Question 1

Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to

Accepted Answer

A)  decrease. 
B)  increase. 
C)  not change. 
D)  increase, then decrease. 
A)  decrease. 
B)  increase. 
C)  not change. 
D)  increase, then decrease.

Question 2

In the countries that have adopted inflation targeting, the inflation rate has typically

Accepted Answer

A)  increased. 
B)  decreased. 
C)  decreased to zero. 
D)  not changed. 
A)  increased. 
B)  decreased. 
C)  decreased to zero. 
D)  not changed.

Question 3

The larger the fraction of an investment financed by borrowing,

Accepted Answer

A)  the greater the potential return and potential loss on that investment. 
B)  the smaller the potential return and potential loss on that investment. 
C)  the greater the potential return and the smaller the potential loss on that investment. 
D)  the smaller the potential return and the greater the potential loss on that investment. 
A)  the greater the potential return and potential loss on that investment. 
B)  the smaller the potential return and potential loss on that investment. 
C)  the greater the potential return and the smaller the potential loss on that investment. 
D)  the smaller the potential return and the greater the potential loss on that investment.

Question 4

Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals

Accepted Answer

A)  4 percent. 
B)  6 percent. 
C)  8 percent. 
D)  10 percent. 
A)  4 percent. 
B)  6 percent. 
C)  8 percent. 
D)  10 percent.

Question 5

A decrease in real GDP can

Accepted Answer

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

Question 6

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

Accepted Answer

A)  increase. 
B)  decrease. 
C)  not change. 
D)  increase if the economy is in a recession. 
A)  increase. 
B)  decrease. 
C)  not change. 
D)  increase if the economy is in a recession.

Question 7

The body that is responsible for dating the beginning and ending dates for a recession is

Accepted Answer

A)  the Fed. 
B)  the Congress. 
C)  the National Bureau of Economic Research. 
D)  the Bureau of Economic Analysis. 
A)  the Fed. 
B)  the Congress. 
C)  the National Bureau of Economic Research. 
D)  the Bureau of Economic Analysis.

Question 8

Firms that participate in regular open market transactions with ________ are called primary dealers.

Accepted Answer

A)  commercial banks 
B)  Treasury banks 
C)  the Federal Reserve 
D)  mortgage lenders 
A)  commercial banks 
B)  Treasury banks 
C)  the Federal Reserve 
D)  mortgage lenders

Question 9

When Congress established the Federal Reserve in 1913, what was its main responsibility? When did Congress broaden the Fed's responsibilities?

Accepted Answer

When Congress established the Fed in 191

Question 10

The federal funds rate

Accepted Answer

A)  is determined administratively by the Fed. 
B)  is determined by the supply of and demand for bank reserves. 
C)  is determined directly by household demand for funds. 
D)  is determined directly by firm demand for funds. 
A)  is determined administratively by the Fed. 
B)  is determined by the supply of and demand for bank reserves. 
C)  is determined directly by household demand for funds. 
D)  is determined directly by firm demand for funds.

Question 11

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 12

A financial asset is considered a security if

Accepted Answer

A)  the owner of the security receives dividends and realizes a capital gain when the asset is sold. 
B)  it can be sold in a secondary market. 
C)  its value increases after it is sold in a primary market. 
D)  its value is secure; that is, the owner will not suffer a financial loss when the asset is sold. 
A)  the owner of the security receives dividends and realizes a capital gain when the asset is sold. 
B)  it can be sold in a secondary market. 
C)  its value increases after it is sold in a primary market. 
D)  its value is secure; that is, the owner will not suffer a financial loss when the asset is sold.

Question 13

Figure 26-1  
-Refer to Figure 26-1. In the figure above, the money demand curve would move from Money demand1 to Money demand2 if

Accepted Answer

A)  real GDP decreased. 
B)  the price level increased. 
C)  the interest rate decreased. 
D)  the Federal Reserve sold Treasury securities. 
A)  real GDP decreased. 
B)  the price level increased. 
C)  the interest rate decreased. 
D)  the Federal Reserve sold Treasury securities.

Question 14

The interest rate that banks charge other banks for overnight loans is the

Accepted Answer

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

Question 15

Why doesn't the Fed have both a money supply target and an interest rate target?

Accepted Answer

A)  Short-term interest rates do not respond to changes in the money supply, which the Fed can control. 
B)  The Fed does not control money demand. 
C)  The Fed cannot offset the impact of changes in cash management by the public or changes in lending policies of commercial banks on the money supply. 
D)  Only the level of interest rates matters when we consider rates of growth in real GDP, employment, and rates of price inflation. 
A)  Short-term interest rates do not respond to changes in the money supply, which the Fed can control. 
B)  The Fed does not control money demand. 
C)  The Fed cannot offset the impact of changes in cash management by the public or changes in lending policies of commercial banks on the money supply. 
D)  Only the level of interest rates matters when we consider rates of growth in real GDP, employment, and rates of price inflation.

Question 16

Prior to 1970, mortgages were ________ resold in the secondary market.

Accepted Answer

A)  never 
B)  rarely 
C)  often 
D)  always 
A)  never 
B)  rarely 
C)  often 
D)  always

Question 17

A monetary policy target is a variable that the Fed can affect directly, which then affects one or more of the Fed's policy goals.

Accepted Answer

A) True 
 B)False

Question 18

If the Federal Reserve targets the money supply, and the money demand curve shifts to the left, then the Fed

Accepted Answer

A)  cannot maintain the money supply target. 
B)  can maintain the money supply target, but at a lower interest rate. 
C)  can maintain the money supply target, but at a higher interest rate. 
D)  can maintain the money supply target with no change in the interest rate. 
A)  cannot maintain the money supply target. 
B)  can maintain the money supply target, but at a lower interest rate. 
C)  can maintain the money supply target, but at a higher interest rate. 
D)  can maintain the money supply target with no change in the interest rate.

Question 19

Figure 26-11  
-Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, if 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 no policy, then at point B

Accepted Answer

A)  there is pressure on wages and prices to rise. 
B)  the unemployment rate is very, very low. 
C)  firms are operating above their normal capacity. 
D)  the economy is below full employment. 
E)  incomes and profits are rising. 
A)  there is pressure on wages and prices to rise. 
B)  the unemployment rate is very, very low. 
C)  firms are operating above their normal capacity. 
D)  the economy is below full employment. 
E)  incomes and profits are rising.

Question 20

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

Exam 26: Monetary Policy

Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to

In the countries that have adopted inflation targeting, the inflation rate has typically

The larger the fraction of an investment financed by borrowing,

A decrease in real GDP can

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

The body that is responsible for dating the beginning and ending dates for a recession is

Firms that participate in regular open market transactions with ________ are called primary dealers.

When Congress established the Federal Reserve in 1913, what was its main responsibility? When did Congress broaden the Fed's responsibilities?

The federal funds rate

Inflation targeting is a framework for carrying out monetary policy whereby

A financial asset is considered a security if

Figure 26-1 -Refer to Figure 26-1. In the figure above, the money demand curve would move from Money demand1 to Money demand2 if

The interest rate that banks charge other banks for overnight loans is the

Why doesn't the Fed have both a money supply target and an interest rate target?

Prior to 1970, mortgages were ________ resold in the secondary market.

A monetary policy target is a variable that the Fed can affect directly, which then affects one or more of the Fed's policy goals.

If the Federal Reserve targets the money supply, and the money demand curve shifts to the left, then the Fed

Figure 26-11 -Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, if 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 no policy, then at point B

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

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