Question 1

A monetary growth rule means that

Accepted Answer

A) the Fed will lower interest rates if it thinks a recession is on the horizon. 
B) the Fed will raise interest rates if it thinks the economy is growing faster than potential. 
C) the money supply should grow at a constant rate. 
D) the money supply should grow in response to economic conditions.

Question 2

Expansionary monetary policy refers to the Fed's increasing the money supply and increasing interest rates to increase real GDP.

Accepted Answer

A) True 
 B)False

Question 3

The federal funds rate is

Accepted Answer

A) the interest rate the Fed charges commercial banks. 
B) the interest rate a bank charges its best customers. 
C) the interest rate banks charge each other for overnight loans. 
D) the interest rate on a Treasury Bill.

Question 4

Rising nominal GDP will increase the demand for money and short-term interest rates.

Accepted Answer

A) True 
 B)False

Question 5

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.

Accepted Answer

A) increase;more 
B) decrease;less 
C) decrease;more 
D) increase;less 
E) increase;similar

Question 6

Suppose that the economy is producing below potential GDP and the Fed implements the correct change in monetary policy,but not until after the economy has passed the trough of the recession.Then

Accepted Answer

A) the Fed's contractionary policy will result in too large of a decrease in GDP. 
B) the Fed's contractionary policy will result in too small of a decrease in GDP. 
C) the Fed's expansionary policy will result in too small of a decrease in GDP. 
D) the Fed's expansionary policy will result in too large of an increase in GDP.

Question 7

Most of the pressure for a monetary growth rule has disappeared because since 1980

Accepted Answer

A) the relationship between movements in the money supply and movements in real GDP and the price level have become much stronger. 
B) the relationship between movements in the money supply and movements in real GDP and the price level have become much weaker. 
C) the relationship between movements in interest rates and movements in real GDP and the price level have become much stronger. 
D) the relationship between movements in interest rates and movements in real GDP and the price level have become much weaker.

Question 8

Suppose you buy a house for $250,000.One year later,the market price for the house has fallen to $200,000.What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent?

Accepted Answer

The answer of Suppose you buy a house for $250,000.One...

Question 9

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve

Accepted Answer

A) does not try to eliminate recessions,but instead focuses on preventing inflation. 
B) can fine tune the economy and realistically hope to keep the economy from experiencing recessions. 
C) cannot realistically fine tune the economy,but seeks to keep recessions shorter and milder than they would otherwise be. 
D) cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions.

Question 10

Under the monetary growth rule proposed by the monetarists,the money supply would grow each year at a constant rate equal to the long-run rate of growth of

Accepted Answer

A) inflation. 
B) real GDP. 
C) interest rates. 
D) employment.

Question 11

Figure 26-3 
-Refer to Figure 26-3.In the figure above,when the money supply shifts from MS1 to MS2,at the interest rate of 3 percent households and firms will

Accepted Answer

A) buy Treasury bills. 
B) sell Treasury bills. 
C) neither buy nor sell Treasury bills. 
D) want to hold more money.

Question 12

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

Question 13

According to the Taylor rule,does the target for the federal funds rate respond differently for an increase in inflation caused by an increase in aggregate demand and for an increase in inflation caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the federal funds rate changes.

Accepted Answer

The answer of According to the Taylor rule,does the target...

Question 14

Write out the expression for the Taylor rule.Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Federal Reserve's target for the federal funds rate.

Accepted Answer

The answer of Write out the expression for the Taylor...

Question 15

Table 26-8
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2013 & \$ 13.5 \text { trillion } & \$ 13.5 \text { trillion } & 142 \
\hline 2014 & 14.0 \text { trillion } & 14.4 \text { trillion } & 150 \
\hline
\end{array}$$
-Refer to Table 26-8.The hypothetical information in the table shows what the values for real GDP and the price level would have been in 2014 if the Federal Reserve did not use monetary policy:
a.If the Fed wanted to keep real GDP at its potential level in 2014,should it have used an expansionary policy or a contractionary policy? Should the trading desk have bought T-bills or sold them?
b.Suppose the Fed's policy was successful in keeping real GDP at its potential level in 2014.State whether each of the following would be higher or lower than if the Fed had taken no action:
(i)Real GDP
(ii)Full-employment real GDP
(iii)The inflation rate
(iv)The unemployment rate
c.Draw an aggregate demand and aggregate supply graph to illustrate your answer.Be sure that your graph contains LRAS curves for 2013 and 2014;SRAS curves 2013 and 2014;AD curve for 2013 and 2014,with and without monetary policy actions;and equilibrium real GDP and the price level in 2014 with and without policy.

Accepted Answer

The answer of Table 26-8
 \[\begin{array} { | c |...

Question 16

Firms that participate in regular open market transactions with ________ are called primary dealers.

Accepted Answer

A) commercial banks 
B) Treasury banks 
C) the Federal Reserve 
D) mortgage lenders

Question 17

If the amount you owe on your house is less than the price of the house,you have

Accepted Answer

A) positive equity in your house. 
B) an adjustable-rate mortgage on your house. 
C) negative equity in your house. 
D) a reverse mortgage on your house.

Question 18

According to the Taylor rule,the Fed should set the target for the federal funds rate equal to the sum of the equilibrium real federal funds rate,the current inflation rate,one-half times the ________,and one-half times the ________.

Accepted Answer

A) interest rate gap;inflation gap 
B) interest rate gap;output gap 
C) inflation gap;output gap 
D) unemployment gap;government-spending gap

Question 19

Monetary policy could be procyclical if the Federal Reserve

Accepted Answer

A) is late recognizing that a recession has begun and conducts expansionary monetary policy. 
B) is quick to recognize that a recession has begun and conducts expansionary monetary policy. 
C) is late recognizing that a recession has begun and does not conduct expansionary monetary policy. 
D) is quick to recognize that a recession has begun and does not conduct expansionary monetary policy.

Question 20

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.

Exam 26: Monetary Policy

A monetary growth rule means that

Expansionary monetary policy refers to the Fed's increasing the money supply and increasing interest rates to increase real GDP.

The federal funds rate is

Rising nominal GDP will increase the demand for money and short-term interest rates.

A decrease in interest rates can the demand for stocks as stocks become relatively attractive investments as compared to bonds.

Suppose that the economy is producing below potential GDP and the Fed implements the correct change in monetary policy,but not until after the economy has passed the trough of the recession.Then

Most of the pressure for a monetary growth rule has disappeared because since 1980

Suppose you buy a house for $250,000.One year later,the market price for the house has fallen to $200,000.What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent?

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve

Under the monetary growth rule proposed by the monetarists,the money supply would grow each year at a constant rate equal to the long-run rate of growth of

Figure 26-3 -Refer to Figure 26-3.In the figure above,when the money supply shifts from MS1 to MS2,at the interest rate of 3 percent households and firms will

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

Write out the expression for the Taylor rule.Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Federal Reserve's target for the federal funds rate.

Firms that participate in regular open market transactions with ________ are called primary dealers.

If the amount you owe on your house is less than the price of the house,you have

According to the Taylor rule,the Fed should set the target for the federal funds rate equal to the sum of the equilibrium real federal funds rate,the current inflation rate,one-half times the ,and one-half times the .

Monetary policy could be procyclical if the Federal Reserve

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?