Question 1

An increase in interest rates

Accepted Answer

A)  decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports. 
B)  decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports. 
C)  decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. 
D)  increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. 
A)  decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports. 
B)  decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports. 
C)  decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. 
D)  increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. C

Question 2

The situation in which short-term interest rates are pushed to zero,leaving the central bank unable to lower them further is known as

Accepted Answer

A)  the Taylor rule. 
B)  a liquidity trap. 
C)  a zero-sum game. 
D)  an interest rate panic. 
A)  the Taylor rule. 
B)  a liquidity trap. 
C)  a zero-sum game. 
D)  an interest rate panic. B

Question 3

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. B

Question 4

Figure 26-3  
-Refer to Figure 26-3.In the figure above,when the money supply shifts from MS1 to MS2,at the interest rate of 3 percent households and firms will

Accepted Answer

A)  buy Treasury bills. 
B)  sell Treasury bills. 
C)  neither buy nor sell Treasury bills. 
D)  want to hold more money. 
A)  buy Treasury bills. 
B)  sell Treasury bills. 
C)  neither buy nor sell Treasury bills. 
D)  want to hold more money.

Question 5

Which of the following statements about inflation targeting is true?

Accepted Answer

A)  Inflation targeting would not allow the central bank the flexibility to take action against a severe recession. 
B)  Inflation targeting has been adopted by the central banks of fewer than five countries. 
C)  With changes in leadership over time at the Federal Reserve, inflation targeting could help institutionalize good U.S. monetary policy. 
D)  Inflation targeting is practiced strongly in the United States but is ignored in Europe. 
A)  Inflation targeting would not allow the central bank the flexibility to take action against a severe recession. 
B)  Inflation targeting has been adopted by the central banks of fewer than five countries. 
C)  With changes in leadership over time at the Federal Reserve, inflation targeting could help institutionalize good U.S. monetary policy. 
D)  Inflation targeting is practiced strongly in the United States but is ignored in Europe.

Question 6

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 7

An increase in the interest rate causes

Accepted Answer

A)  a movement up along the money demand curve. 
B)  a movement down along the money demand curve. 
C)  the money demand curve to shift to the left. 
D)  the money demand curve to shift to the right. 
A)  a movement up along the money demand curve. 
B)  a movement down along the money demand curve. 
C)  the money demand curve to shift to the left. 
D)  the money demand curve to shift to the right.

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

From an initial long-run macroeconomic equilibrium,if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply,then the Federal Reserve would most likely

Accepted Answer

A)  decrease interest rates. 
B)  increase interest rates. 
C)  decrease income tax rates. 
D)  increase income tax rates. 
A)  decrease interest rates. 
B)  increase interest rates. 
C)  decrease income tax rates. 
D)  increase income tax rates.

Question 10

Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.

Accepted Answer

The increase in real GDP shift

Question 11

Monetary policy could be procyclical if the Federal Reserve

Accepted Answer

A)  is late recognizing that a recession has begun and conducts expansionary monetary policy. 
B)  is quick to recognize that a recession has begun and conducts expansionary monetary policy. 
C)  is late recognizing that a recession has begun and does not conduct expansionary monetary policy. 
D)  is quick to recognize that a recession has begun and does not conduct expansionary monetary policy. 
A)  is late recognizing that a recession has begun and conducts expansionary monetary policy. 
B)  is quick to recognize that a recession has begun and conducts expansionary monetary policy. 
C)  is late recognizing that a recession has begun and does not conduct expansionary monetary policy. 
D)  is quick to recognize that a recession has begun and does not conduct expansionary monetary policy.

Question 12

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 13

If the probability of losing your job remains ________,a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time.

Accepted Answer

A)  low; lowers 
B)  low; raises 
C)  high; lowers 
D)  high; raises 
E)  low; does not change 
A)  low; lowers 
B)  low; raises 
C)  high; lowers 
D)  high; raises 
E)  low; does not change

Question 14

Figure 26-5  
-Refer to Figure 26-5.Suppose the economy is in a recession and no policy is pursued.Using the static AD-AS model in the figure above,this situation would be depicted as a movement from
A) A to B.
B) B to A.
C) C to B.
D) A to E.
E) C to D.

Accepted Answer

The answer of Figure 26-5  
-Refer to Figure 26-5.Suppose...

Question 15

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 16

The Fed can increase the federal funds rate by

Accepted Answer

A)  selling Treasury bills, which increases bank reserves. 
B)  buying Treasury bills, which increases bank reserves. 
C)  selling Treasury bills, which decreases bank reserves. 
D)  buying Treasury bills, which decreases bank reserves. 
A)  selling Treasury bills, which increases bank reserves. 
B)  buying Treasury bills, which increases bank reserves. 
C)  selling Treasury bills, which decreases bank reserves. 
D)  buying Treasury bills, which decreases bank reserves.

Question 17

In September 2011,the Fed announced a new policy in which it would invest in additional mortgage-backed securities in an attempt to further reduce mortgage rates and boost the housing market.Lower mortgage rates should lead to an increase in refinancing,which should ________ disposable income and therefore ________ aggregate demand.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease 
A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease

Question 18

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 19

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 20

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

Exam 26: Monetary Policy

An increase in interest rates

The situation in which short-term interest rates are pushed to zero,leaving the central bank unable to lower them further is known as

When the Fed uses contractionary policy,

Figure 26-3 -Refer to Figure 26-3.In the figure above,when the money supply shifts from MS1 to MS2,at the interest rate of 3 percent households and firms will

Which of the following statements about inflation targeting is true?

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

An increase in the interest rate causes

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

From an initial long-run macroeconomic equilibrium,if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply,then the Federal Reserve would most likely

Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.

Monetary policy could be procyclical if the Federal Reserve

If the probability of losing your job remains ________,a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time.

Figure 26-5 -Refer to Figure 26-5.Suppose the economy is in a recession and no policy is pursued.Using the static AD-AS model in the figure above,this situation would be depicted as a movement from A) A to B. B) B to A. C) C to B. D) A to E. E) C to D.

Contractionary monetary policy on the part of the Fed results in

The Fed can increase the federal funds rate by

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

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

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

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

If the probability of losing your job remains ,a recession would be a good time to purchase a home because the Fed usually interest rates during this time.