Deck 13: Monetary Policy

Question 1

The financial problems facing several Eurozone countries have led to all of these EXCEPT:

A) countries considering whether to leave the Eurozone.
B) increased loans by the European Central Bank at favorable terms.
C) nearly half of Eurozone countries defaulting on their debts.
D) slow economic growth in many Eurozone countries.

Answer 1

C

Question 2

A _____ is the most difficult for the Federal Reserve to address because it causes both inflation and unemployment to rise.

A) negative supply shock
B) negative demand shock
C) positive supply shock
D) positive demand shock

Answer 2

A

Question 3

One of the important reasons why many economists prefer monetary policy that uses discretion instead of rules is that it:

A) prevents the Federal Reserve from using excessive expansionary policy to pump up the economy.
B) does a better job at keeping inflation at the long-run target.
C) keeps the money supply steady over the long run.
D) allows monetary policy to be used more aggressively when major economic shocks occur.

Answer 3

D

Question 4

The Taylor rule is 2 + inflation rate + 1/2 output gap + 1/2 inflation gap. If inflation is 3%, output gap is 1%, and the inflation gap is 1%, the target interest rate is:

A) 4%
B) 5%
C) 6%
D) 7%

Question 5

If the Federal Reserve Chair is considered a "dove," this means that she:

A) enjoys bird watching and other leisure activities.
B) places greater emphasis on promoting output than curbing inflation.
C) places greater emphasis on curbing inflation than promoting output.
D) places equal emphasis on promoting output and curbing inflation.

Question 6

If the Federal Reserve increases its purchase of bonds, then the money supply will _____ and aggregate demand will _____.

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

Question 7

The following diagram represents the economy experiencing inflation at point A. If the Federal Reserve wanted to bring the economy back to full employment, it would engage in _____ monetary policy by _____ bonds.

A) expansionary; buying
B) contractionary; buying
C) expansionary; selling
D) contractionary; selling

Question 8

If the economy is in a recession, the Federal Reserve would most likely pursue _____, which causes interest rates to _____.

A) contractionary monetary policy; rise
B) expansionary monetary policy; rise
C) contractionary monetary policy; fall
D) expansionary monetary policy; fall

Question 9

When the Federal Reserve pursues expansionary monetary policy, which of these happens?

A) AD shifts right.
B) AD shifts left.
C) SRAS shifts right.
D) SRAS shifts left.

Question 10

Which of these is NOT a benefit of countries adopting the euro?

A) It becomes easier to address regional differences in economic performance.
B) It reduces transaction costs of doing business across member countries.
C) It promotes cooperation among countries who now share a common monetary policy.
D) It allows the euro to be a major reserve currency.

Question 11

The Taylor rule is 2 + inflation rate + 1/2 output gap + 1/2 inflation gap. If inflation is 1%, output gap is -3%, and the inflation gap is -1%, the target interest rate is:

A) 0%
B) 1%
C) 4%
D) 6%

Question 12

An important reason why the Federal Reserve would not want to keep interest rates at 0% forever is that:

A) it limits the ability of the Fed to use expansionary monetary policy when the next recession occurs.
B) it restricts the money supply, making it harder for banks to lend money.
C) it raises the possibility of higher unemployment because lower interest rates slow economic growth.
D) it makes borrowing for homes and major purchases more expensive.

Question 13

What were the primary causes of the 2007-2009 U.S. financial crisis?

A) high interest rates and easy lending standards
B) high interest rates and tight lending standards
C) low interest rates and easy lending standards
D) low interest rates and tight lending standards

Question 14

According to the equation of exchange, if P × Q = 7 trillion and the money supply is 2 trillion, what is the velocity of money?

A) 3.5
B) 5
C) 9
D) 14

Question 15

Which type of economist would advocate little to no role for the central bank?

A) Keynesians
B) monetarists
C) classical economists
D) progressive economists

Question 16

Which nation was NOT part of the Eurozone when it was introduced in 1999?

A) Germany
B) Luxembourg
C) Portugal
D) Slovenia

Question 17

According to the Taylor rule, what will the Federal Reserve do if output falls below its potential GDP?

A) It will lower its target.
B) It will increase its target.
C) It will keep its target the same.
D) It will implement expansionary monetary policy.

Question 18

If the Federal Reserve wishes to raise the interest rate, what does it need to do?

A) buy bonds from banks using money it creates electronically
B) buy bonds from banks while reducing the money supply
C) sell bonds to banks while creating money electronically
D) sell bonds to banks while reducing the money supply

Question 19

The twin goals of monetary policy are:

A) low taxes and stable prices.
B) economic growth and stable prices.
C) economic growth and low taxes.
D) low taxes and high government spending.

Question 20

If the economy is currently operating below long-run output, what should the Federal Reserve do?

A) set interest rates at exactly 2%
B) lower interest rates from their current level
C) raise interest rates from their current level
D) leave interest rates alone

Question 21

The dramatic collapse in the price of technology stocks in 2001-2003, coupled with a short recession in 2001, caused the Federal Reserve to _____ interest rates to stimulate _____.

A) raise; employment
B) lower; employment
C) raise; prices
D) lower; prices

Question 22

Monetary policy deals with how:

A) the money supply is controlled to target interest rates.
B) the money supply is controlled to target specific prices.
C) taxes, government transfer payments, and government spending are controlled to target unemployment.
D) taxes, government transfer payments, and government spending are controlled to target interest rates.

Question 23

If the economy is facing inflationary pressures, the Federal Reserve will:

A) raise taxes.
B) raise interest rates.
C) lower interest rates.
D) decrease government spending.

Question 24

Suppose a news article reports, "Dismal jobs report suggests the Federal Reserve will lower interest rates." If the Fed does lower interest rates, the dollar will _____ against foreign currencies, and U.S. goods will become _____ for foreigners.

A) rise; more expensive
B) rise; cheaper
C) fall; more expensive
D) fall; cheaper

Question 25

In May 2013, Brazilian President Dilma Rousseff said she would ensure that Brazil's central bank had the autonomy to do what was needed to tame inflation. Brazil's central bank would have to pursue a(n) _____ monetary policy. As a result, the dollar would _____ against the real (Brazil's currency), making U.S. exports to Brazil _____.

A) expansionary; rise; more expensive
B) expansionary; fall; cheaper
C) tight; rise; more expensive
D) tight; fall; cheaper

Question 26

If monetary policy is tight:

A) the dollar will rise.
B) it will become easier for businesses to obtain loans.
C) U.S. exports will increase.
D) U.S. imports will decline.

Question 27

If the unemployment rate is 4.5% and the inflation rate is 6%, the Federal Reserve will most likely:

A) lower the discount rate.
B) buy bonds.
C) lower the reserve requirement.
D) sell bonds.

Question 28

If the unemployment rate is 10% and the inflation rate is 2%, the Federal Reserve will most likely:

A) raise the discount rate.
B) buy bonds.
C) lower the reserve requirement.
D) sell bonds.

Question 29

The peak of Internet growth in 1998-1999 led to inflationary pressures and _____, and the Federal Reserve responded by _____ interest rates.

A) economic growth; lowering
B) economic growth; raising
C) unemployment; raising
D) unemployment; lowering

Question 30

A higher interest rate _____ consumption, investment, and _____, which _____ aggregate demand.

A) decreases; exports; decreases
B) decreases; imports; decreases
C) increases; exports; increases
D) increases; imports; increases

Question 31

Which action is the Federal Reserve MOST likely to take to curb inflation?

A) lower the discount rate
B) lower reserve requirements
C) raise taxes
D) sell securities in the open market

Question 32

Which group is MOST likely to favor a tight monetary policy?

A) importers
B) borrowers
C) car dealers
D) home builders

Question 33

If the Federal Reserve pursues an expansionary monetary policy:

A) the dollar will rise.
B) U.S. imports from other countries will rise.
C) U.S. exports to other countries will rise.
D) aggregate supply will increase.

Question 34

Fill in the blanks in this imaginary news article: "The value of the Indian rupee _____ in response to the Federal Reserve's announcement that it would continue its economic stimulus, making Indian exports to the U.S. _____."

A) increased; drop
B) increased; rise
C) decreased; drop
D) decreased; rise

Question 35

If the economy has high levels of unemployment, the Federal Reserve will:

A) lower taxes.
B) raise interest rates.
C) reduce interest rates.
D) increase government spending.

Question 36

A lower interest rate increases consumption, investment, and _____, which _____ aggregate demand.

A) imports; increases
B) imports; decreases
C) exports; increases
D) exports; decreases

Question 37

When the housing bubble collapsed in 2007, _____ rose significantly, and the Federal Reserve _____ interest rates.

A) inflation; increased
B) unemployment; increased
C) unemployment; lowered
D) inflation; lowered

Question 38

The Federal Reserve uses its tools to counteract:

A) booms.
B) recessions.
C) booms and recessions.
D) depressions.

Question 39

The twin goals of monetary policy are:

A) economic growth with low unemployment and stable prices with moderate short-term interest rates.
B) economic growth with low unemployment and falling prices with low long-term interest rates.
C) economic growth with low unemployment and stable prices with moderate long-term interest rates.
D) economic growth with moderate unemployment and stable prices with low long-term interest rates.

Question 40

The housing bubble of 2004-2006 caused _____ pressures, leading the Federal Reserve to _____ interest rates.

A) deflationary; raise
B) deflationary; lower
C) inflationary; lower
D) inflationary; raise

Question 41

The housing bubble collapsed from:

A) 1988 to 1999.
B) 2001 to 2003.
C) 2004 to 2006.
D) 2007 to 2009.

Question 42

When the value of the dollar rises, exports _____ and imports _____.

A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Question 43

Tightening monetary policy causes interest rates to _____ and aggregate _____ to _____.

A) fall; demand; increase
B) rise; supply; decrease
C) rise; demand; decrease
D) fall; supply; increase

Question 44

In times of economic downturn, the Federal Reserve will engage in _____ monetary policy by _____ bonds.

A) contractionary; buying
B) contractionary; selling
C) expansionary; selling
D) expansionary; buying

Question 45

A reduction in the interest rate causes consumption and investment to _____, which shifts the aggregate demand curve _____.

A) rise; rightward
B) rise; leftward
C) fall; rightward
D) fall; leftward

Question 46

When current real output exceeds potential real output, the Federal Reserve will _____ interest rates in an effort to fight _____.

A) increase; a recession
B) decrease; a recession
C) decrease; inflation
D) increase; inflation

Question 47

When interest rates rise, exports _____ and imports _____.

A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Question 48

Which statement correctly describes the sequence that explains how a contractionary monetary policy impacts an economy?

A) The policy lowers interest rates; lower interest rates increase investment; higher investment increases aggregate demand, which impacts output and the price level.
B) The policy lowers interest rates; lower interest rates discourage investment; lower investment decreases aggregate demand, which impacts output and the price level.
C) The policy raises interest rates; higher interest rates reduce spending; lower spending reduces aggregate demand, which impacts output and the price level.
D) The policy raises interest rates; higher interest rates attract more savings; higher savings fuels investment growth which raises aggregate demand, which impacts output and the price level.

Question 49

The price of technology stocks collapsed dramatically from:

A) 1988 to 1999.
B) 2001to 2003.
C) 2004 to 2006.
D) 2007 to 2009.

Question 50

Loosening monetary policy causes interest rates to ____, and consumption and investment to ____.

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

Question 51

An increase in the interest rate causes the aggregate _____ curve to shift _____.

A) demand; rightward
B) demand; leftward
C) supply; rightward
D) supply; leftward

Question 52

During 2010-2013, the United States underwent a _____ economic recovery with _____.

A) rapid; low unemployment
B) slow; persistent unemployment
C) rapid; high inflation
D) slow; falling prices

Question 53

When the interest rate falls, American bonds become _____ attractive to foreign investors, often leading to a(n) _____ in the value of the U.S. dollar in foreign exchange markets.

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

Question 54

Which statement correctly describes the sequence that explains how an expansionary monetary policy impacts an economy?

A) The policy lowers interest rates; lower interest rates increase investment; higher investment increases aggregate demand, which impacts output and the price level.
B) The policy lowers interest rates; lower interest rates discourage investment; lower investment decreases aggregate demand, which impacts output and the price level.
C) The policy raises interest rates; higher interest rates reduce spending; lower spending reduces aggregate demand, which impacts output and the price level.
D) The policy raises interest rates; higher interest rates attract more savings; higher savings fuels investment growth, which raises aggregate demand, which impacts output and the price level.

Question 55

When the Federal Reserve increases excess reserves to reduce interest rates and stimulate spending, it is said to engage in:

A) tight money policy.
B) expansionary fiscal policy.
C) expansionary monetary policy.
D) restrictive policy.

Question 56

Which result is NOT expected when the Federal Reserve lowers its federal funds target rate?

A) increased investment
B) increased consumption of durable goods
C) decreased exports
D) decreased imports

Question 57

The peak of Internet growth, when new "dot.com" companies sprouted up daily, occurred during:

A) 1988-1999.
B) 2001-2003.
C) 2004-2006.
D) 2007-2009.

Question 58

When the interest rate falls, the value of the U.S. dollar in foreign exchange markets tends to _____ and net exports tend to _____.

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

Question 59

The housing bubble occurred from:

A) 1988 to 1999.
B) 2001 to 2003.
C) 2004 to 2006.
D) 2007 2009.

Question 60

Suppose the Federal Reserve raises interest rates. Which situation would MOST likely trigger such a policy move?

A) The U.S. dollar had appreciated and inflation was high.
B) The U.S. dollar had depreciated and inflation was high.
C) The U.S. dollar had appreciated and unemployment was high.
D) The U.S. dollar had appreciated and unemployment was high.

Question 61

Which of these fiscal items is NOT a component in the equation of exchange in classical economics?

A) price level
B) money supply
C) output of the economy
D) unemployment rate

Question 62

According to the equation of exchange, the long-run effect of a doubling of the money supply would be that:

A) both prices and real GDP double.
B) the economy grows with little inflation.
C) the price level is halved and real GDP doubles.
D) prices double and real GDP is unchanged.

Question 63

Which of these is an alternative countercyclical policy to a tight money policy if the policy goal is to reduce inflation?

A) increase taxes
B) reduce the money supply
C) raise government purchases
D) reduce taxes

Question 64

In the equation of exchange, if M = $2 trillion, P = 1.5, and Q = $8 trillion:

A) the velocity of money (V) = 6.
B) nominal GDP is $16 trillion.
C) the velocity of money (V) = 4.
D) real GDP is $12 trillion.

Question 65

In the classical monetary transmission mechanism, any change in _____ will bring about _____.

A) M; changes in interest rates
B) M; a direct proportionate change in P
C) V; a direct proportionate change in Q
D) M or V; changes in P

Question 66

When the long-run aggregate supply curve is drawn as a vertical line, the theorist is assuming that:

A) the economy tends to move toward full employment in the long run.
B) the economy tends to produce stable prices in the long run.
C) the economy is stagnating at a low level of growth.
D) shifting aggregate demand can change the level of employment in the long run.

Question 67

Which policy would cause a reduction in both bank reserves and aggregate demand?

A) a reduction in the discount rate
B) the Federal Reserve purchasing government securities in the open market
C) a reduction in taxes
D) an increase in the reserve requirement

Question 68

The money illusion:

A) is the misperception that prices have changed; it occurs when the Federal Reserve reduces the money supply.
B) occurs when output rises.
C) is the distinguishing factor between the short run and the long run.
D) is the misperception that one is wealthier; it occurs when the money supply grows.

Question 69

The idea that a change in the money supply would affect prices but not real GDP is associated with the:

A) monetary equivalence theory.
B) law of unintended consequences.
C) classical monetary transmission mechanism.
D) GDP impossibility rule.

Question 70

Which of these is an alternative countercyclical policy to a loose money policy if the policy goal is to reduce short-run unemployment?

A) increase taxes
B) reduce the money supply
C) cut government purchases
D) reduce taxes

Question 71

Which statement is a characteristic of the quantity theory of money?

A) It is focused on the short run.
B) It assumes that prices and interest rates are sticky.
C) It is a product of the classical school of economics.
D) It assumes money is used for both transactions and savings.

Question 72

Keynesian theory:

A) states that open market operations and an increase in the money supply lead people to buy bonds, causing bond prices to rise and interest rates to fall, and increase the investment component of aggregate demand.
B) states that changes in the money supply have no impact on GDP in either the short or long run.
C) is the same as the classical transmission mechanism in all essential elements.
D) states that an increase in the money supply will lower interest rates and thereby shift the long-run aggregate supply curve to the right.

Question 73

In the equation of exchange, the term P × Q is the same as:

A) real GDP.
B) nominal GDP.
C) the money supply.
D) national income.

Question 74

Which statement about the classical money transmission mechanism is false?

A) The quantity theory provides a good explanation of the short-run impact of monetary growth.
B) The quantity theory provides a good explanation of the long-run impact of monetary growth.
C) Changes in the money supply typically affect prices before equilibrium can be reestablished.
D) People typically respond to money supply changes by making more or fewer purchases of goods and services.

Question 75

Assuming full employment in the classical model, if velocity increases and the government wants stable prices, the government should:

A) increase the money supply.
B) decrease the money supply.
C) do nothing.
D) increase government spending.

Question 76

The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called:

A) the liquidity trap.
B) the horizontality of demand.
C) the sterilization of money.
D) monetary incapacitation.

Question 77

In the equation of exchange, if M = $1.5 trillion, V = 7, and P = 1.05, then:

A) nominal GDP is $10 trillion.
B) Q = $10 trillion.
C) Q = $10.5 trillion.
D) real GDP is $10.5 trillion.

Question 78

In the long run, when the economy is at full employment, any change in money supply:

A) leads to a change in velocity only.
B) leads to a change in aggregate output only.
C) leads to a change in prices.
D) is brought about by a change in tax policy.

Question 79

The short-run aggregate supply curve is _____ and the long-run aggregate supply curve is _____.

A) vertical; upward sloping
B) horizontal; vertical
C) vertical; horizontal
D) upward sloping; vertical

Question 80

Suppose the central bank raises interest rates. Which statement is a logical explanation of how this will impact aggregate demand?

A) Higher interest rates attract funding from abroad, which provides an injection into the country's economy, raising aggregate demand.
B) Higher interest rates create a greater incentive for investments, which increases aggregate demand.
C) Higher interest rates cause an increase in savings and government spending, which leads to a reduction in aggregate demand.
D) Higher interest rates cause reductions in investment in capital and houses, which reduce aggregate demand.