Question 1

Which of the following statements about inflation targeting is true?

Accepted Answer

A)  Inflation targeting by the central banks in other countries has not typically lowered inflation. 
B)  Inflation targeting would not reduce the flexibility of monetary policy to address other policy goals. 
C)  Inflation targeting would not allow the central bank the flexibility to take action against a severe recession. 
D)  Inflation targeting would make it easier for households and firms to form accurate expectations of future inflation, improving their planning and the efficiency of the economy. 
A)  Inflation targeting by the central banks in other countries has not typically lowered inflation. 
B)  Inflation targeting would not reduce the flexibility of monetary policy to address other policy goals. 
C)  Inflation targeting would not allow the central bank the flexibility to take action against a severe recession. 
D)  Inflation targeting would make it easier for households and firms to form accurate expectations of future inflation, improving their planning and the efficiency of the economy.

Question 2

The supporters of a monetary growth rule believe that active monetary policy

Accepted Answer

A)  stabilizes the economy, decreasing the number of recessions and their severity. 
B)  destabilizes the economy, increasing the number of recessions and their severity. 
C)  cannot change the inflation rate. 
D)  cannot change real GDP. 
A)  stabilizes the economy, decreasing the number of recessions and their severity. 
B)  destabilizes the economy, increasing the number of recessions and their severity. 
C)  cannot change the inflation rate. 
D)  cannot change real GDP.

Question 3

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 4

An increase in the interest rate

Accepted Answer

A)  decreases the opportunity cost of holding money. 
B)  increases the opportunity cost of holding money. 
C)  decreases the percentage yield of holding money. 
D)  increases the percentage yield of holding money. 
A)  decreases the opportunity cost of holding money. 
B)  increases the opportunity cost of holding money. 
C)  decreases the percentage yield of holding money. 
D)  increases the percentage yield of holding money.

Question 5

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 6

To reassure investors who were unwilling to buy mortgages in the secondary market,the U.S.Congress used two government sponsored enterprises,Fannie Mae and Freddie Mac,to stand between investors and banks that grant mortgages.Fannie Mae and Freddie Mac

Accepted Answer

A)  sell mortgages to investors and use the funds to purchase bonds from banks. 
B)  sell bonds to investors and use the funds to purchase mortgages from banks. 
C)  sell bonds to banks and use the funds to purchase mortgages from investors. 
D)  sell mortgages to banks and use the funds to purchase bonds from investors. 
A)  sell mortgages to investors and use the funds to purchase bonds from banks. 
B)  sell bonds to investors and use the funds to purchase mortgages from banks. 
C)  sell bonds to banks and use the funds to purchase mortgages from investors. 
D)  sell mortgages to banks and use the funds to purchase bonds from investors.

Question 7

Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency.Using the money demand and money supply model and assuming everything else is held constant,the equilibrium interest rate should

Accepted Answer

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

Question 8

For purposes of monetary policy,the Federal Reserve has targeted the interest rate known as the

Accepted Answer

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

Question 9

Figure 26-5  
-Refer to Figure 26-5.Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy.Using the static AD-AS model in the figure above,this would be depicted as a movement from
A) A to B.
B) B to C.
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 10

Figure 26-2  
-Refer to Figure 26-2.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 less money. 
A)  buy Treasury bills. 
B)  sell Treasury bills. 
C)  neither buy nor sell Treasury bills. 
D)  want to hold less money.

Question 11

Using the Taylor rule,if the current inflation rate equals the target inflation rate and real GDP equals potential GDP,then the federal funds target rate equals the

Accepted Answer

A)  current discount rate. 
B)  current inflation rate. 
C)  real equilibrium federal funds rate. 
D)  current inflation rate plus the real equilibrium federal funds rate. 
A)  current discount rate. 
B)  current inflation rate. 
C)  real equilibrium federal funds rate. 
D)  current inflation rate plus the real equilibrium federal funds rate.

Question 12

The Fed can directly lower the inflation rate.

Accepted Answer

A) True 
 B)False

Question 13

Most of the pressure for a monetary growth rule has disappeared because since 1980,

Accepted Answer

A)  the relationship between movements in the money supply and movements in real GDP and the price level have become much stronger. 
B)  the relationship between movements in the money supply and movements in real GDP and the price level have become much weaker. 
C)  the relationship between movements in interest rates and movements in real GDP and the price level have become much stronger. 
D)  the relationship between movements in interest rates and movements in real GDP and the price level have become much weaker. 
A)  the relationship between movements in the money supply and movements in real GDP and the price level have become much stronger. 
B)  the relationship between movements in the money supply and movements in real GDP and the price level have become much weaker. 
C)  the relationship between movements in interest rates and movements in real GDP and the price level have become much stronger. 
D)  the relationship between movements in interest rates and movements in real GDP and the price level have become much weaker.

Question 14

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 15

With a monetary growth rule as proposed by the monetarists,during a recession the rate of growth of the money supply would

Accepted Answer

A)  decrease. 
B)  increase. 
C)  not change. 
D)  decrease or increase depending on economic conditions. 
A)  decrease. 
B)  increase. 
C)  not change. 
D)  decrease or increase depending on economic conditions.

Question 16

Expansionary monetary policy refers to the ________ to increase real GDP.

Accepted Answer

A)  government's increasing spending and lowering taxes 
B)  government's decreasing spending and raising taxes 
C)  Federal Reserve's increasing the money supply and decreasing interest rates 
D)  Federal Reserve's decreasing the money supply and increasing interest rates 
A)  government's increasing spending and lowering taxes 
B)  government's decreasing spending and raising taxes 
C)  Federal Reserve's increasing the money supply and decreasing interest rates 
D)  Federal Reserve's decreasing the money supply and increasing interest rates

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Figure 26-5  
-Refer to Figure 26-5.Suppose the Fed lowers its target for the federal funds rate.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) E to A.
E) C to D.

Accepted Answer

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

Question 19

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 20

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 ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

Accepted Answer

A)  sub-prime; "Alt-A" 
B)  adjustable rate; shadow-banking 
C)  "credit crunch"; black market 
D)  "fresh-start"; prime rate 
A)  sub-prime; "Alt-A" 
B)  adjustable rate; shadow-banking 
C)  "credit crunch"; black market 
D)  "fresh-start"; prime rate

Exam 26: Monetary Policy

Which of the following statements about inflation targeting is true?

The supporters of a monetary growth rule believe that active monetary policy

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

An increase in the interest rate

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

To reassure investors who were unwilling to buy mortgages in the secondary market,the U.S.Congress used two government sponsored enterprises,Fannie Mae and Freddie Mac,to stand between investors and banks that grant mortgages.Fannie Mae and Freddie Mac

Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency.Using the money demand and money supply model and assuming everything else is held constant,the equilibrium interest rate should

For purposes of monetary policy,the Federal Reserve has targeted the interest rate known as the

Figure 26-5 -Refer to Figure 26-5.Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy.Using the static AD-AS model in the figure above,this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) A to E. E) C to D.

Figure 26-2 -Refer to Figure 26-2.In the figure above,when the money supply shifts from MS1 to MS2,at the interest rate of 3 percent households and firms will

Using the Taylor rule,if the current inflation rate equals the target inflation rate and real GDP equals potential GDP,then the federal funds target rate equals the

The Fed can directly lower the inflation rate.

Most of the pressure for a monetary growth rule has disappeared because since 1980,

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

With a monetary growth rule as proposed by the monetarists,during a recession the rate of growth of the money supply would

Expansionary monetary policy refers to the ________ to increase real GDP.

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

Figure 26-5 -Refer to Figure 26-5.Suppose the Fed lowers its target for the federal funds rate.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) E to A. E) C to D.

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

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 ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

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.

Figure 26-2 -Refer to Figure 26-2.In the figure above,when the money supply shifts from MS₁ to MS₂,at the interest rate of 3 percent households and firms will

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 borrowers with flawed credit histories and borrowers who did not document their incomes.