more because they now have more money.

The monetary policy target the Federal Reserve focuses primarily on today is

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the

List the Fed's four main monetary goals.

By the 2000s, an important market change occurred when investment banks became significant participants in the secondary market for

If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run.

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 ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

Figure 26-5 -Refer to Figure 26-5. In the figure above, the movement from point A to point B in the money market would be caused by

Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2001 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession?

What is a banking panic, and what role did banking panics play in the decision by Congress to establish the Federal Reserve?

The Fed can increase the federal funds rate by

Figure 26-2 -Refer to Figure 26-2. In the figure above, the movement from point A to point B in the money market would be caused by

Expansionary monetary policy refers to the Fed's increasing the money supply and increasing interest rates to increase real GDP.

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.

Table 26-8 -The supporters of a monetary growth rule believe that active monetary policy

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

Since World War II, the Federal Reserve has not been involved in carrying out monetary policy.

The money demand curve has a

An increase in interest rates

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

If the Fed raises the interest rate, this will inflation and real GDP in the short run.

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 borrowers with flawed credit histories and borrowers who did not document their incomes.