Deck 13: Monetary Policy

Question 1

The long-run aggregate supply curve is upward sloping because of sticky wages and prices.

Answer 1

False

Question 2

Which action by the Federal Reserve is NOT considered to be one of its normal monetary policy tools?

A) buying Treasury securities
B) lowering the federal funds rate
C) making loans to banks at the discount rate
D) buying mortgage-backed securities

Answer 2

buying mortgage-backed securities

Question 3

Suppose a country faces the following situation: inflation rate = 4%; target inflation rate = 2%; current federal funds rate = 3%; and current GDP 4% below full-employment GDP. Which statement correctly describes monetary policy actions that would be recommended according to inflation targeting and the Taylor rule?

A) Inflation targeting would recommend contractionary policy; the Taylor rule would recommend contractionary policy.
B) Inflation targeting would recommend contractionary policy; the Taylor rule would recommend expansionary policy.
C) Inflation targeting would recommend expansionary policy; the Taylor rule would recommend expansionary policy.
D) Inflation targeting would recommend expansionary policy; the Taylor rule would recommend contractionary policy.

Answer 3

Inflation targeting would recommend contractionary policy; the Taylor rule would recommend expansionary policy.

Question 4

Fill in the blanks in this imaginary news article: "The value of the Indian rupee _____ in value against the U.S. dollar 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 5

An increase in the money supply will increase interest rates.

Question 6

From 2008 to 2013, nearly _____ of the Eurozone nations faced some sort of financial crisis.

A) 10%
B) 25%
C) 33%
D) 50%

Question 7

A monetary rule is especially appropriate in the case of a major economic shock.

Question 8

In which situation are people experiencing money illusion?

A) Prices rise 5% while incomes remain unchanged and thus people think their real incomes have not changed.
B) Prices remain unchanged and incomes remain unchanged and thus people think their real incomes have not changed.
C) Prices rise 5% and incomes rise 5% and people think that their real incomes have risen 5%.
D) Prices rise 5% while incomes rise 8% and people think that their real incomes have risen 3%.

Question 9

If inflation is too high, the Federal Reserve will raise taxes to reduce spending.

Question 10

The Federal Reserve's transparency helps the public to understand why it makes particular decisions and also what it will probably do in similar circumstances in the future.

Question 11

Suppose an economy faces the following situation: current federal funds rate = 2%; inflation rate = 3%; inflation rate target = 2%; and current GDP 3% higher than full-employment GDP. According to the Taylor rule, which policy approach should this country be using?

A) accommodative monetary policy
B) quantitative easing
C) tight money
D) none, since the federal funds rate is at the desired level

Question 12

If the change in aggregate demand is small or temporary, a monetary growth rule will probably function well.

Question 13

A nominal GDP of $265 billion and an M1 of $12 billion results in a velocity of

A) 22.08.
B) 253.
C) 0.277.
D) 3,108.

Question 14

Classical analysis states that in the long run, aggregate supply is vertical and fixed at full employment, and changes in the money supply result directly in changes in the price level.

Question 15

Which statement is NOT a criticism of the Federal Reserve's handling of the 2007-2009 financial crisis?

A) The Fed encouraged a housing bubble by keeping interest rates too low for too long.
B) The Fed should have strengthened the dollar to shore up exports.
C) The Fed overstepped its authority by exercising powers it did not legally have.
D) The Fed should have recognized that there was a problem sooner.

Question 16

The Federal Reserve will increase the money supply by a set percentage every year at a level consistent with long-term price stability and economic growth if it is following

A) Friedman's monetary rule.
B) inflation targeting procedures.
C) monetary targeting procedures.
D) the Taylor rule.

Question 17

The Federal Reserve is responsible for, among other things, promoting economic growth with low inflation.

Question 18

The velocity of money is the average number of times money is spent in a year.

Question 19

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

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

Question 20

When the Federal Reserve sells bonds, it is implementing

A) quantitative easing.
B) expansionary monetary policy.
C) tight money policy.
D) easy money policy.

Question 21

Which statement correctly describes the approach of monetary "doves" and "hawks" during times of economic instability?

A) Doves favor greater central bank action and hawks favor less central bank action.
B) Doves favor less central bank action and hawks favor more central bank action.
C) Doves are more concerned about unemployment than inflation, while hawks are more concerned about inflation than unemployment.
D) Doves are more classical in perspective and hawks are more Keynesian in perspective.

Question 22

Keynesians argue that fiscal policy is required in depressions because the liquidity trap can render monetary policy ineffective.

Question 23

Which of these is considered to be one of the Federal Reserve's normal monetary policy tools?

A) making loans to firms outside the banking industry
B) lowering the federal funds rate
C) buying mortgage-backed securities
D) dramatically increasing the monetary base

Question 24

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 25

In a liquidity trap, a(n)

A) increase in the money supply will not lower interest rates.
B) decrease in the money supply will not lower interest rates.
C) decrease in the interest rate will be matched by a corresponding decrease in investment.
D) increase in the money supply leads to inflation.

Question 26

What was the chain of events that occurred in 2008-2009 when the U.S. "housing bubble collapsed"?

A) Home prices rose out of the reach of households; home sales fell; and banks were left with no borrowers for their excess reserves, creating a crisis for banks.
B) Savings increased, leading to less investment in homes; a lower demand for homes caused drops in home prices, which led to unemployment in the construction industry.
C) Interest rates on mortgages rose, which caused homeowners to default on these loans, causing losses to financial firms, investors, and banks.
D) Banks foreclosed on mortgage loans, which caused housing prices to drop, which led to interest rates rising so that homes became unaffordable.

Question 27

Given that M represents the money supply, i represents interest rates, I represents investment, AD represents aggregate demand, V represents the velocity of money, C represents consumption, P represents the price level, and Q represents the economy's real output level, Friedman's monetarist transmission mechanism can be represented by

A)
M → (
i and/or
C) →
I →
AD →
Q and/or
P.
B)
M →
i → (
I and/or
V) → AD →
Q and/or
P.
C)
M →
V → (
I and/or
C) → AD →
Q and/or
P.
D)
M →
i → (
I and/or
C) → AD →
Q and/or
P.

Question 28

A policy of transparency in the Federal Reserve

A) allows investors to sit in on Federal Reserve Board meetings.
B) requires the Fed to act in specific ways in specific situations.
C) requires the Fed to explain why it acted or chose not to act in a specific situation.
D) allows Wall Street to audit the Fed's books.

Question 29

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 30

In September 2012, Norway's central bank said it would delay plans to tighten monetary policy. When the Norges Bank does pursue tighter monetary policy, the Norwegian krone is likely to rise against foreign currencies.

Question 31

In the long run, the Federal Reserve targets full employment, which it considers to be 4% to 5% unemployment.

Question 32

Which of these was NOT one of the monetary criteria for potential members to be able to enter the Eurozone?

A) have had no major currency devaluations in the previous two years
B) maintain annual deficits of less than 3% of GDP
C) maintain low inflation rates
D) maintain high long-term interest rates

Question 33

Federal Reserve Chairman Ben Bernanke was not happy about bailing out institutions that had gotten themselves into trouble by taking on too much risk. So, why did the Fed do it?

A) Rescuing floundering banks is part of the Fed's mandate as set forth in the Federal Reserve Act of 1913.
B) The Fed bailed out some institutions to curry political favor.
C) Powerful members of Congress forced the Fed to bail out constituents in their districts.
D) The Fed feared that failures of very large institutions threatened the stability of the entire financial system.

Question 34

A monetary rule would make it difficult to respond to unforeseen consequences.

Question 35

If the Federal Reserve followed Milton Friedman's monetary rule, it would increase the money supply to fight recessions and decrease the money supply to fight inflation.

Question 36

_____ on credit by households and _____ interest rates set in motion the events that led to the 2007-2009 recession.

A) Overspending; high
B) Underspending; high
C) Underspending; low
D) Overspending; low

Question 37

Inflation targeting

A) explicitly considers the long-run goal of price stability for monetary policy.
B) states that the long-run goal of monetary policy is an output target.
C) explicitly considers the short-run goal of price stability for monetary policy.
D) puts equal weight on price stability and on an output target for monetary policy.

Question 38

The Taylor rule suggests that

A) the federal funds target rate should be equal to 2% plus the inflation rate plus one-half the inflation gap plus one-half the output gap.
B) the Federal Reserve should always increase the money supply at exactly the rate of inflation.
C) the money supply should be targeted so that the value of the dollar is fixed with respect to the price of gold.
D) the Federal Reserve should target a federal funds rate that will ensure a 1% rate of unemployment.

Question 39

During the 2007-2009 recession, the Federal Reserve's balance sheet

A) consisted mostly of safe Treasury securities.
B) was split, with 25% in risky assets and 75% in safe assets.
C) was split almost 50-50 between risky assets and safe assets.
D) consisted primarily of risky assets bought from troubled banks.

Question 40

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 _____ in value 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 41

Because classical economists assumed long-run full employment, as well as a slowly changing technology and monetary institutional system, both the velocity and the aggregate output in the equation of exchange are fixed.

Question 42

_____ keeps the growth of money stocks, such as M1 and M2, on a steady path, following the equation of exchange.

A) Inflation targeting
B) The Friedman rule
C) The Taylor rule
D) A monetary rule

Question 43

Monetary policy is LEAST effective in reversing

A) demand-pull inflation.
B) a decrease in private spending.
C) an adverse supply shock.
D) rapid growth in consumption expenditures.

Question 44

According to the Taylor rule, the higher the inflation rate, other things equal, the lower the federal funds target rate.

Question 45

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 46

Which country voted to leave the European Union in 2016?

A) Sweden
B) Denmark
C) Greece
D) the United Kingdom

Question 47

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 48

According to the Taylor rule, the more actual GDP falls below potential GDP, other things equal, the lower the federal funds target rate.

Question 49

According to Keynesian monetary theory, when the money supply decreases, interest rates increase and investment and output decrease.

Question 50

In counteracting a negative supply shock, the Federal Reserve could achieve _____ by using _____ monetary policy.

A) both price stability and full employment; expansionary
B) full employment but not price stability; expansionary
C) both price stability and full employment; contractionary
D) price stability but not full employment; expansionary

Question 51

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 52

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 53

One of the causes of the 2007-2009 financial crisis was a lack of faith in the ability of the U.S. Treasury to pay on government bonds.

Question 54

Expansionary monetary policy shifts the aggregate demand curve rightward.

Question 55

What occurs during a negative demand shock?

A) Output and price level increase.
B) Output and price level decrease.
C) Output increases and price level decreases.
D) Output decreases and price level increases.

Question 56

Which economists believe that fiscal policy is ineffective, while monetary policy is effective?

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

Question 57

The phenomenon of hoarding money when the interest rate falls to low levels is an outcome of

A) the liquidity trap.
B) the transactions demand for money.
C) the precautionary demand for money.
D) deflation.

Question 58

The Eurozone is the only monetary union whose members are so economically diverse that monetary authorities must choose the economic concerns of one region over another in formulating monetary policy.

Question 59

Negative demand shocks to the economy can come from

A) reductions in consumer demand.
B) increases in investment.
C) increases in government spending.
D) reductions in imports.

Question 60

Most economists think the Federal Reserve should target

A) income and output in the long run.
B) price stability in the long run.
C) price stability in the short run.
D) the federal funds rate.

Question 61

Countries that adopt the dollar as their official currency maintain the ability to conduct independent monetary policy.

Question 62

Use of restrictive monetary policy will increase excess reserves.

Question 63

Actions taken by the European Central Bank to address the European Union's financial crisis from 2009 to 2013 include all of these EXCEPT

A) reducing taxes to provide stimulus packages.
B) negotiating agreements for private banks to write off or restructure loans to governments.
C) insisting that governments move closer toward balanced budgets.
D) providing loans to banks.

Question 64

If the Federal Reserve adheres strictly to the Taylor rule, it will

A) lower the target federal funds rate when the economy starts to overheat.
B) keep the target federal funds rate constant, regardless of evolving economic conditions.
C) increase the target federal funds rate when there is concern about inflation and lower it when there is concern about recessions.
D) decrease the target federal funds rate when the government runs an expansionary fiscal policy.

Question 65

Agricultural output is a large part of Econland's GDP. Particularly bad weather one year leads to an output that is smaller than normal, causing a shock to Econland's economy. Which of these correctly describes, from a Keynesian perspective, the impact of expansionary or contractionary monetary policy taken to address the situation?

A) increase M1 to reduce inflation while having no impact on unemployment, or decrease M1 to reduce unemployment while having no impact on inflation
B) increase M1 to reduce both inflation and unemployment, or reduce M1 to increase both inflation and unemployment
C) increase M1 to reduce inflation while adding to unemployment, or decrease M1 to reduce unemployment while adding to inflation
D) increase M1 to reduce unemployment but adding to inflation, or decrease M1 to reduce the inflation while adding to unemployment

Question 66

Some politicians have criticized contractionary monetary policy being used to reduce inflationary pressures because they fear that the Fed will cause slower economic growth.

Question 67

The Federal Reserve engineered a recession to reduce out-of-control inflation under

A) Arthur Burns.
B) Paul Volcker.
C) Alan Greenspan.
D) Ben Bernanke.

Question 68

During 2010-2015, 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 69

The Federal Reserve's policy of buying bonds, adding to bank reserves, can be referred to by any of these terms EXCEPT

A) quantitative easing.
B) expansionary monetary policy.
C) tight money policy.
D) easy money policy.

Question 70

During the 2007-2009 financial crisis, both the Federal Reserve and the European Central Bank bought bad debt in order to stabilize banks.

Question 71

Which policy would cause a reduction in both excess 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 72

Monetary policy is LEAST effective in maintaining low inflation and high GDP when

A) there has been a supply shock.
B) there has been a demand shock.
C) the government is running a deficit.
D) consumers do not want to save.

Question 73

Which economists believe that fiscal policy is effective, while monetary policy may be ineffective?

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

Question 74

Most economists agree that the Federal Reserve should target price stability in the long run.

Question 75

Which of these was NOT a cause of the 2007-2009 financial crisis?

A) Low interest rates encouraged a housing bubble.
B) Banks and other lenders lowered their quality standards for mortgage loans.
C) Congress enacted restrictive trade policies that failed to curb imports.
D) Investors and financial institutions bought assets that required an unsustainable rise in housing prices.

Question 76

In counteracting demand shocks, the Federal Reserve can achieve

A) price stability but not full employment.
B) both full employment and price stability.
C) full employment but not price stability.
D) neither full employment nor price stability.

Question 77

If the economy has high levels of unemployment, the Federal Reserve will raise interest rates to stimulate spending.

Question 78

What is the difference between the Eurozone and the European Union (EU)?

A) There is no difference; they are simply different terms for the same thing.
B) The Eurozone refers to only those member countries that are geographically connected, having common borders within the EU, while the EU includes all member countries.
C) The Eurozone includes all countries within the continent of Europe, while the EU includes only the European countries that have joined the European Union.
D) The Eurozone includes all countries that adopted the Euro as their official currency, while the EU includes all countries that belong to the European Union.

Question 79

Both overspending on credit by households and low interest rates set in motion the events that led to the 2007-2009 recession.

Question 80

Monetary policy can be effective in responding to demand shocks, whether the shocks are positive or negative.