Question 1

Which is a reasonable cause for the formation of the housing bubble in the 2000s?

Accepted Answer

A)  high market confidence 
B)  credible monetary policy 
C)  low Federal Funds rate 
D)  the Fed's use of a monetary policy rule 
A)  high market confidence 
B)  credible monetary policy 
C)  low Federal Funds rate 
D)  the Fed's use of a monetary policy rule

Question 2

Monetary rules work best when:

Accepted Answer

A)  the Fed loses control of the money supply. 
B)  interest rates are high. 
C)  money velocity is stable. 
D)  inflation expectations are high. 
A)  the Fed loses control of the money supply. 
B)  interest rates are high. 
C)  money velocity is stable. 
D)  inflation expectations are high.

Question 3

If the Federal Reserve offsets a negative shock to aggregate demand with increased money growth:

Accepted Answer

A)  inflation will rise,but real GDP growth will remain unchanged. 
B)  inflation will fall,but real GDP growth will remain unchanged. 
C)  both inflation and real GDP growth will rise. 
D)  both inflation and real GDP growth will fall. 
A)  inflation will rise,but real GDP growth will remain unchanged. 
B)  inflation will fall,but real GDP growth will remain unchanged. 
C)  both inflation and real GDP growth will rise. 
D)  both inflation and real GDP growth will fall.

Question 4

What is a possible reason for the Fed's inability to prevent a recession?

Accepted Answer

A)  The Fed has too much power over M1 and M2 and can flood the money supply. 
B)  Much of the information about the economy is unknown when the Fed is making policy. 
C)  Firms and individuals do not often understand the goals of the Fed. 
D)  The Fed often performs complex and conflicting maneuvers at the same time. 
A)  The Fed has too much power over M1 and M2 and can flood the money supply. 
B)  Much of the information about the economy is unknown when the Fed is making policy. 
C)  Firms and individuals do not often understand the goals of the Fed. 
D)  The Fed often performs complex and conflicting maneuvers at the same time.

Question 5

Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy?

Accepted Answer

A)  The Fed has too much data to sort through quickly. 
B)  All monetary policies must be approved by Congress before being implemented. 
C)  The Fed's control of the money supply is incomplete and subject to uncertain lags. 
D)  The effects of monetary policy always offset those of fiscal policy. 
A)  The Fed has too much data to sort through quickly. 
B)  All monetary policies must be approved by Congress before being implemented. 
C)  The Fed's control of the money supply is incomplete and subject to uncertain lags. 
D)  The effects of monetary policy always offset those of fiscal policy.

Question 6

An increase in money growth will cause the inflation rate to increase in:

Accepted Answer

A)  the short run only. 
B)  the long run only. 
C)  both the short run and the long run. 
D)  neither the short run nor the long run. 
A)  the short run only. 
B)  the long run only. 
C)  both the short run and the long run. 
D)  neither the short run nor the long run.

Question 7

Deflation has occurred if the economy's price index for this year is lower than the same economy's price index for last year.

Accepted Answer

A) True 
 B)False

Question 8

An example of a negative real shock is a rapid increase in:

Accepted Answer

A)  oil prices. 
B)  money supply growth. 
C)  government debt. 
D)  housing prices. 
A)  oil prices. 
B)  money supply growth. 
C)  government debt. 
D)  housing prices.

Question 9

Use the following to answer questions  
Figure: Negative Supply Shock  
-(Figure: Negative Supply Shock)Refer to the figure.This economy initially begins at point A and a negative supply shock takes it to point Y.If the Fed reacts by increasing money growth by 9%,this would take the economy to:

Accepted Answer

A)  point A. 
B)  point B. 
C)  point X. 
D)  point V. 
A)  point A. 
B)  point B. 
C)  point X. 
D)  point V.

Question 10

When aggregate demand decreases,the Fed will want to use its policy tools to:

Accepted Answer

A)  keep aggregate demand lower until wages catch up. 
B)  quickly bring aggregate demand back to its original position. 
C)  push aggregate demand higher than it was originally to make up for lost growth potential. 
D)  shift aggregate supply to left to balance with lower demand. 
A)  keep aggregate demand lower until wages catch up. 
B)  quickly bring aggregate demand back to its original position. 
C)  push aggregate demand higher than it was originally to make up for lost growth potential. 
D)  shift aggregate supply to left to balance with lower demand.

Question 11

The Federal Reserve has complete control of the money supply.

Accepted Answer

A) True 
 B)False

Question 12

What happens to GDP if the Fed is too responsive to changes in aggregate demand?

Accepted Answer

A)  Volatility increases. 
B)  Volatility decreases. 
C)  GDP is difficult to influence in the short-run and the long-run. 
D)  It ends up being lower in all cases. 
A)  Volatility increases. 
B)  Volatility decreases. 
C)  GDP is difficult to influence in the short-run and the long-run. 
D)  It ends up being lower in all cases.

Question 13

In the short run,if the Fed responds to a negative real shock by raising the growth rate of the money supply,inflation will be:

Accepted Answer

A)  lower than the rate without responding to the negative shock. 
B)  higher than the rate without responding to the negative shock. 
C)  the same as the rate without responding to the negative shock. 
D)  lower or higher than the rate without responding to the negative shock,depending on the size of money supply growth. 
A)  lower than the rate without responding to the negative shock. 
B)  higher than the rate without responding to the negative shock. 
C)  the same as the rate without responding to the negative shock. 
D)  lower or higher than the rate without responding to the negative shock,depending on the size of money supply growth.

Question 14

Between 1997 and 2006,U.S.housing prices:

Accepted Answer

A)  remained relatively constant. 
B)  decreased rapidly. 
C)  increased slowly. 
D)  increased rapidly. 
A)  remained relatively constant. 
B)  decreased rapidly. 
C)  increased slowly. 
D)  increased rapidly.

Question 15

Disinflation is a decrease in prices.

Accepted Answer

A) True 
 B)False

Question 16

A negative shock to AD will cause the growth rate of real GDP to increase in:

Accepted Answer

A)  the short run only. 
B)  the long run only. 
C)  both the short run and the long run. 
D)  neither the short run nor the long run. 
A)  the short run only. 
B)  the long run only. 
C)  both the short run and the long run. 
D)  neither the short run nor the long run.

Question 17

The disinflation of the 1980s led to:

Accepted Answer

A)  high unemployment. 
B)  sticky wages and prices. 
C)  reduced credibility for the Federal Reserve. 
D)  extremely low interest rates. 
A)  high unemployment. 
B)  sticky wages and prices. 
C)  reduced credibility for the Federal Reserve. 
D)  extremely low interest rates.

Question 18

In the absence of monetary intervention following a negative shock to aggregate demand:

Accepted Answer

A)  inflation,real growth,and nominal wage growth will all decrease. 
B)  inflation will decrease,but real growth and nominal wage growth will increase. 
C)  inflation will increase,real growth will decrease,and nominal wage growth will stay the same. 
D)  inflation and real growth will decrease,but nominal wage growth will stay the same. 
A)  inflation,real growth,and nominal wage growth will all decrease. 
B)  inflation will decrease,but real growth and nominal wage growth will increase. 
C)  inflation will increase,real growth will decrease,and nominal wage growth will stay the same. 
D)  inflation and real growth will decrease,but nominal wage growth will stay the same.

Question 19

Which is the MOST credible monetary policy action?

Accepted Answer

A)  The central bank makes policy actions in secret to avoid speculation. 
B)  The central bank attempts to confuse the public by changing its policy stance frequently. 
C)  The central bank announces its policy in public and sticks with the policy over time. 
D)  The central bank does nothing to the economy regardless of any economic shock. 
A)  The central bank makes policy actions in secret to avoid speculation. 
B)  The central bank attempts to confuse the public by changing its policy stance frequently. 
C)  The central bank announces its policy in public and sticks with the policy over time. 
D)  The central bank does nothing to the economy regardless of any economic shock.

Question 20

A central bank can always keep an economy at its long-run growth rate by exactly offsetting any shock to aggregate demand.

Accepted Answer

A) True 
 B)False

Exam 16: Monetary Policy

Which is a reasonable cause for the formation of the housing bubble in the 2000s?

Monetary rules work best when:

If the Federal Reserve offsets a negative shock to aggregate demand with increased money growth:

What is a possible reason for the Fed's inability to prevent a recession?

Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy?

An increase in money growth will cause the inflation rate to increase in:

Deflation has occurred if the economy's price index for this year is lower than the same economy's price index for last year.

An example of a negative real shock is a rapid increase in:

Use the following to answer questions Figure: Negative Supply Shock -(Figure: Negative Supply Shock)Refer to the figure.This economy initially begins at point A and a negative supply shock takes it to point Y.If the Fed reacts by increasing money growth by 9%,this would take the economy to:

When aggregate demand decreases,the Fed will want to use its policy tools to:

The Federal Reserve has complete control of the money supply.

What happens to GDP if the Fed is too responsive to changes in aggregate demand?

In the short run,if the Fed responds to a negative real shock by raising the growth rate of the money supply,inflation will be:

Between 1997 and 2006,U.S.housing prices:

Disinflation is a decrease in prices.

A negative shock to AD will cause the growth rate of real GDP to increase in:

The disinflation of the 1980s led to:

In the absence of monetary intervention following a negative shock to aggregate demand:

Which is the MOST credible monetary policy action?

A central bank can always keep an economy at its long-run growth rate by exactly offsetting any shock to aggregate demand.

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

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