Question 1

With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would

Accepted Answer

A)   decrease.
B)   increase.
C)   not change.
D)   decrease or increase depending on economic conditions.

Question 2

Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve's open market sale of Treasury securities.

Accepted Answer

An open market sale of Treasur...

Question 3

The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as

Accepted Answer

A)   the Taylor rule.
B)   a liquidity trap.
C)   a zero-sum game.
D)   an interest rate panic.

Question 4

In 2008, the Treasury and Federal Reserve took several actions in response to the deepening financial crisis. One action was that the Fed announced it would loan up to $200 billion of Treasury securities in exchange for

Accepted Answer

A)   stock.
B)   mortgage-backed securities.
C)   corporate bonds.
D)   required bank reserves.

Question 5

The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of ________, it also can achieve the goal of ________ simultaneously.

Accepted Answer

A)   high employment; economic growth
B)   high employment; lowering government spending
C)   economic growth; a low current account deficit
D)   stability of financial markets; a low current account deficit

Question 6

The Fed

Accepted Answer

A)   can easily distinguish the minor ups and downs of the economy from a recession.
B)   can have difficulty distinguishing the minor ups and downs of the economy from a recession.
C)   always times its policy responses correctly.
D)   can easily determine if a drop in production means a recession is inevitable.

Question 7

The relationship between GDP and the money supply has gotten stronger since the 1980s.

Accepted Answer

A) True 
 B)False

Question 8

Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.

Accepted Answer

A)   will be greater than
B)   will be less than
C)   will be the same as
D)   may be greater than or less than

Question 9

Figure 26-7 
-Refer to Figure 26-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the basic AD-AS model in the figure above, this would be depicted as a movement from

Accepted Answer

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

Question 10

When Congress established the Federal Reserve in 1913, what was its main responsibility? When did Congress broaden the Fed's responsibilities?

Accepted Answer

When Congress established the Fed in 191...

Question 11

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 12

Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2001 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession?

Accepted Answer

The inflation rate responds differently ...

Question 13

An increase in the demand for Treasury bills will

Accepted Answer

A)   decrease the price of Treasury bills.
B)   decrease the interest rate on Treasury bills.
C)   increase the opportunity cost of holding money.
D)   eventually cause households to hold less money.

Question 14

Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.

Accepted Answer

A)   buy; up
B)   buy; down
C)   sell; up
D)   sell; down

Question 15

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely

Accepted Answer

A)   decrease interest rates.
B)   increase interest rates.
C)   decrease income tax rates.
D)   increase income tax rates.

Question 16

By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

Accepted Answer

A)   sub-prime; "Alt-A"
B)   adjustable rate; shadow-banking
C)   "credit crunch"; black market
D)   "fresh-start"; prime rate

Question 17

List the Fed's four main monetary policy goals.

Accepted Answer

1. Price stability
2. High emp...

Question 18

An increase in real GDP

Accepted Answer

A)   increases the buying and selling of goods and increases the demand for money as a medium of exchange.
B)   increases the buying and selling of goods and decreases the demand for money as a medium of exchange.
C)   decreases the buying and selling of goods and increases the demand for money as a medium of exchange.
D)   decreases the buying and selling of goods and decreases the demand for money as a medium of exchange.

Question 19

The federal funds rate

Accepted Answer

A)   is determined administratively by the Fed.
B)   is determined by the supply of and demand for bank reserves.
C)   is determined directly by household demand for funds.
D)   is determined directly by firm demand for funds.

Question 20

A decrease in real GDP can

Accepted Answer

A)   shift money demand to the right and decrease the interest rate.
B)   shift money demand to the right and increase the interest rate.
C)   shift money demand to the left and decrease the interest rate.
D)   shift money demand to the left and increase the interest rate.

Exam 26: Monetary Policy

An increase in real GDP

Correct AnswerverifiedShow Answer

With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would

Correct AnswerverifiedShow Answer

An increase in the demand for Treasury bills will

Correct AnswerverifiedShow Answer

Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.

Correct AnswerverifiedShow Answer

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely

Correct AnswerverifiedShow Answer

The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of ________, it also can achieve the goal of ________ simultaneously.

Correct AnswerverifiedShow Answer

The relationship between GDP and the money supply has gotten stronger since the 1980s.

Correct AnswerverifiedShow Answer

A decrease in real GDP can

Correct AnswerverifiedShow Answer

The Fed

Correct AnswerverifiedShow Answer

List the Fed's four main monetary policy goals.

Correct Answerverified1. Price stability2. High emp...View AnswerShow Answer

The federal funds rate

Correct AnswerverifiedShow Answer

Figure 26-7 -Refer to Figure 26-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the basic AD-AS model in the figure above, this would be depicted as a movement from

Correct AnswerverifiedShow Answer

In 2008, the Treasury and Federal Reserve took several actions in response to the deepening financial crisis. One action was that the Fed announced it would loan up to $200 billion of Treasury securities in exchange for

Correct AnswerverifiedShow Answer

By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

Correct AnswerverifiedShow Answer

When Congress established the Federal Reserve in 1913, what was its main responsibility? When did Congress broaden the Fed's responsibilities?

Correct AnswerverifiedWhen Congress established the Fed in 191...View AnswerShow Answer

Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2001 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession?

Correct AnswerverifiedThe inflation rate responds differently ...View AnswerShow Answer

Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.

Correct AnswerverifiedShow Answer

The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as

Correct AnswerverifiedShow Answer

Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve's open market sale of Treasury securities.

Correct AnswerverifiedAn open market sale of Treasur...View AnswerShow Answer

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 ________.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Suppose the Fed decreases the money supply. In response households and firms will short term assets and this will drive interest rates.

Correct Answer
verified

Correct Answer
verified

The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of , it also can achieve the goal of simultaneously.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
1. Price stability
2. High emp...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to borrowers with flawed credit histories and borrowers who did not document their incomes.

Correct Answer
verified

Correct Answer
verified
When Congress established the Fed in 191...
View Answer

Correct Answer
verified
The inflation rate responds differently ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
An open market sale of Treasur...
View Answer

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 .

Correct Answer
verified