Question 1

When the Federal Reserve increases the money supply, people spend more because interest rates fall.

Accepted Answer

A) True 
 B)False

Question 2

Rising prices erode the value of money as a ________ and as a ________.

Accepted Answer

A)  unit of barter; unit of account 
B)  store of value; unit of liquidity 
C)  medium of exchange; store of value 
D)  store of value; unit of barter 
A)  unit of barter; unit of account 
B)  store of value; unit of liquidity 
C)  medium of exchange; store of value 
D)  store of value; unit of barter

Question 3

In 2008, the Treasury and Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these measures were taken?

Accepted Answer

A)  The Emergency Economic Stabilization Act required the Fed and the Treasury to provide financial assistance to firms that participated in regular open market actions with the Fed. 
B)  The bankruptcy of a large financial firm would force the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail. 
C)  The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the firms before they went bankrupt. 
D)  The failure of these firms would have forced the Fed to increase interest rates, which could have led to a severe recession. 
A)  The Emergency Economic Stabilization Act required the Fed and the Treasury to provide financial assistance to firms that participated in regular open market actions with the Fed. 
B)  The bankruptcy of a large financial firm would force the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail. 
C)  The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the firms before they went bankrupt. 
D)  The failure of these firms would have forced the Fed to increase interest rates, which could have led to a severe recession.

Question 4

The Fed can directly lower the inflation rate.

Accepted Answer

A) True 
 B)False

Question 5

An increase in the money supply will

Accepted Answer

A)  increase the interest rate. 
B)  decrease the interest rate. 
C)  have no affect on the interest rate. 
D)  decrease the equilibrium quantity of money in the economy. 
A)  increase the interest rate. 
B)  decrease the interest rate. 
C)  have no affect on the interest rate. 
D)  decrease the equilibrium quantity of money in the economy.

Question 6

What actions should the Fed take if it believes the economy is about to fall into recession?

Accepted Answer

If the Fed believes the economy is about

Question 7

Although the Federal Reserve had traditionally made discount loans only to commercial banks, in response to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well.

Accepted Answer

A)  the Treasury Department 
B)  mortgage brokers 
C)  savings banks 
D)  primary dealers 
A)  the Treasury Department 
B)  mortgage brokers 
C)  savings banks 
D)  primary dealers

Question 8

Using the money demand and money supply model, show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.

Accepted Answer

The Fed does not control money demand, s

Question 9

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 sub-prime borrowers ________ and "Alt-A" borrowers ________.

Accepted Answer

A)  with flawed credit histories; who did not document their incomes 
B)  who borrowed money at rates below the prime interest rate; who had AAA credit ratings 
C)  who borrowed more than 120 percent of the value of the house; with no proof of U.S. citizenship 
D)  who purchased homes in depressed housing markets; who purchased homes which were repossessed by government agencies. 
A)  with flawed credit histories; who did not document their incomes 
B)  who borrowed money at rates below the prime interest rate; who had AAA credit ratings 
C)  who borrowed more than 120 percent of the value of the house; with no proof of U.S. citizenship 
D)  who purchased homes in depressed housing markets; who purchased homes which were repossessed by government agencies.

Question 10

The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was

Accepted Answer

A)  fighting inflation. 
B)  increasing employment. 
C)  increasing economic growth. 
D)  increasing regulation of commercial banks. 
E)  a low current account deficit. 
A)  fighting inflation. 
B)  increasing employment. 
C)  increasing economic growth. 
D)  increasing regulation of commercial banks. 
E)  a low current account deficit.

Question 11

When the Fed uses contractionary policy,

Accepted Answer

A)  the price level rises higher than it would if the Fed did not pursue policy. 
B)  the price level rises less than it would if the Fed did not pursue policy. 
C)  it does not change the price level. 
D)  it causes inflation. 
A)  the price level rises higher than it would if the Fed did not pursue policy. 
B)  the price level rises less than it would if the Fed did not pursue policy. 
C)  it does not change the price level. 
D)  it causes inflation.

Question 12

Inflation targeting, typically, has been accompanied by lower inflation.

Accepted Answer

A) True 
 B)False

Question 13

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 wants to keep real GDP at its potential level in 2015, it should

Accepted Answer

A)  buy Treasury securities. 
B)  sell Treasury securities. 
C)  decrease the required reserve ratio. 
D)  decrease income taxes. 
A)  buy Treasury securities. 
B)  sell Treasury securities. 
C)  decrease the required reserve ratio. 
D)  decrease income taxes.

Question 14

Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

Accepted Answer

A)  lowers the interest rate, and firms increase investment spending. 
B)  causes people to spend more because they know prices will rise in the future. 
C)  raises the interest rate and consumers decrease spending on durable goods. 
D)  lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports. 
A)  lowers the interest rate, and firms increase investment spending. 
B)  causes people to spend more because they know prices will rise in the future. 
C)  raises the interest rate and consumers decrease spending on durable goods. 
D)  lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports.

Question 15

With the Troubled Asset Relief Program (TARP), the Treasury provided funds to banks in exchange for stock.

Accepted Answer

A) True 
 B)False

Question 16

Ceteris paribus, an increase in the money supply will lower short-term interest rates.

Accepted Answer

A) True 
 B)False

Question 17

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 wants to keep real GDP at its potential level in 2015, it should

Accepted Answer

A)  buy Treasury securities. 
B)  sell Treasury securities. 
C)  increase the required reserve ratio. 
D)  increase income taxes. 
A)  buy Treasury securities. 
B)  sell Treasury securities. 
C)  increase the required reserve ratio. 
D)  increase income taxes.

Question 18

Does the money demand curve have a positive slope or a negative slope? Why does it have this slope? Explain why an increase in the variable on the vertical axis of the money demand curve causes either an increase or a decrease in the variable on the horizontal axis of the money demand curve.

Accepted Answer

The money demand curve has a negative sl

Question 19

The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

Accepted Answer

A)  oil prices. 
B)  business taxes. 
C)  income tax rates. 
D)  investment spending. 
A)  oil prices. 
B)  business taxes. 
C)  income tax rates. 
D)  investment spending.

Exam 26: Monetary Policy

When the Federal Reserve increases the money supply, people spend more because interest rates fall.

Rising prices erode the value of money as a ________ and as a ________.

In 2008, the Treasury and Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these measures were taken?

The Fed can directly lower the inflation rate.

An increase in the money supply will

What actions should the Fed take if it believes the economy is about to fall into recession?

Although the Federal Reserve had traditionally made discount loans only to commercial banks, in response to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well.

Using the money demand and money supply model, show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.

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 sub-prime borrowers ________ and "Alt-A" borrowers ________.

The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was

When the Fed uses contractionary policy,

Inflation targeting, typically, has been accompanied by lower inflation.

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 wants to keep real GDP at its potential level in 2015, it should

Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

With the Troubled Asset Relief Program (TARP), the Treasury provided funds to banks in exchange for stock.

Ceteris paribus, an increase in the money supply will lower short-term interest rates.

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 wants to keep real GDP at its potential level in 2015, it should

Does the money demand curve have a positive slope or a negative slope? Why does it have this slope? Explain why an increase in the variable on the vertical axis of the money demand curve causes either an increase or a decrease in the variable on the horizontal axis of the money demand curve.

The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year.

Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

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

Rising prices erode the value of money as a and as a .

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 sub-prime borrowers and "Alt-A" borrowers .