Question 1

Which statement is TRUE regarding the effects of monetary policy when a real shock occurs?

Accepted Answer

A)  Monetary policy can always be used to simultaneously achieve a high real growth rate and lower the inflation rate. 
B)  Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate. 
C)  Monetary policy can be used only to change the real growth rate,but not the inflation rate. 
D)  Monetary policy can be used only to change the inflation rate,but not the real growth rate. 
A)  Monetary policy can always be used to simultaneously achieve a high real growth rate and lower the inflation rate. 
B)  Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate. 
C)  Monetary policy can be used only to change the real growth rate,but not the inflation rate. 
D)  Monetary policy can be used only to change the inflation rate,but not the real growth rate.

Question 2

Suppose the government subsidizes the price of bananas,making it so low that you buy an enormous number of bananas and store them on your roof.If your roof caves in,it's

Accepted Answer

A)  the government's fault. 
B)  your fault. 
C)  no one's fault. 
D)  the fault of banana vendors. 
A)  the government's fault. 
B)  your fault. 
C)  no one's fault. 
D)  the fault of banana vendors.

Question 3

Economist Milton Friedman called for a policy rule that keeps the growth rate of the money supply at 3% because:

Accepted Answer

A)  real shocks on average are 3% of real GDP. 
B)  spending shocks on average are 3% of real GDP. 
C)  the economy's long-run potential growth rate is 3%. 
D)  the money supply has grown on average at 3% historically. 
A)  real shocks on average are 3% of real GDP. 
B)  spending shocks on average are 3% of real GDP. 
C)  the economy's long-run potential growth rate is 3%. 
D)  the money supply has grown on average at 3% historically.

Question 4

If initially, $\vec { M }$ = 5%, $\vec { v }$ = 3%, $\vec { P }$ = 2%,and $\vec { Y } _ { R }$ = 6% and then because of economic uncertainty $\vec { v }$ falls to 1%,what should the Fed do?

Accepted Answer

A)  Quietly raise
$\vec{ Y } _ { R }$ to 8% to offset the decrease in
$\vec { v }$ . 
B)  Publicly lower
$\vec{ M }$ to 3% so that
$\vec{ M }$ -
$\vec { v }$ stays constant at 2%. 
C)  Publicly demonstrate a commitment to keep
$\vec{ M }$ +
$\vec { v }$ at 8% by raising
$\vec{ M }$ . 
D)  Quietly raise
$\vec{ M }$ without telling anyone,as only unexpected inflation is expansionary. 
A)  Quietly raise
$\vec{ Y } _ { R }$ to 8% to offset the decrease in
$\vec { v }$ . 
B)  Publicly lower
$\vec{ M }$ to 3% so that
$\vec{ M }$ -
$\vec { v }$ stays constant at 2%. 
C)  Publicly demonstrate a commitment to keep
$\vec{ M }$ +
$\vec { v }$ at 8% by raising
$\vec{ M }$ . 
D)  Quietly raise
$\vec{ M }$ without telling anyone,as only unexpected inflation is expansionary.

Question 5

The Fed can fight the inflationary effects of a negative real shock by decreasing money growth.

Accepted Answer

A) True 
 B)False

Question 6

If the Federal Reserve wishes to avoid short-run increases in the unemployment rate,the correct response to a negative AD shock would be:

Accepted Answer

A)  an increase in government spending growth. 
B)  a tax cut. 
C)  an increase in money supply growth. 
D)  a lower goal for inflation. 
A)  an increase in government spending growth. 
B)  a tax cut. 
C)  an increase in money supply growth. 
D)  a lower goal for inflation.

Question 7

If the Fed reverses course and attempts to reduce inflation,it must be willing to accept lower growth as a consequence.

Accepted Answer

A) True 
 B)False

Question 8

In the AD-AS model,an increase in money growth 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 9

The supporters of discretionary monetary policy want to see the course of the economy guided by certain targets.

Accepted Answer

A) True 
 B)False

Question 10

A constant money growth rule requires the Fed to ignore changes in velocity.

Accepted Answer

A) True 
 B)False

Question 11

Disinflation is engineered through monetary expansions.

Accepted Answer

A) True 
 B)False

Question 12

The housing boom of the 2000s is an example of a negative real shock.

Accepted Answer

A) True 
 B)False

Question 13

A nominal GDP rule requires the Fed to keep Mv constant.

Accepted Answer

A) True 
 B)False

Question 14

Which does NOT explain why the 1997-2006 housing boom increased aggregate demand?

Accepted Answer

A)  The construction sector created new employment and higher wages. 
B)  Homeowners felt wealthier as they saw their homes rising in value every year. 
C)  Homeowners tended to spend more money and even borrow money,hoping that rising wealth from the home values will let them repay the money in the future. 
D)  During the boom,some builders were working 60 or 80 hours a week instead of 40. 
A)  The construction sector created new employment and higher wages. 
B)  Homeowners felt wealthier as they saw their homes rising in value every year. 
C)  Homeowners tended to spend more money and even borrow money,hoping that rising wealth from the home values will let them repay the money in the future. 
D)  During the boom,some builders were working 60 or 80 hours a week instead of 40.

Question 15

Decreasing money growth following a negative real shock allows the Fed to address both higher inflation and higher unemployment that accompanies such shocks.

Accepted Answer

A) True 
 B)False

Question 16

When a negative shock to aggregate demand occurs,the inflation rate will:

Accepted Answer

A)  increase. 
B)  remain the same. 
C)  decrease. 
D)  be automatically adjusted by the Fed. 
A)  increase. 
B)  remain the same. 
C)  decrease. 
D)  be automatically adjusted by the Fed.

Question 17

A significant decrease in the rate of inflation is called:

Accepted Answer

A)  deflation. 
B)  credible inflation. 
C)  disinflation. 
D)  quantitative easing. 
A)  deflation. 
B)  credible inflation. 
C)  disinflation. 
D)  quantitative easing.

Question 18

A monetary contraction is most successful when it is credible,namely when:

Accepted Answer

A)  disinflation supersedes inflation. 
B)  the effect of fiscal policy is weakening. 
C)  market participants expect the central bank to carry through its tough stance. 
D)  market participants are uncertain about the current state of the economy. 
A)  disinflation supersedes inflation. 
B)  the effect of fiscal policy is weakening. 
C)  market participants expect the central bank to carry through its tough stance. 
D)  market participants are uncertain about the current state of the economy.

Question 19

A nominal GDP rule requires the Fed to keep the growth rate of M constant.

Accepted Answer

A) True 
 B)False

Question 20

In the short run,if the Federal Reserve responds to a negative real shock with an increase in money supply growth,the inflation rate will increase because of:

Accepted Answer

A)  the real shock only. 
B)  the increase in money growth only. 
C)  both the real shock and the increase in money growth. 
D)  some reason other than the real shock and the increase in money growth. 
A)  the real shock only. 
B)  the increase in money growth only. 
C)  both the real shock and the increase in money growth. 
D)  some reason other than the real shock and the increase in money growth.

Exam 16: Monetary Policy

Which statement is TRUE regarding the effects of monetary policy when a real shock occurs?

Suppose the government subsidizes the price of bananas,making it so low that you buy an enormous number of bananas and store them on your roof.If your roof caves in,it's

Economist Milton Friedman called for a policy rule that keeps the growth rate of the money supply at 3% because:

If initially, M⃗\vec { M }M = 5%, v⃗\vec { v }v = 3%, P⃗\vec { P }P = 2%,and Y⃗R\vec { Y } _ { R }YR​ = 6% and then because of economic uncertainty v⃗\vec { v }v falls to 1%,what should the Fed do?

The Fed can fight the inflationary effects of a negative real shock by decreasing money growth.

If the Federal Reserve wishes to avoid short-run increases in the unemployment rate,the correct response to a negative AD shock would be:

If the Fed reverses course and attempts to reduce inflation,it must be willing to accept lower growth as a consequence.

In the AD-AS model,an increase in money growth will cause the growth rate of real GDP to increase in:

The supporters of discretionary monetary policy want to see the course of the economy guided by certain targets.

A constant money growth rule requires the Fed to ignore changes in velocity.

Disinflation is engineered through monetary expansions.

The housing boom of the 2000s is an example of a negative real shock.

A nominal GDP rule requires the Fed to keep Mv constant.

Which does NOT explain why the 1997-2006 housing boom increased aggregate demand?

Decreasing money growth following a negative real shock allows the Fed to address both higher inflation and higher unemployment that accompanies such shocks.

When a negative shock to aggregate demand occurs,the inflation rate will:

A significant decrease in the rate of inflation is called:

A monetary contraction is most successful when it is credible,namely when:

A nominal GDP rule requires the Fed to keep the growth rate of M constant.

In the short run,if the Federal Reserve responds to a negative real shock with an increase in money supply growth,the inflation rate will increase because of:

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

If initially, $\vec { M }$ = 5%, $\vec { v }$ = 3%, $\vec { P }$ = 2%,and $\vec { Y } _ { R }$ = 6% and then because of economic uncertainty $\vec { v }$ falls to 1%,what should the Fed do?