Deck 33: Transmission and Amplification Mechanisms

Question 1

A negative shock to AD will cause the inflation rate to increase in

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.

Answer 1

D

Question 2

Figure: Monetary Policy Reference: Ref 16-1 (Figure: Monetary Policy) Assume that the economy is initially at Point Y. If the Fed takes the appropriate action with monetary policy, but overestimates how serious the recession is

A) the Solow growth curve would shift to the left.
B) the Fed would take the economy to Point X.
C) the Fed would fail to stimulate the economy and it would remain at Point Y.
D) the Fed would overshoot and the economy would move to Point W.

Answer 2

D

Question 3

Figure: Monetary Policy Reference: Ref 16-1 (Figure: Monetary Policy) Assume that the economy is initially at Point Y. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend,

A) the Fed action would be magnified and the economy would move to Point X.
B) the Fed action would be nullified and the economy would remain at Point Y.
C) the Fed action would be partially effective and the economy would move to Point Z.
D) the Solow growth curve would shift to the left.

Answer 3

C

Question 4

Which of the following is a tool that the Federal Reserve can use to influence AD?

A) open-market operations
B) lending to banks and other financial institutions
C) changes in reserve requirements and the interest rate paid on reserves
D) Each of these answers is correct.

Question 5

What is a possible reason for the Fed's inability to prevent a recession?

A) The Fed has too much power over M1 and M2 and can flood the money supply.
B) Much of the data about the economy is unknown when the Fed is making policy.
C) Firms and individuals do not often understand the goals of the Fed.
D) The Fed often performs complex and conflicting maneuvers at the same time.

Question 6

A negative shock to AD will cause the growth rate of real GDP to increase in

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 7

Suppose the Fed reacts to an economic shock and quickly restores the economy to the Solow growth rate. The shock is most likely

A) an aggregate demand shock.
B) a real shock.
C) a productivity shock.
D) a shock affecting consumer and investor expectations.

Question 8

The economy is growing at the Solow growth rate of 3 percent with an inflation rate of 4 percent. If a positive aggregate demand shock occurs and the Fed responds by decreasing the money supply but fails to offset the aggregate demand shock, then in the short run

A) the real growth rate will be 3 percent, and the inflation rate will be 4 percent.
B) the real growth rate will be lower than 3 percent, and the inflation rate will be lower than 4 percent.
C) the real growth rate will be higher than 3 percent and the inflation rate will be lower than 4 percent.
D) the real growth rate will be higher than 3 percent and the inflation rate will be higher than 4 percent.

Question 9

How can the Fed offset a positive shock to aggregate demand?

A) Increase the growth rate of the money supply.
B) Decrease the growth rate of the money supply.
C) Increase the growth rate of government spending.
D) Decrease the growth rate of government spending.

Question 10

Figure: Monetary Policy and Demand Shocks Reference: Ref 16-2 (Figure: Monetary Policy and Demand Shocks) The original real growth rate of the economy was 3 percent when a negative aggregate demand shock caused a shift of the AD curve from AD1 to AD2. As a result of the Fed's policy response, the AD curve shifted to AD5 in the short run. Which of the following is TRUE about the Fed's policy response?

A) The Fed responded too little to the shock.
B) The Fed responded too much to the shock.
C) The Fed provided just the right amount of response to the shock.
D) The Fed was too fast in responding to the shock.

Question 11

When aggregate demand decreases, the Fed will want to use its policy tools to

A) keep aggregate demand lower until wages catch up.
B) quickly bring aggregate demand back to its original position.
C) push aggregate demand higher than it was originally to make up for lost growth potential.
D) None of these answers is correct.

Question 12

Figure: Monetary Policy Reference: Ref 16-1 (Figure: Monetary Policy) Assume that the economy is initially at Point Y. In the best case scenario, the Fed will

A) increase money supply to take the economy to Point X.
B) decrease money supply to take the economy to Point W.
C) increase money supply to take the economy to Point W.
D) decrease money supply to take the economy to Point X.

Question 13

An increase in the money supply can typically affect the economy with a lag of

A) 2-3 months.
B) 4-10 months.
C) 6-18 months.
D) 10-24 months.

Question 14

The Fed's job in manipulating monetary policy is made harder by the fact that

A) monetary authorities do not have a good understanding of how monetary policy works.
B) monetary policy is usually pulling the economy in the opposite direction from fiscal policy.
C) the Fed operates in real time and information on recessions becomes available with a lag.
D) monetary policy is hardly ever effective in influencing business fluctuations.

Question 15

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

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

Question 16

In the dynamic AD-AS diagram, an increase in the growth rate of the money supply causes

A) a shift of the aggregate demand curve to the left.
B) a shift of the aggregate demand curve to the right.
C) a downward movement along the aggregate demand curve.
D) an upward movement along the aggregate demand curve.

Question 17

When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence?

A) Inflation remains high.
B) Growth stays positive.
C) Interest rates continue to rise.
D) Unemployment is high.

Question 18

Figure: Monetary Policy and Demand Shocks Reference: Ref 16-2 (Figure: Monetary Policy and Demand Shocks) The real growth rate in this economy is 3 percent when a positive aggregate demand shock shifts the AD curve from AD1 to AD4. The correct monetary policy response is to

A) reduce money supply growth, so that the AD curve shifts back to AD1.
B) reduce money supply growth, so that the AD curve remains at AD4.
C) increase money supply growth, so that the AD curve shifts to AD3.
D) increase money supply growth, so that the AD curve shifts to AD5.

Question 19

If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by

A) decreasing money supply to spur the economy out of the recession.
B) increasing money supply, lowering real interest rates, and encouraging borrowing.
C) increasing government expenditures to spur the economy out of the recession.
D) decreasing corporate taxes to encourage firms to increase their spending.

Question 20

In the best case scenario, the Federal Reserve is most successful at counteracting a negative

A) AD shock.
B) SRAS shock.
C) shock to the Solow growth curve.
D) None of the answers is correct.

Question 21

What philosophy of economic adjustment is against tying the hands of the central bank?

A) rules
B) discretion
C) prudence
D) inclination

Question 22

Economists who believe that the Federal Reserve is likely to make lots of mistakes in the implementation of monetary policy believe

A) in monetary policy discretion.
B) in monetary policy run by the federal government.
C) in monetary policy rules.
D) that the Federal Reserve should be abolished.

Question 23

A potential problem with expansionary monetary policy is that banks can

A) be loaned up prior to open-market operations.
B) be unwilling to lend.
C) decide that a recession is best for the economy.
D) Each of these answers is correct.

Question 24

The first signs of trouble in the subprime mortgage market came in August of

A) 2006.
B) 2007.
C) 2008.
D) 2009.

Question 25

What happens to GDP if the Fed is too responsive to changes in aggregate demand?

A) Volatility increases.
B) Volatility decreases.
C) GDP is difficult to influence in the short-run and the long- run.
D) It ends up being lower in all cases.

Question 26

Monetary policy rules are risky because I. the severity and nature of economic fluctuations are unpredictable. II. Fed Chairs have counseled against the use of rules to influence the economy. III. unexpected shocks may occur that require emergency action by the Fed.

A) I only
B) I and III only
C) II and III only
D) I, II, and III

Question 27

What was Milton Friedman's reasoning behind the 3 percent growth rule for money supply?

A) monetary neutrality
B) increasing long-run economic growth rates
C) minimization of negative supply shocks
D) price stability

Question 28

An economy where the Central Bank overstimulates aggregate demand will suffer from

A) inflation.
B) unemployment.
C) increases in money supply.
D) deflation.

Question 29

The problem associated with too much expansionary monetary policy is

A) additional inflation.
B) additional unemployment.
C) higher interest rates.
D) reduced economic growth.

Question 30

What kind of monetary policy rule did Milton Friedman advocate?

A) The money supply should increase by 3 percent each year.
B) Prices should increase by 3 percent each year.
C) Economic growth should be 3 percent every year.
D) Long-run economic growth should be 3 percent.

Question 31

Which of the following would be an example of running monetary policy by rules?

A) A 5 percent increase in money supply automatically leads to a 2 percent increase in real GDP.
B) An increase in money supply automatically leads to an increase in inflation.
C) The Fed will increase money growth to different levels, depending on the severity of the recession.
D) A 1 percent drop in real GDP will automatically elicit a 2 percent increase in money supply.

Question 32

Milton Friedman recommended a monetary policy rule by which the

A) interest rate increases 3 percent each year.
B) unemployment rate increases 3 percent each year.
C) money supply increases 3 percent each year.
D) government deficit increases 3 percent each year.

Question 33

According to Milton Friedman, if the Solow growth rate is 3 percent, then the Fed should set the annual money growth rate at

A) 3 percent.
B) less than 3 percent.
C) more than 3 percent.
D) approximately 3 percent, depending on the shocks.

Question 34

If the Fed sets a target rate of inflation below 4 percent, it is an example of the Fed using

A) a monetary policy rule.
B) discretion.
C) unofficial influence.
D) the bully pulpit.

Question 35

The lags associated with monetary policy make its implementation more difficult during

A) recessions only.
B) contractions only.
C) both expansions and contractions.
D) None of the answers is correct.

Question 36

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

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 37

Because the Fed can easily provide too much or too little response to economic shocks, economists advocate

A) policy discretion.
B) policy rules.
C) no response to any shock.
D) a wait-and-see policy.

Question 38

What strict rule did Milton Friedman believe would provide for greater price stability?

A) GDP should not go above 5 percent.
B) Unemployment should never be above 10 percent.
C) Inflation should stay below 3 percent a year.
D) Money supply should grow by 3 percent annually.

Question 39

When a central bank reacts the same way to a shock every time, it is likely using

A) policy discretion.
B) a policy rule.
C) a bandwagon policy.
D) a wait-and-see policy.

Question 40

An increase in money growth will cause the inflation rate to increase in

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 41

What do many economists think contributed to the over 13 percent inflation rates experienced by the United States in the 1980s?

A) The Fed was inflexible in its rule of 3 percent growth.
B) The Fed did not do enough to increase money supply.
C) The Fed overstimulated the economy with too much money in the 1970s.
D) The Fed did not react to the oil shocks of the 1970s.

Question 42

Reference: Ref 16-3 (Table: Annual Inflation) This table shows inflation data for an economy. During what period did it experience disinflation?

A) 2001 to 2002
B) 2003 to 2005
C) 2005 to 2006
D) 1998 to 2000

Question 43

A decrease in the price level is called

A) reversing course.
B) Volcker's regret.
C) disinflation.
D) deflation.

Question 44

If a country's central bank becomes more credible and announces a monetary contraction in advance, then

A) more firms will invest now before the threat materializes.
B) slower wages will fall.
C) wages will rise in anticipation of the fall in incomes.
D) unemployment costs will be lower.

Question 45

Monetary policy can be difficult for the Fed to design because of I. the political pressure from Congress. II. changing market expectations and confidence. III. imprecise data about the sizes of shocks and policy responses.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 46

The disinflation of the 1980s led to

A) high unemployment.
B) sticky wages and prices.
C) reduced credibility for the Federal Reserve.
D) Each of these answers is correct.

Question 47

The Fed dealt with high inflation in the 1980s by

A) reducing the money supply and causing aggregate demand to fall.
B) raising the money supply and causing aggregate demand to rise.
C) reducing the money supply and causing aggregate demand to rise.
D) raising the money supply and causing aggregate demand to fall.

Question 48

A reduction in the rate of inflation is called

A) deflation.
B) disinflation.
C) stagflation.
D) devaluation.

Question 49

Why do many people think that the Fed overstimulated the money supply in the 1970s?

A) because of a presidential dictate to do so
B) to induce a recession
C) because of the unemployment associated with the oil crises
D) because it was trying to control inflation

Question 50

When people believe that a central bank will stick with its policy, monetary policy is likely to have

A) high credibility.
B) low credibility.
C) a high bandwagon effect.
D) a low bandwagon effect.

Question 51

Which of the following best describes U.S. economic conditions in the 1980s?

A) Deflation occurred because the Fed reacted too much to AD shocks.
B) High inflation occurred because the Fed reacted too little to AD shocks.
C) High real growth occurred because of the deliberate actions of the Fed.
D) Disinflation occurred because of the deliberate actions of the Fed.

Question 52

When the Fed reacts to a positive aggregate demand shock, which of the following is likely to make the period of disinflation shorter? I. credibility on the part of the Fed II. higher uncertainty about investment returns III. greater nominal wage flexibility

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 53

If a central bank wishes to reduce inflation, it should announce its intentions and follow through with them, thereby using _________ monetary policy.

A) visible
B) integral
C) credible
D) authoritative

Question 54

Under Paul Volcker the Fed reduced the inflation rate in the early 1980s by over 10 percent causing

A) unemployment to decrease and a severe recession to take place.
B) housing prices to soar and interest rates to remain high.
C) GDP growth rise to 6 percent and consumer confidence to grow.
D) None of the answers is correct.

Question 55

Disinflation occurs when the Fed

A) raises the growth rate of the money supply.
B) reduces the growth rate of the money supply.
C) sets the money supply growth rate above the inflation rate.
D) does nothing when a shock occurs.

Question 56

What is the difference between disinflation and deflation?

A) Disinflation is a smaller increase in prices, whereas deflation is a decrease in prices.
B) Deflation is a smaller increase in prices, whereas disinflation is a decrease in prices.
C) The Fed can engineer disinflation but not deflation.
D) There is no difference between disinflation and deflation.

Question 57

Reference: Ref 16-3 (Table: Annual Inflation) This table shows inflation data for an economy. During what period did it experience deflation?

A) 2003 to 2005
B) 2005 to 2006
C) 1998 to 2000
D) 2000 to 2002

Question 58

When the price level actually falls, what is the economy experiencing?

A) deflation
B) disinflation
C) stagflation
D) devaluation

Question 59

A reduction in the rate of inflation is called

A) reversing course.
B) Volcker's regret.
C) disinflation.
D) deflation.

Question 60

The disinflation experiment reduced inflation in the United States but at the cost of

A) an increase in the long-run growth rate of the economy.
B) high unemployment.
C) high inflation.
D) deflation.

Question 61

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

A) Monetary policy can always be used to simultaneously achieve a high real growth rate and a low 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 62

Why is monetary policy not fully effective in combating a negative supply shock?

A) The Fed has no tools that stimulate an economy after a negative supply shock.
B) When countering a negative supply shock, Fed action will cause deflation.
C) When countering a negative supply shock, Fed action will raise unemployment.
D) When countering a negative supply shock, Fed action will raise inflation.

Question 63

If the Fed reacts to a series of negative real shocks by raising money growth every time,

A) the inflation rate will increase over time.
B) the inflation rate will decrease over time.
C) deflation will occur.
D) the inflation rate will remain unchanged.

Question 64

In the short run, if the Fed responds to a negative real shock by raising the growth rate of money supply, inflation will be

A) lower than the rate without responding to the negative shock.
B) higher than the rate without responding to the negative shock.
C) the same as the rate without responding to the negative shock.
D) lower or higher than the rate without responding to the negative shock, depending on the size of money supply growth.

Question 65

Following the terrorist attacks of September 11, 2001, the Federal Reserve increased

A) its lending to banks.
B) required reserve ratios.
C) open market sales of bonds.
D) the discount rate.

Question 66

Monetary policy works best to counteract

A) negative aggregate demand shocks.
B) negative supply shocks.
C) positive supply shocks.
D) Solow growth shocks.

Question 67

Figure: Negative Supply Shock Reference: Ref 16-4 (Figure: Negative Supply Shock) This economy initially begins at Point A and a negative supply shock takes it to Point Y. Taking the economy back to the Solow growth curve would require.

A) a monetary expansion of 21 percent
B) an inflation rate much greater than 16 percent.
C) an inflation rate of 16 percent.
D) an unemployment rate of-2 percent.

Question 68

When the Fed increases the money supply to counteract a negative real shock

A) growth usually returns to the level it was before the shock.
B) half of the increase is seen in growth and half in inflation.
C) inflation increases a lot and growth increases a little.
D) growth remains stuck at the level of the negative real shock.

Question 69

When hit with a real negative economic shock, the Fed must make its policy choice between

A) too low of a growth rate and too high of an unemployment rate.
B) too low of a growth rate and too high of an inflation rate.
C) too high of a growth rate and too low wages.
D) too high of a growth rate and too low of a savings rate.

Question 70

One of the Fed's greatest powers is its ability to

A) boost market confidence.
B) perfectly control the supply of M1 and M2.
C) help stabilize commodity prices.
D) always keep a nation on its Solow growth curve.

Question 71

If uncertainty causes people to increase their demand for cash at the same time that the Fed raises money supply growth, then the Fed's action will

A) shift the AD curve further to the right.
B) shift the AD curve less to the right.
C) shift the AD curve further to the left.
D) more effectively move the economy back to the old equilibrium point.

Question 72

The bandwagon effect causes investment to be

A) evenly distributed over time.
B) unevenly distributed over time.
C) more responsive to monetary policy changes during recessions.
D) more responsive to monetary policy changes during expansions.

Question 73

If the public's demand for cash increases, the growth rate of the velocity of money will

A) remain unchanged.
B) increase.
C) decrease.
D) become unpredictable.

Question 74

Figure: Negative Supply Shock (Figure: Negative Supply Shock) This economy initially begins at Point A and a negative supply shock takes it to Point Y. If the Fed reacts by increasing money growth by 9 percent, this would take the economy to

A) PointX. B. PointV.
C) PointB.
D) PointA.

Question 75

If the Fed wants to raise real GDP growth by raising money supply growth, which of the following conditions will make monetary policy more effective in raising real GDP growth?

A) Uncertainty causes people to increase their demand for cash.
B) People lose confidence and reduce investment spending.
C) People believe the Fed will abandon its policy.
D) Prices continue to remain very sticky.

Question 76

A significant real shock in an economy can result in I. a leftward shift of the Solow growth curve. II. a leftward shift of the short-run aggregate supply curve. III. consumer pessimism and a leftward shift of the aggregate demand curve.

A) I and II only
B) I and III only
C) II and III only
D) I, II, and III

Question 77

During the 1970s, the Fed often reacted to negative oil shocks by decreasing the money supply and focusing on

A) increasing long-run growth in the economy.
B) reducing inflation.
C) reducing unemployment.
D) raising employment.

Question 78

Monetary policy is

A) equally effective in dealing with real shocks and aggregate demand shocks.
B) more effective in dealing with real shocks than with aggregate demand shocks.
C) less effective in dealing with real shocks than with aggregate demand shocks.
D) totally ineffective in dealing with real shocks or aggregate demand shocks.

Question 79

When uncertainty causes a delay in investment activity, it leads to a

A) scarcity of information.
B) delay in action by the Fed.
C) coordination failure.
D) bandwagon effect.

Question 80

How did the Fed encourage business confidence after the September 11th terrorist attacks?

A) by lowering corporate taxes
B) by reducing money supply
C) by lending billions to banks
D) by putting a moratorium on bank loans