Question 1

Which of the following correctly describes what the Fed used as monetary targets in the past?

Accepted Answer

A)  The Fed used M1 and M2 as targets after 1993. 
B)  The Fed focused on M1 as a target after deregulation of the financial markets. 
C)  The Fed increased its reliance on interest rate targets since the mid-1990s. 
D)  After 1980 and before the 1990s, the Fed focused on interest rate targets.

Question 2

If the Fed orders an expansionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy:
a. The money supply
b. Interest rates
c. Investment
d. Consumption
e. Net Exports
f. The aggregate demand curve
g. Real GDP
h. The price level

Accepted Answer

The answer of If the Fed orders an expansionary monetary...

Question 3

Consider the Taylor rule for the target of the federal funds rate. Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 3 percent, the current inflation rate is 3 percent, real GDP equals potential real GDP, and the weights are 1/2 for the inflation gap and the output gap. Using the Taylor rule, what does the target for the federal funds rate equal? Next, if the Federal Reserve lowered the target for the inflation rate to 1 percent, how much would the target for the federal funds rate change?

Accepted Answer

The answer of Consider the Taylor rule for the target...

Question 4

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Accepted Answer

A)  Potential GDP is forecasted to be higher than equilibrium GDP. 
B)  Potential GDP is forecasted to be lower than equilibrium GDP. 
C)  Aggregate demand is growing too fast to keep the economy at full employment. 
D)  Aggregate demand is growing too slowly and the economy is in danger of producing GDP above full employment.

Question 5

Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals

Accepted Answer

A)  4 percent. 
B)  6 percent. 
C)  8 percent. 
D)  10 percent.

Question 6

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 7

Monetarists think that the Fed should use ________ as a target when conducting monetary policy.

Accepted Answer

A)  the money supply 
B)  the federal funds rate 
C)  the Treasury bill rate 
D)  the inflation rate 
E)  the unemployment rate

Question 8

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Accepted Answer

The answer of Use a graph to show the effects...

Question 9

Which of the following characterizes the Fed's ability to prevent recessions?

Accepted Answer

A)  The Fed is able to "fine tune" the economy and entirely eliminate recessions. 
B)  The Fed is incapable of changing aggregate demand through its monetary policy tools. 
C)  The Fed is able to keep a recession shorter and milder than it would otherwise be. 
D)  The Fed is able to eliminate the business cycle and achieve absolute price stability.

Question 10

Mortgage lenders often resell mortgages in secondary markets. How might this make lenders act differently than if they intended to hold the mortgages themselves?

Accepted Answer

The answer of Mortgage lenders often resell mortgages in secondary...

Question 11

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed responded?

Accepted Answer

A)  The Fed made investment banks eligible for discount loans. 
B)  The Fed lent investment banks Treasury securities in exchange for mortgage-backed securities. 
C)  The Fed lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves. 
D)  The Fed helped JP Morgan to acquire Bear Stearns, a nearly bankrupt investment bank.

Question 12

Figure 26-14 
-Refer to Figure 26-14. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Accepted Answer

A)  decrease income taxes 
B)  increase the required-reserve ratio 
C)  buy Treasury bills 
D)  sell Treasury bills

Question 13

Figure 26-1 
-Refer to Figure 26-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if

Accepted Answer

A)  real GDP increased. 
B)  the price level decreased. 
C)  the interest rate increased. 
D)  the Federal Reserve sold Treasury securities.

Question 14

In June 2017, the Federal Open Market Committee raised the target for the federal funds rate to a range of 1.00 to 1.25 percent. To keep the federal funds rate in this target band, the Fed set the interest rate it pays on bank reserves to

Accepted Answer

A)  1.00 percent. 
B)  1.125 percent, the mid-point of the target range. 
C)  1.25 percent. 
D)  2.25 percent.

Question 15

Article Summary
With global borrowing costs so low, economic analysts are warning that central banks need to be prepared to set negative interest rates during the next economic downturn. Several central banks in Europe set negative interest rates in 2014, as did the Japanese central bank in 2016, in an attempt to spur lending. The global market value of negative-yielding bonds rose to $8.6 trillion in mid-2017 due to low inflation and increased perceptions of geopolitical risk. The current U.S. economic expansion is the third longest since the 19th century, and credit markets are showing signs of reaching a cyclical peak. According to Harvard professor Kenneth Rogoff, low interest rates this late in an economic cycle are unprecedented, noting that the Fed cut interest rates by an average of 5.5 percentage points in the nine recessions since the 1950s, and this would be impossible today without negative interest rates.

-Refer to the Article Summary. Implementing a negative interest rate policy, as is discussed in the article summary, would be designed to ________ the price level and ________ real GDP.

Accepted Answer

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

Question 16

Figure 26-7 
-Refer to Figure 26-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

Accepted Answer

A)  A to B. 
B)  B to D. 
C)  C to B. 
D)  B to C. 
E)  C to D.

Question 17

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.

Question 18

To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks.

Accepted Answer

A)  the Fed and the Treasury Department 
B)  Fannie Mae and Freddie Mac 
C)  the Securities and Exchange Commission (SE
C)  and the Federal Trade Commission (FT
C)  
D)  ACORN and the Federal Housing Administration (FH
A)

Question 19

By the 2000s, investment banks had become significant participants in the secondary market for mortgages.

Accepted Answer

A) True 
 B)False

Question 20

Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Fed listed in the textbook.

Accepted Answer

A) True 
 B)False

Exam 26: Monetary Policy

Which of the following correctly describes what the Fed used as monetary targets in the past?

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively and real GDP to be relatively .

Monetarists think that the Fed should use ________ as a target when conducting monetary policy.

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Which of the following characterizes the Fed's ability to prevent recessions?

Mortgage lenders often resell mortgages in secondary markets. How might this make lenders act differently than if they intended to hold the mortgages themselves?

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed responded?

Figure 26-14 -Refer to Figure 26-14. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Figure 26-1 -Refer to Figure 26-1. In the figure, the money demand curve would move from Money demand₁ to Money demand₂ if

In June 2017, the Federal Open Market Committee raised the target for the federal funds rate to a range of 1.00 to 1.25 percent. To keep the federal funds rate in this target band, the Fed set the interest rate it pays on bank reserves to

Figure 26-7 -Refer to Figure 26-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

Which of the following statements about inflation targeting is true?

To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks.

By the 2000s, investment banks had become significant participants in the secondary market for mortgages.

Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Fed listed in the textbook.

Exam 26: Monetary Policy

Which of the following correctly describes what the Fed used as monetary targets in the past?

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.

Monetarists think that the Fed should use ________ as a target when conducting monetary policy.

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Which of the following characterizes the Fed's ability to prevent recessions?

Mortgage lenders often resell mortgages in secondary markets. How might this make lenders act differently than if they intended to hold the mortgages themselves?

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed responded?

Figure 26-14 -Refer to Figure 26-14. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Figure 26-1 -Refer to Figure 26-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if

In June 2017, the Federal Open Market Committee raised the target for the federal funds rate to a range of 1.00 to 1.25 percent. To keep the federal funds rate in this target band, the Fed set the interest rate it pays on bank reserves to

Figure 26-7 -Refer to Figure 26-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

Which of the following statements about inflation targeting is true?

To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks.

By the 2000s, investment banks had become significant participants in the secondary market for mortgages.

Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Fed listed in the textbook.

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively and real GDP to be relatively .

Figure 26-1 -Refer to Figure 26-1. In the figure, the money demand curve would move from Money demand₁ to Money demand₂ if