Question 1

Using monetary policy to deal with aggregate demand shocks is much easier in theory than in practice.Describe three major difficulties that a central bank might face.

Accepted Answer

In practice,monetary policy is much more

Question 2

A problem with a monetary rule that requires the Fed to keep money growth constant is:

Accepted Answer

A)  the Fed has no control over money growth. 
B)  constant money growth implies more volatility in inflation. 
C)  constant money growth implies more volatility in real output growth. 
D)  the Fed must ignore changes in money velocity. 
A)  the Fed has no control over money growth. 
B)  constant money growth implies more volatility in inflation. 
C)  constant money growth implies more volatility in real output growth. 
D)  the Fed must ignore changes in money velocity.

Question 3

Wages tend to be especially sticky in the upward direction.

Accepted Answer

A) True 
 B)False

Question 4

Disinflation in the 1980s was a result of:

Accepted Answer

A)  leftward shifts in the aggregate demand curve due to money supply reductions. 
B)  leftward shifts in the aggregate supply curve due to sticky wages and prices. 
C)  leftward shifts in the LRAS curve due to negative real shocks. 
D)  rightward shifts in the LRAS curve due to positive real shocks. 
A)  leftward shifts in the aggregate demand curve due to money supply reductions. 
B)  leftward shifts in the aggregate supply curve due to sticky wages and prices. 
C)  leftward shifts in the LRAS curve due to negative real shocks. 
D)  rightward shifts in the LRAS curve due to positive real shocks.

Question 5

When the price level actually falls,what is the economy experiencing?

Accepted Answer

A)  deflation 
B)  disinflation 
C)  stagflation 
D)  devaluation 
A)  deflation 
B)  disinflation 
C)  stagflation 
D)  devaluation

Question 6

Increased uncertainty will cause the economy's AD curve to:

Accepted Answer

A)  shift inward. 
B)  shift outward. 
C)  become steeper. 
D)  become flatter. 
A)  shift inward. 
B)  shift outward. 
C)  become steeper. 
D)  become flatter.

Question 7

Monetary authorities in a country say that there have been no recent negative supply shocks.The economy in this country is currently experiencing high inflation and its productive capacity cannot be increased much.Explain how monetary policy could work to address this scenario.Are there any negative consequences of your recommended policy?

Accepted Answer

Since there have been no negative supply

Question 8

When the Fed reacts to a positive aggregate demand shock,which is likely to make the period of disinflation shorter?

Accepted Answer

A)  credibility on the part of the Fed 
B)  higher uncertainty about investment returns 
C)  flexible wages and prices 
D)  an increase in the velocity of money 
A)  credibility on the part of the Fed 
B)  higher uncertainty about investment returns 
C)  flexible wages and prices 
D)  an increase in the velocity of money

Question 9

When facing a real shock,a central bank will encounter a dilemma that forces it to choose between:

Accepted Answer

A)  too low a rate of growth or too high a rate of inflation. 
B)  too high a rate of growth or too low a rate of inflation. 
C)  too low a rate of growth or too low a rate of inflation. 
D)  too high a rate of growth or too high a rate of inflation. 
A)  too low a rate of growth or too high a rate of inflation. 
B)  too high a rate of growth or too low a rate of inflation. 
C)  too low a rate of growth or too low a rate of inflation. 
D)  too high a rate of growth or too high a rate of inflation.

Question 10

What kind of monetary policy rule did Milton Friedman advocate?

Accepted Answer

A)  The money supply should increase by 3% every year. 
B)  Prices should increase by 3% every year. 
C)  Velocity growth should be 3% every year. 
D)  Long-run economic growth should be 3%. 
A)  The money supply should increase by 3% every year. 
B)  Prices should increase by 3% every year. 
C)  Velocity growth should be 3% every year. 
D)  Long-run economic growth should be 3%.

Question 11

If the public's demand for holding cash increases,the growth rate of money velocity will:

Accepted Answer

A)  remain unchanged. 
B)  increase. 
C)  decrease. 
D)  become unpredictable. 
A)  remain unchanged. 
B)  increase. 
C)  decrease. 
D)  become unpredictable.

Question 12

Use the following to answer questions 
Figure: Monetary Policy  
-(Figure: Monetary Policy)Refer to the figure.Assume that the economy is initially at point Y in the graph.If the Fed takes the appropriate action with monetary policy,but overestimates how serious the recession is,then:

Accepted Answer

A)  the LRAS curve would shift to the left. 
B)  the Fed would take the economy to point X. 
C)  the Fed would fail to stimulate the economy and it would remain at point Y. 
D)  the Fed would overshoot and the economy would move to point W. 
A)  the LRAS curve would shift to the left. 
B)  the Fed would take the economy to point X. 
C)  the Fed would fail to stimulate the economy and it would remain at point Y. 
D)  the Fed would overshoot and the economy would move to point W.

Question 13

If the Fed reacts to a series of negative real shocks by raising money growth every time:

Accepted Answer

A)  the inflation rate will increase over time. 
B)  the inflation rate will decrease over time. 
C)  deflation will occur. 
D)  the inflation rate will remain unchanged. 
A)  the inflation rate will increase over time. 
B)  the inflation rate will decrease over time. 
C)  deflation will occur. 
D)  the inflation rate will remain unchanged.

Question 14

Milton Friedman was chair of the Fed in 1980 and quickly brought inflation rates down.

Accepted Answer

A) True 
 B)False

Question 15

An increase in the money supply can typically affect the economy with a lag of:

Accepted Answer

A)  2 to 3 months. 
B)  4 to 10 months. 
C)  6 to 18 months. 
D)  10 to 24 months. 
A)  2 to 3 months. 
B)  4 to 10 months. 
C)  6 to 18 months. 
D)  10 to 24 months.

Question 16

In the late 1990s,America's economy:

Accepted Answer

A)  grew at its historical pace. 
B)  was booming and unemployment was very low. 
C)  experienced stagflation: high inflation and low real growth. 
D)  suffered from several severe nominal shocks,producing low inflation and low growth. 
A)  grew at its historical pace. 
B)  was booming and unemployment was very low. 
C)  experienced stagflation: high inflation and low real growth. 
D)  suffered from several severe nominal shocks,producing low inflation and low growth.

Question 17

Many economists now believe that rising U.S.housing prices in the early 2000s were a bubble.Explain why the Federal Reserve did not pop the bubble.

Accepted Answer

There are two main reasons why the Feder

Question 18

If a country's central bank becomes more credible and announces a monetary contraction in advance,then:

Accepted Answer

A)  more firms will invest now before the threat materializes. 
B)  slower wages will fall. 
C)  wages will rise in anticipation of the fall in incomes. 
D)  unemployment costs will be lower. 
A)  more firms will invest now before the threat materializes. 
B)  slower wages will fall. 
C)  wages will rise in anticipation of the fall in incomes. 
D)  unemployment costs will be lower.

Question 19

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

Accepted Answer

A)  The Fed might run out of money. 
B)  Banks usually don't do what the Fed demands of them. 
C)  The Fed must operate in real time,when a lot of the data about the state of the economy are unknown. 
D)  The economy responds to the Fed's actions with no lag. 
A)  The Fed might run out of money. 
B)  Banks usually don't do what the Fed demands of them. 
C)  The Fed must operate in real time,when a lot of the data about the state of the economy are unknown. 
D)  The economy responds to the Fed's actions with no lag.

Question 20

Uncertainty drives people away from investment projects.

Accepted Answer

A) True 
 B)False

Using monetary policy to deal with aggregate demand shocks is much easier in theory than in practice.Describe three major difficulties that a central bank might face.

A problem with a monetary rule that requires the Fed to keep money growth constant is:

Wages tend to be especially sticky in the upward direction.

Disinflation in the 1980s was a result of:

When the price level actually falls,what is the economy experiencing?

Increased uncertainty will cause the economy's AD curve to:

When the Fed reacts to a positive aggregate demand shock,which is likely to make the period of disinflation shorter?

When facing a real shock,a central bank will encounter a dilemma that forces it to choose between:

What kind of monetary policy rule did Milton Friedman advocate?

If the public's demand for holding cash increases,the growth rate of money velocity will:

Use the following to answer questions Figure: Monetary Policy -(Figure: Monetary Policy)Refer to the figure.Assume that the economy is initially at point Y in the graph.If the Fed takes the appropriate action with monetary policy,but overestimates how serious the recession is,then:

If the Fed reacts to a series of negative real shocks by raising money growth every time:

Milton Friedman was chair of the Fed in 1980 and quickly brought inflation rates down.

An increase in the money supply can typically affect the economy with a lag of:

In the late 1990s,America's economy:

Many economists now believe that rising U.S.housing prices in the early 2000s were a bubble.Explain why the Federal Reserve did not pop the bubble.

If a country's central bank becomes more credible and announces a monetary contraction in advance,then:

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

Uncertainty drives people away from investment projects.

The Big Ideas

The Power of Trade

Supply and Demand

Equilibrium- How Supply and Demand

Price Ceilings and Floors

GDP and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth,capital Accumulation

Saving,investment,and the Financial System

Stock Markets and Personal Finance

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

Business Fluctuations

Transmission and Amplification Mechanisms

The Federal Reserve System

The Federal Budget- Taxes and Spending

Fiscal Policy

International Trade

International Finance

Political Economy and Public Choice

Filters

Exam 16: Monetary Policy

Using monetary policy to deal with aggregate demand shocks is much easier in theory than in practice.Describe three major difficulties that a central bank might face.

A problem with a monetary rule that requires the Fed to keep money growth constant is:

Wages tend to be especially sticky in the upward direction.

Disinflation in the 1980s was a result of:

When the price level actually falls,what is the economy experiencing?

Increased uncertainty will cause the economy's AD curve to:

When the Fed reacts to a positive aggregate demand shock,which is likely to make the period of disinflation shorter?

When facing a real shock,a central bank will encounter a dilemma that forces it to choose between:

What kind of monetary policy rule did Milton Friedman advocate?

If the public's demand for holding cash increases,the growth rate of money velocity will:

Use the following to answer questions Figure: Monetary Policy -(Figure: Monetary Policy)Refer to the figure.Assume that the economy is initially at point Y in the graph.If the Fed takes the appropriate action with monetary policy,but overestimates how serious the recession is,then:

If the Fed reacts to a series of negative real shocks by raising money growth every time:

Milton Friedman was chair of the Fed in 1980 and quickly brought inflation rates down.

An increase in the money supply can typically affect the economy with a lag of:

In the late 1990s,America's economy:

Many economists now believe that rising U.S.housing prices in the early 2000s were a bubble.Explain why the Federal Reserve did not pop the bubble.

If a country's central bank becomes more credible and announces a monetary contraction in advance,then:

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

Uncertainty drives people away from investment projects.

The Big Ideas

The Power of Trade

Supply and Demand

Equilibrium- How Supply and Demand

Price Ceilings and Floors

GDP and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth,capital Accumulation

Saving,investment,and the Financial System

Stock Markets and Personal Finance

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

Business Fluctuations

Transmission and Amplification Mechanisms

The Federal Reserve System

The Federal Budget- Taxes and Spending

Fiscal Policy

International Trade

International Finance

Political Economy and Public Choice

Filters