Question 1

Contractionary monetary policy refers to the Fed's decreasing the money supply and decreasing interest rates to decrease real GDP.

Accepted Answer

A) True 
 B)False

Question 2

The rate of interest banks charge other banks for overnight loans of reserves is the

Accepted Answer

A)  discount rate. 
B)  prime rate. 
C)  federal funds rate 
D)  real rate. 
A)  discount rate. 
B)  prime rate. 
C)  federal funds rate 
D)  real rate.

Question 3

Figure 26-7  
-Refer to Figure 26-7. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from

Accepted Answer

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

Question 4

Your income will increase if the Federal Reserve buys a Treasury bill from you and pays you with a check from the Fed.

Accepted Answer

A) True 
 B)False

Question 5

In response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as

Accepted Answer

A)  inflation targeting. 
B)  contractionary monetary policy. 
C)  securities-bubble deflating. 
D)  quantitative easing. 
A)  inflation targeting. 
B)  contractionary monetary policy. 
C)  securities-bubble deflating. 
D)  quantitative easing.

Question 6

The economy suffered a mild recession in 2001. Despite the recession, home sales and durable goods sales remained high. Which of the following is a plausible explanation?

Accepted Answer

A)  The Fed's pursuit of contractionary policy stimulated these markets. 
B)  The Fed caused a reduction in the federal funds rate to its lowest level in 40 years. 
C)  Rising inflation encouraged many to invest in the real estate market. 
D)  Home building and consumer durable purchases are always high during a recession. 
A)  The Fed's pursuit of contractionary policy stimulated these markets. 
B)  The Fed caused a reduction in the federal funds rate to its lowest level in 40 years. 
C)  Rising inflation encouraged many to invest in the real estate market. 
D)  Home building and consumer durable purchases are always high during a recession.

Question 7

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 8

When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to

Accepted Answer

A)  buy Treasury bills. 
B)  sell Treasury bills. 
C)  neither buy nor sell Treasury bills. 
D)  hold less money. 
A)  buy Treasury bills. 
B)  sell Treasury bills. 
C)  neither buy nor sell Treasury bills. 
D)  hold less money.

Question 9

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 10

In October 2008, Congress passed the ________, under which the Treasury provided funds to banks in exchange for stock.

Accepted Answer

A)  Bank Rescue Alliance Treaty (BRAT) 
B)  Mortgage Transfer Agency (MT
A)  
C)  Troubled Asset Relief Program (TARP) 
D)  Financial Assurance Association (FA
A)  
A)  Bank Rescue Alliance Treaty (BRAT) 
B)  Mortgage Transfer Agency (MT
A)  
C)  Troubled Asset Relief Program (TARP) 
D)  Financial Assurance Association (FA
A)

Question 11

If the Fed's policy is contractionary, it will

Accepted Answer

A)  use open market operations to buy Treasury bills. 
B)  use open market operations to sell Treasury bills. 
C)  lower the discount rate. 
D)  lower the reserve requirement. 
A)  use open market operations to buy Treasury bills. 
B)  use open market operations to sell Treasury bills. 
C)  lower the discount rate. 
D)  lower the reserve requirement.

Question 12

What problems can high inflation rates cause for the economy?

Accepted Answer

The problems that inflation ca

Question 13

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

Question 14

The relationship between GDP and the money supply has gotten stronger since the 1980s.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following explains why mortgages weren't considered securities prior to 1970?

Accepted Answer

A)  The Federal Reserve Act of 1913 prohibited mortgages from being considered securities. An amendment to the Act was approved in 1970 that allowed mortgages to be considered securities. 
B)  Until 1970, the average annual increase in housing prices did not allow the buying and selling of mortgages to be profitable. There has been a significant annual increase in housing prices and mortgage values since 1970. 
C)  Congress passed a law in 1970 stipulating that mortgages could be classified as securities. 
D)  Prior to 1970, mortgages were rarely resold in the secondary market. 
A)  The Federal Reserve Act of 1913 prohibited mortgages from being considered securities. An amendment to the Act was approved in 1970 that allowed mortgages to be considered securities. 
B)  Until 1970, the average annual increase in housing prices did not allow the buying and selling of mortgages to be profitable. There has been a significant annual increase in housing prices and mortgage values since 1970. 
C)  Congress passed a law in 1970 stipulating that mortgages could be classified as securities. 
D)  Prior to 1970, mortgages were rarely resold in the secondary market.

Question 16

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 17

In the Taylor rule, does the target for the federal funds rate respond differently for a recession caused by a decrease in aggregate demand and for a recession caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the federal funds rate changes.

Accepted Answer

The target for the federal funds rate re

Question 18

Table 26-7
  
-Refer to Table 26-7. Suppose the table above illustrates the values of real and potential GDP and the price level, if the Fed did not vote to change their current policy to be more contractionary or expansionary. Suppose that the Fed used an appropriate policy and was successful in keeping real GDP at potential in 2013. Draw an aggregate demand and supply curve to illustrate your answer.

Accepted Answer

@#IMG-DLM& The economy starts in equilibrium in 20

Question 19

An increase in real GDP

Accepted Answer

A)  increases the buying and selling of goods and increases the demand for money as a medium of exchange. 
B)  increases the buying and selling of goods and decreases the demand for money as a medium of exchange. 
C)  decreases the buying and selling of goods and increases the demand for money as a medium of exchange. 
D)  decreases the buying and selling of goods and decreases the demand for money as a medium of exchange. 
A)  increases the buying and selling of goods and increases the demand for money as a medium of exchange. 
B)  increases the buying and selling of goods and decreases the demand for money as a medium of exchange. 
C)  decreases the buying and selling of goods and increases the demand for money as a medium of exchange. 
D)  decreases the buying and selling of goods and decreases the demand for money as a medium of exchange.

Question 20

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower 
A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Exam 26: Monetary Policy

Contractionary monetary policy refers to the Fed's decreasing the money supply and decreasing interest rates to decrease real GDP.

The rate of interest banks charge other banks for overnight loans of reserves is the

Your income will increase if the Federal Reserve buys a Treasury bill from you and pays you with a check from the Fed.

In response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as

The economy suffered a mild recession in 2001. Despite the recession, home sales and durable goods sales remained high. Which of the following is a plausible explanation?

If the Fed buys Treasury bills, this will shift the

When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to

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.

In October 2008, Congress passed the ________, under which the Treasury provided funds to banks in exchange for stock.

If the Fed's policy is contractionary, it will

What problems can high inflation rates cause for the economy?

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

The relationship between GDP and the money supply has gotten stronger since the 1980s.

Which of the following explains why mortgages weren't considered securities prior to 1970?

An increase in real GDP

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

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 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.

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be and real GDP to be .