Question 1

If the Fed pursues expansionary monetary policy,

Accepted Answer

A)  aggregate demand will rise, and the price level will rise. 
B)  aggregate demand will fall, and the price level will fall. 
C)  aggregate demand will rise, and the price level will fall. 
D)  aggregate demand will fall, and the price level will rise. 
A)  aggregate demand will rise, and the price level will rise. 
B)  aggregate demand will fall, and the price level will fall. 
C)  aggregate demand will rise, and the price level will fall. 
D)  aggregate demand will fall, and the price level will rise.

Question 2

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.

Accepted Answer

A)  increase; more 
B)  decrease; less 
C)  decrease; more 
D)  increase; less 
E)  increase; similar 
A)  increase; more 
B)  decrease; less 
C)  decrease; more 
D)  increase; less 
E)  increase; similar

Question 3

The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

Accepted Answer

A)  tax rates. 
B)  real interest rates. 
C)  nominal interest rates. 
D)  foreign exchange rates. 
A)  tax rates. 
B)  real interest rates. 
C)  nominal interest rates. 
D)  foreign exchange rates.

Question 4

The money demand curve has a negative slope because

Accepted Answer

A)  lower interest rates cause households and firms to switch from money to financial assets. 
B)  lower interest rates cause households and firms to switch from financial assets to money. 
C)  lower interest rates cause households and firms to switch from money to stocks. 
D)  lower interest rates cause households and firms to switch from money to bonds. 
A)  lower interest rates cause households and firms to switch from money to financial assets. 
B)  lower interest rates cause households and firms to switch from financial assets to money. 
C)  lower interest rates cause households and firms to switch from money to stocks. 
D)  lower interest rates cause households and firms to switch from money to bonds.

Question 5

Contractionary monetary policy on the part of the Fed results in

Accepted Answer

A)  an increase in the money supply, an increase in interest rates, and an increase in GDP. 
B)  a decrease in the money supply, an increase in interest rates, and a decrease in GDP. 
C)  an increase in the money supply, a decrease in interest rates, and an increase in GDP. 
D)  a decrease in the money supply, a decrease in interest rates, and a decrease in GDP. 
A)  an increase in the money supply, an increase in interest rates, and an increase in GDP. 
B)  a decrease in the money supply, an increase in interest rates, and a decrease in GDP. 
C)  an increase in the money supply, a decrease in interest rates, and an increase in GDP. 
D)  a decrease in the money supply, a decrease in interest rates, and a decrease in GDP.

Question 6

The leader of the monetarist school and major proponent of a monetary growth rule was

Accepted Answer

A)  Ben Bernanke. 
B)  Milton Friedman. 
C)  Alan Greenspan. 
D)  Paul Volcker. 
A)  Ben Bernanke. 
B)  Milton Friedman. 
C)  Alan Greenspan. 
D)  Paul Volcker.

Question 7

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 8

When the Fed embarked on a policy known as quantitative easing, they

Accepted Answer

A)  slowly lowered the federal funds rate target until it was equal to zero. 
B)  reduced the required reserve ration by one-quarter point per month for 12 months. 
C)  bought longer-term securities than are usually bought in open market operations. 
D)  opened up lending to primary dealers, commercial banks, and investment banks. 
A)  slowly lowered the federal funds rate target until it was equal to zero. 
B)  reduced the required reserve ration by one-quarter point per month for 12 months. 
C)  bought longer-term securities than are usually bought in open market operations. 
D)  opened up lending to primary dealers, commercial banks, and investment banks.

Question 9

If the Fed orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy:
a. The money supply
b. Interest rates
c. Investment
d. Consumption
e. Net Exports
f. The aggregate demand curve
g. Real GDP
h. The price level

Accepted Answer

a. The money supply decreases
b. Interes

Question 10

During the turmoil in the market for subprime mortgages in 2007 and 2008, the Fed increased the volume of discount loans. The goal of the Fed was to

Accepted Answer

A)  reduce the rate of inflation. 
B)  stimulate economic growth. 
C)  reduce unemployment. 
D)  reassure financial markets and promote financial stability. 
E)  reduce the current account deficit. 
A)  reduce the rate of inflation. 
B)  stimulate economic growth. 
C)  reduce unemployment. 
D)  reassure financial markets and promote financial stability. 
E)  reduce the current account deficit.

Question 11

The Fed

Accepted Answer

A)  can easily distinguish the minor ups and downs of the economy from a recession. 
B)  can have difficulty distinguishing the minor ups and downs of the economy from a recession. 
C)  always times its policy responses correctly. 
D)  can easily determine if a drop in production means a recession is inevitable. 
A)  can easily distinguish the minor ups and downs of the economy from a recession. 
B)  can have difficulty distinguishing the minor ups and downs of the economy from a recession. 
C)  always times its policy responses correctly. 
D)  can easily determine if a drop in production means a recession is inevitable.

Question 12

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 13

Figure 26-13  
-Refer to Figure 26-13. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then 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.

Question 14

What is a mortgage? What were the important developments in the mortgage market during the years after 1970?

Accepted Answer

A mortgage is a loan a borrower takes to

Question 15

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Accepted Answer

If the economy is experiencing inflation

Question 16

The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association were established by Congress in order to regulate banks that buy and sell mortgage-backed securities.

Accepted Answer

A) True 
 B)False

Question 17

Firms that participate in regular open market transactions with the Federal Reserve are called

Accepted Answer

A)  secondary market banks. 
B)  Treasury banks. 
C)  primary dealers. 
D)  Federal Reserve partners. 
A)  secondary market banks. 
B)  Treasury banks. 
C)  primary dealers. 
D)  Federal Reserve partners.

Question 18

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 19

By the 2000s, investment banks had become significant participants in the secondary market for mortgages.

Accepted Answer

A) True 
 B)False

Question 20

Figure 26-10  
-Refer to Figure 26-10. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

Accepted Answer

A)  an increase in income taxes 
B)  a decrease in the required reserve ratio 
C)  an open market purchase of Treasury bills 
D)  an open market sale of Treasury bills 
A)  an increase in income taxes 
B)  a decrease in the required reserve ratio 
C)  an open market purchase of Treasury bills 
D)  an open market sale of Treasury bills

Exam 26: Monetary Policy

If the Fed pursues expansionary monetary policy,

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.

The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

The money demand curve has a negative slope because

Contractionary monetary policy on the part of the Fed results in

The leader of the monetarist school and major proponent of a monetary growth rule was

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

When the Fed embarked on a policy known as quantitative easing, they

During the turmoil in the market for subprime mortgages in 2007 and 2008, the Fed increased the volume of discount loans. The goal of the Fed was to

The Fed

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

Figure 26-13 -Refer to Figure 26-13. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

What is a mortgage? What were the important developments in the mortgage market during the years after 1970?

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association were established by Congress in order to regulate banks that buy and sell mortgage-backed securities.

Firms that participate in regular open market transactions with the Federal Reserve are called

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

By the 2000s, investment banks had become significant participants in the secondary market for mortgages.

Figure 26-10 -Refer to Figure 26-10. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

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

A decrease in interest rates can the demand for stocks as stocks become relatively attractive investments as compared to bonds.