Question 1

Inflation targeting occurs when the central bank sets an explicit goal for the inflation rate and uses monetary policy to hit that goal.

Accepted Answer

A) True 
 B)False

Question 2

Use the following to answer questions:
Figure: Short-Run Determination of the Interest Rate  
-(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run Determination of the Interest Rate. If the money supply is at MS1 and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r2. In the long run prices will _____ the demand for money.

Accepted Answer

A) decrease, decreasing 
B) decrease, increasing 
C) increase, decreasing 
D) increase, increasing 
A) decrease, decreasing 
B) decrease, increasing 
C) increase, decreasing 
D) increase, increasing

Question 3

Use the following to answer questions :
Scenario: Taylor Rule
Suppose the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account when setting the federal funds rate. Also suppose that the inflation rate in the economy is 3% and the unemployment gap is -2%.
-(Scenario: Taylor Rule) Look at the scenario Taylor Rule. In this case, the Federal Reserve will set the federal funds rate at:

Accepted Answer

A) 9.8%. 
B) 6.25%. 
C) 5.75%. 
D) 4.75%. 
A) 9.8%. 
B) 6.25%. 
C) 5.75%. 
D) 4.75%.

Question 4

The Federal Open Market Committee sets the target interest rate for the next:

Accepted Answer

A) three months. 
B) six months. 
C) three weeks. 
D) six weeks. 
A) three months. 
B) six months. 
C) three weeks. 
D) six weeks.

Question 5

Given a recessionary gap, the Federal Reserve will use monetary policy to _____ real GDP and _____ 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 6

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will _____ Treasury bills in the open market, _____ the supply of money, and _____ the interest rate to the target rate.

Accepted Answer

A) sell; increase; lower 
B) buy; increase; lower 
C) sell; decrease; raise 
D) buy; decrease; raise 
A) sell; increase; lower 
B) buy; increase; lower 
C) sell; decrease; raise 
D) buy; decrease; raise

Question 7

People forgo interest and hold money:

Accepted Answer

A) because they are required to. 
B) to reduce their transaction costs. 
C) because there are no substitutes for money. 
D) because banks are too risky. 
A) because they are required to. 
B) to reduce their transaction costs. 
C) because there are no substitutes for money. 
D) because banks are too risky.

Question 8

To close a recessionary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.

Accepted Answer

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

Question 9

The slope of the demand curve for money is:

Accepted Answer

A) vertical. 
B) horizontal. 
C) positive. 
D) negative. 
A) vertical. 
B) horizontal. 
C) positive. 
D) negative.

Question 10

If the economy is at potential output and the Fed increases the money supply, in the SHORT run the price level will likely:

Accepted Answer

A) fluctuate randomly. 
B) remain the same. 
C) decrease. 
D) increase. 
A) fluctuate randomly. 
B) remain the same. 
C) decrease. 
D) increase.

Question 11

An increase in the demand for money would result from a(n):

Accepted Answer

A) decrease in nominal GDP. 
B) decrease in real GDP. 
C) decrease in the price level. 
D) increase in the price level. 
A) decrease in nominal GDP. 
B) decrease in real GDP. 
C) decrease in the price level. 
D) increase in the price level.

Question 12

In 2007, the Fed raised its target federal funds rate to prevent unemployment and a recession.

Accepted Answer

A) True 
 B)False

Question 13

Other things equal, if the amount of money demanded is greater than the amount of money supplied, then the interest rate may fall.

Accepted Answer

A) True 
 B)False

Question 14

In the long run, an increase in the quantity of money:

Accepted Answer

A) increases real output. 
B) increases prices but not long-run output. 
C) increases real interest rates. 
D) has no effect on the economy. 
A) increases real output. 
B) increases prices but not long-run output. 
C) increases real interest rates. 
D) has no effect on the economy.

Question 15

Use the following to answer questions :
Figure: Money Market I  
-(Figure: Money Market I) Look at the figure Money Market I. If the money market is initially in equilibrium at point E and the central bank buys Treasury bills, then the interest rate will:

Accepted Answer

A) move toward point H. 
B) move toward point L. 
C) remain at point E. 
D) shift leftward. 
A) move toward point H. 
B) move toward point L. 
C) remain at point E. 
D) shift leftward.

Question 16

A 30% increase in the aggregate price level will:

Accepted Answer

A) increase money demand by 30%. 
B) increase money demand by the money multiplier. 
C) decrease money demand by 30%. 
D) not affect the demand for money. 
A) increase money demand by 30%. 
B) increase money demand by the money multiplier. 
C) decrease money demand by 30%. 
D) not affect the demand for money.

Question 17

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2% sellers of interest-bearing financial assets _____ interest rates to find willing buyers.

Accepted Answer

A) must offer higher 
B) can offer lower 
C) can offer 2% 
D) Sales of financial assets do not depend on the rate offered. 
A) must offer higher 
B) can offer lower 
C) can offer 2% 
D) Sales of financial assets do not depend on the rate offered.

Question 18

When the quantity of money demanded is less than the quantity of money supplied:

Accepted Answer

A) interest rates will fall. 
B) people want to decrease their money holdings. 
C) people will begin to sell their nonmonetary assets. 
D) interest rates will remain unchanged. 
A) interest rates will fall. 
B) people want to decrease their money holdings. 
C) people will begin to sell their nonmonetary assets. 
D) interest rates will remain unchanged.

Question 19

The Federal Reserve can influence financial crises because it:

Accepted Answer

A) determines tax rates. 
B) determines government spending. 
C) conducts monetary policy. 
D) is responsive to the people who elected its members to office. 
A) determines tax rates. 
B) determines government spending. 
C) conducts monetary policy. 
D) is responsive to the people who elected its members to office.

Question 20

The interest rate is determined in the loanable funds market in the short run.

Accepted Answer

A) True 
 B)False

Inflation targeting occurs when the central bank sets an explicit goal for the inflation rate and uses monetary policy to hit that goal.

The Federal Open Market Committee sets the target interest rate for the next:

Given a recessionary gap, the Federal Reserve will use monetary policy to _ real GDP and _ aggregate demand.

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will ___ Treasury bills in the open market, _ the supply of money, and ___ the interest rate to the target rate.

People forgo interest and hold money:

To close a recessionary gap using monetary policy, the Federal Reserve should ___ the money supply to _ investment and consumer spending and shift the aggregate demand curve to the ___.

The slope of the demand curve for money is:

If the economy is at potential output and the Fed increases the money supply, in the SHORT run the price level will likely:

An increase in the demand for money would result from a(n):

In 2007, the Fed raised its target federal funds rate to prevent unemployment and a recession.

Other things equal, if the amount of money demanded is greater than the amount of money supplied, then the interest rate may fall.

In the long run, an increase in the quantity of money:

Use the following to answer questions : Figure: Money Market I -(Figure: Money Market I) Look at the figure Money Market I. If the money market is initially in equilibrium at point E and the central bank buys Treasury bills, then the interest rate will:

A 30% increase in the aggregate price level will:

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2% sellers of interest-bearing financial assets _____ interest rates to find willing buyers.

When the quantity of money demanded is less than the quantity of money supplied:

The Federal Reserve can influence financial crises because it:

The interest rate is determined in the loanable funds market in the short run.

First Principles

Economic Models

Supply and Demand

International Trade 5

Macroeconomics: the Big Picture

Gdp and Cpi: Tracking the Macroeconomy

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending, and the Financial System

Fiscal Policy Appendix Taxes and the Multiplier

Money, Banking, and the Federal Reserve System

Inflation, Disinflation, and Deflation

Crises and Consequences

Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

toward a Fuller Understanding of Present Value

Filters

Exam 15: Monetary Policy

Inflation targeting occurs when the central bank sets an explicit goal for the inflation rate and uses monetary policy to hit that goal.

The Federal Open Market Committee sets the target interest rate for the next:

Given a recessionary gap, the Federal Reserve will use monetary policy to _____ real GDP and _____ aggregate demand.

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will _____ Treasury bills in the open market, _____ the supply of money, and _____ the interest rate to the target rate.

People forgo interest and hold money:

To close a recessionary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.

The slope of the demand curve for money is:

If the economy is at potential output and the Fed increases the money supply, in the SHORT run the price level will likely:

An increase in the demand for money would result from a(n):

In 2007, the Fed raised its target federal funds rate to prevent unemployment and a recession.

Other things equal, if the amount of money demanded is greater than the amount of money supplied, then the interest rate may fall.

In the long run, an increase in the quantity of money:

Use the following to answer questions : Figure: Money Market I -(Figure: Money Market I) Look at the figure Money Market I. If the money market is initially in equilibrium at point E and the central bank buys Treasury bills, then the interest rate will:

A 30% increase in the aggregate price level will:

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2% sellers of interest-bearing financial assets _____ interest rates to find willing buyers.

When the quantity of money demanded is less than the quantity of money supplied:

The Federal Reserve can influence financial crises because it:

The interest rate is determined in the loanable funds market in the short run.

First Principles

Economic Models

Supply and Demand

International Trade 5

Macroeconomics: the Big Picture

Gdp and Cpi: Tracking the Macroeconomy

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending, and the Financial System

Fiscal Policy Appendix Taxes and the Multiplier

Money, Banking, and the Federal Reserve System

Inflation, Disinflation, and Deflation

Crises and Consequences

Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

toward a Fuller Understanding of Present Value

Filters

Given a recessionary gap, the Federal Reserve will use monetary policy to _ real GDP and _ aggregate demand.

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will ___ Treasury bills in the open market, _ the supply of money, and ___ the interest rate to the target rate.

To close a recessionary gap using monetary policy, the Federal Reserve should ___ the money supply to _ investment and consumer spending and shift the aggregate demand curve to the ___.