Question 1

Changes in the federal funds rate usually result in

Accepted Answer

A)  changes in both short-term and long-term interest rates with more of an effect on short-term interest rates. 
B)  changes in both short-term and long-term interest rates with more of an effect on long-term interest rates. 
C)  changes in both short-term and long-term interest rates with equal effect on both. 
D)  no change in both short-term and long-term interest rates. 
A)  changes in both short-term and long-term interest rates with more of an effect on short-term interest rates. 
B)  changes in both short-term and long-term interest rates with more of an effect on long-term interest rates. 
C)  changes in both short-term and long-term interest rates with equal effect on both. 
D)  no change in both short-term and long-term interest rates.

Question 2

An increase in the domestic interest rate relative to other interest rates should

Accepted Answer

A)  increase investment spending. 
B)  decrease consumption spending. 
C)  increase government spending. 
D)  increase net exports. 
A)  increase investment spending. 
B)  decrease consumption spending. 
C)  increase government spending. 
D)  increase net exports.

Question 3

Mortgage lenders often resell mortgages in secondary markets. How might this make lenders act differently than if they intended to hold the mortgages themselves?

Accepted Answer

Lenders would be more likely to grant mo

Question 4

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

Question 5

When the price of a financial asset ________ its interest rate will ________.

Accepted Answer

A)  rises; rise 
B)  falls; fall 
C)  falls; rise 
D)  rises; remain the same 
A)  rises; rise 
B)  falls; fall 
C)  falls; rise 
D)  rises; remain the same

Question 6

Figure 26-7  
-Refer to Figure 26-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

Accepted Answer

A)  A to B. 
B)  B to D. 
C)  C to B. 
D)  B to C. 
E)  C to D. 
A)  A to B. 
B)  B to D. 
C)  C to B. 
D)  B to C. 
E)  C to D.

Question 7

The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following characterizes the Fed's ability to prevent recessions?

Accepted Answer

A)  The Fed is able to "fine tune" the economy and entirely eliminate recessions. 
B)  The Fed is incapable of changing aggregate demand through its monetary policy tools. 
C)  The Fed is able to keep a recession shorter and milder than it would otherwise be. 
D)  The Fed is able to eliminate the business cycle and achieve absolute price stability. 
A)  The Fed is able to "fine tune" the economy and entirely eliminate recessions. 
B)  The Fed is incapable of changing aggregate demand through its monetary policy tools. 
C)  The Fed is able to keep a recession shorter and milder than it would otherwise be. 
D)  The Fed is able to eliminate the business cycle and achieve absolute price stability.

Question 9

A monetary policy target is a variable that

Accepted Answer

A)  the Fed can affect directly. 
B)  equals one of the Fed's main policy goals. 
C)  the Fed has no ability to change. 
D)  the Fed cannot affect directly. 
A)  the Fed can affect directly. 
B)  equals one of the Fed's main policy goals. 
C)  the Fed has no ability to change. 
D)  the Fed cannot affect directly.

Question 10

Hovnanain Enterprises, a residential home builder based in New Jersey, did well during the mid-2000s but did not do so well in during and immediately after the recession of 2007-2009. The reason for this is

Accepted Answer

A)  the Fed kept low interest rates in the mid-2000s but raised interest rates in 2007 to help fight inflation. 
B)  the Fed kept low interest rates in the mid-2000s but by 2007 the housing bubble had burst. 
C)  the Fed raised interest rates in the mid-2000s but lowered interest rates in 2007 to revive the housing market. 
D)  the Fed raised interest rates in the mid-2000s and raised interest rates in 2007 to help fight inflation. 
A)  the Fed kept low interest rates in the mid-2000s but raised interest rates in 2007 to help fight inflation. 
B)  the Fed kept low interest rates in the mid-2000s but by 2007 the housing bubble had burst. 
C)  the Fed raised interest rates in the mid-2000s but lowered interest rates in 2007 to revive the housing market. 
D)  the Fed raised interest rates in the mid-2000s and raised interest rates in 2007 to help fight inflation.

Question 11

An increase in real GDP can shift

Accepted Answer

A)  money demand to the right and decrease the equilibrium interest rate. 
B)  money demand to the right and increase the equilibrium interest rate. 
C)  money demand to the left and decrease the equilibrium interest rate. 
D)  money demand to the left and increase the equilibrium interest rate. 
A)  money demand to the right and decrease the equilibrium interest rate. 
B)  money demand to the right and increase the equilibrium interest rate. 
C)  money demand to the left and decrease the equilibrium interest rate. 
D)  money demand to the left and increase the equilibrium interest rate.

Question 12

Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.

Accepted Answer

A)  buy; up 
B)  buy; down 
C)  sell; up 
D)  sell; down 
A)  buy; up 
B)  buy; down 
C)  sell; up 
D)  sell; down

Question 13

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 14

Figure 26-12  
-Refer to Figure 26-12. In the dynamic AD-AS model, 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 rates higher than what would occur if no policy had been pursued. 
C)  potential real GDP levels lower than what would occur if no policy had been pursued. 
D)  real GDP levels 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 rates higher than what would occur if no policy had been pursued. 
C)  potential real GDP levels lower than what would occur if no policy had been pursued. 
D)  real GDP levels higher than what would occur if no policy had been pursued.

Question 15

The argument advanced by Milton Friedman for adopting a monetary growth rule is that

Accepted Answer

A)  active monetary policy potentially destabilizes the economy. 
B)  the Fed can control the money supply, but not the level of interest rates. 
C)  a constant rate of growth in the money supply would eliminate the booms and recessions that make up the business cycle. 
D)  the growth rate of M1 has been unstable. 
A)  active monetary policy potentially destabilizes the economy. 
B)  the Fed can control the money supply, but not the level of interest rates. 
C)  a constant rate of growth in the money supply would eliminate the booms and recessions that make up the business cycle. 
D)  the growth rate of M1 has been unstable.

Question 16

Table 26-8
  
-Refer to Table 26-8. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2014 if the Federal Reserve does not use monetary policy:
a. If the Fed wants to keep real GDP at its potential level in 2014, should it use an expansionary policy or a contractionary policy? Should the trading desk buy T-bills or sell them?
b. Suppose the Fed's policy is successful in keeping real GDP at its potential level in 2014. State whether each of the following will be higher or lower than if the Fed had taken no action:
(i) Real GDP
(ii) Full-employment real GDP
(iii) The inflation rate
(iv) The unemployment rate
c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2013 and 2014; SRAS curves 2013 and 2014; AD curve for 2013 and 2014, with and without monetary policy actions; and equilibrium real GDP and the price level in 2014 with and without policy.

Accepted Answer

a. The Fed should use contractionary mon

Question 17

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 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 lower 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 18

Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Accepted Answer

If the economy is in recession, it is cu

Question 19

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

Accepted Answer

A)  fell; easier 
B)  fell; harder 
C)  rose; easier 
D)  rose; harder 
A)  fell; easier 
B)  fell; harder 
C)  rose; easier 
D)  rose; harder

Question 20

When the Federal Reserve System was established in 1913, its main policy goal was

Accepted Answer

A)  encouraging strong economic growth. 
B)  promoting price stability. 
C)  preventing bank panics. 
D)  keeping employment high. 
A)  encouraging strong economic growth. 
B)  promoting price stability. 
C)  preventing bank panics. 
D)  keeping employment high.

Exam 26: Monetary Policy

Changes in the federal funds rate usually result in

An increase in the domestic interest rate relative to other interest rates should

Mortgage lenders often resell mortgages in secondary markets. How might this make lenders act differently than if they intended to hold the mortgages themselves?

Which of the following are goals of monetary policy?

When the price of a financial asset ________ its interest rate will ________.

Figure 26-7 -Refer to Figure 26-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply.

Which of the following characterizes the Fed's ability to prevent recessions?

A monetary policy target is a variable that

Hovnanain Enterprises, a residential home builder based in New Jersey, did well during the mid-2000s but did not do so well in during and immediately after the recession of 2007-2009. The reason for this is

An increase in real GDP can shift

Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.

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

Figure 26-12 -Refer to Figure 26-12. In the dynamic AD-AS model, 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

The argument advanced by Milton Friedman for adopting a monetary growth rule is that

Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

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

When the Federal Reserve System was established in 1913, its main policy goal was

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

When the price of a financial asset its interest rate will .

Suppose the Fed decreases the money supply. In response households and firms will short term assets and this will drive interest rates.

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