Deck 5: Monetary Policy

Question 1

A loose-money policy tends to ____ economic growth and ____ the inflation rate.

A)stimulate; place downward pressure on
B)stimulate; place upward pressure on
C)dampen; place upward pressure on
D)dampen; place downward pressure on

Answer 1

B

Question 2

If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated substantially from the Fed's target inflation rate, the Fed could lose credibility.

Answer 2

True

Question 3

The ____ indicators tend to rise or fall at the same time as a business cycle.

A)leading
B)lagging
C)coincident
D)None of these are correct.

Answer 3

C

Question 4

The time between when the Fed adjusts the money supply and when the adjustment has an effect on the economy is the

A)recognition lag.
B)implementation lag.
C)impact lag.
D)open-market lag.

Question 5

The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply.

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

Question 6

In general, there is

A)a positive relationship between unemployment and inflation.
B)an inverse relationship between unemployment and inflation.
C)an inverse relationship between GDP and inflation.
D)a positive relationship between GDP and unemployment.

Question 7

The ____ indicators tend to rise or fall after a business cycle.

A)leading
B)lagging
C)coincident
D)None of these are correct.

Question 8

A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.

A)tight; loose
B)loose; tight
C)tight; tight
D)loose; loose

Question 9

The Fed can affect the interaction between the demand for money and the supply of money to influence interest rates, the aggregate level of spending, and therefore economic growth.

Question 10

A passive monetary policy adjusts the money supply automatically in response to economic conditions.

Question 11

The time lag between when an economic problem arises and when it is reported in economic statistics is the

A)recognition lag.
B)implementation lag.
C)impact lag.
D)open-market lag.

Question 12

Which of the following is NOT an indicator of inflation?

A)housing price indexes
B)wage rates
C)oil prices
D)consumer confidence surveys

Question 13

The Fed is usually more willing to maintain a stimulative monetary policy when inflation is relatively high.

Question 14

____ serves as the most direct indicator of economic growth in the United States.

A)Gross domestic product (GDP)
B)Technology
C)The Treasury bond rate
D)The industrial production index

Question 15

If the Fed attempts to reduce inflation, it would likely increase money supply growth.

Question 16

A credit crunch occurs when

A)interest rates decline.
B)interest rates rise.
C)creditors restrict the amount of loans they are willing to provide.
D)the economy is strong.

Question 17

According to the theory of rational expectations, higher inflationary expectations encourage businesses and households to reduce their demand for loanable funds.

Question 18

When both inflation and unemployment are relatively high, there is more disagreement among FOMC members about the proper monetary policy to implement.

Question 19

A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money supply tends to place ____ pressure on interest rates.

A)upward; upward
B)upward; downward
C)downward; downward
D)downward; upward

Question 20

Which of the following best describes the relationship between the Fed and the presidential administration?

A)The Fed must receive the administration's approval before conducting monetary policy.
B)The Fed must implement a monetary policy specifically to support the administration's policy.
C)The administration must receive approval from the Fed before implementing fiscal policy.
D)The Fed must receive the administration's approval before conducting monetary policy AND the administration must receive approval from the Fed before implementing fiscal policy.
E)None of these are correct.

Question 21

Which of the following is NOT a disadvantage of inflation targeting?

A)If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility.
B)The Fed's focus on inflation could result in a much higher unemployment level.
C)The Fed's focus on inflation will likely lead to a higher government budget deficit.
D)All of these are disadvantages of inflation targeting.

Question 22

The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are

A)low and steady.
B)low, but rising.
C)very high, but declining slightly.
D)very high and rising.

Question 23

There is some evidence that high money supply growth may lead to _______ U.S. inflation over time, which in turn places ____ pressure on U.S. interest rates.

A)higher; upward
B)higher; downward
C)lower; downward
D)lower; upward

Question 24

If the Fed uses a passive monetary policy during weak economic conditions,

A)it increases the money supply substantially.
B)it reduces the money supply substantially.
C)it allows the economy to fix itself.
D)it purchases commercial paper and mortgage-backed securities.

Question 25

In recent years, the Fed has made an effort to be more transparent in its communications to financial markets about its future policy.

Question 26

A ____ dollar tends to exert inflationary pressure in the United States.

A)stable
B)strong
C)weak
D)stable AND strong

Question 27

One reason that a stimulative monetary policy might fail is that savers such as retirees who rely on interest income to meet their expenses may have to reduce their spending.

Question 28

The Fed faces a trade-off in monetary policy between reducing unemployment and reducing the federal government's budget deficit.

Question 29

The relationship between the interest rate on loanable funds and the level of business investment is positive.

Question 30

Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed

A)purchases Treasury securities.
B)maintains a stable money supply.
C)uses a tight-money policy.
D)uses a loose-money policy.

Question 31

Which of the following is NOT an effect of a stimulative monetary policy?

A)The risk-free rate and the credit risk premium increase.
B)A firm's cost of debt decreases.
C)A firm's cost of equity decreases.
D)Depository institutions experience an increase in their supply of funds.

Question 32

Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolios are ____ affected when the Fed ____ interest rates.

A)adversely ; decreases
B)adversely ; increases
C)favorably; increases
D)adversely ; decreases AND favorably; increase

Question 33

When the Fed uses open market operations to sell some of its Treasury securities, there will be

A)an outward shift in the supply schedule of loanable funds.
B)an inward shift in the supply schedule of loanable funds.
C)no shift in the supply schedule of loanable funds.
D)an outward shift in the demand schedule for loanable funds.

Question 34

The supply schedule of loanable funds indicates the quantity of funds that would be demanded at various possible interest rates.

Question 35

Which of the following is true about an increase in the U.S. government's budget deficit?

A)It will lead to global crowding out if U.S. interest rates fall below the level of interest rates in other countries.
B)It will cause outflows of foreign funds from the United States as foreign investors move their funds to other countries.
C)It will cause an inward shift in the aggregate demand for loanable funds curve.
D)None of these are correct.

Question 36

According to the theory of rational expectations, if the Fed uses open market operations to increase the supply of loanable funds, the ultimate effect on interest rates

A)is a reduction in interest rates.
B)is an increase in interest rates.
C)is no effect on interest rates.
D)cannot be determined because the effects may be offsetting.

Question 37

The ____ lag is the time from when an economic problem arises until it is recognized.

A)recognition
B)adjustment
C)implementation
D)None of these are correct.

Question 38

During the 2008-2015 period, the Fed increased the federal funds rate in an effort to stimulate the economy.

Question 39

Inflation is commonly the result of a

A)large budget deficit.
B)high level of interest rates.
C)high level of unemployment.
D)high level of aggregate demand.

Question 40

Global crowding out refers to the impact that

A)excessive U.S. population growth can have on interest rates.
B)excessive global population growth can have on interest rates.
C)an excessive budget deficit in one country can have on interest rates of other countries.
D)an excessive budget deficit in one country can have on exchange rates.

Question 41

The Fed is more likely to use a stimulative policy during a strong-dollar period.

Question 42

The Fed's monetary policy is commonly intended to alter the supply of funds in the banking system in order to achieve a specific targeted

A)discount rate.
B)required reserve requirement.
C)federal funds rate.
D)prime rate.

Question 43

An attempt by the Fed to stimulate the economy by reducing short-term interest rates may have a limited effect if long-term interest rates remain unaffected.

Question 44

Economists who work at the Fed recognize that a stimulative monetary policy will not always reduce a high unemployment rate and could even ignite inflation.

Question 45

If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________.

A)7 percent; 10 percent
B)4 percent;  6 percent
C)7 percent; 9 percent
D)1 percent; 3 percent

Question 46

A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions.

A)leading
B)coincident
C)lagging
D)None of these are correct.

Question 47

Which of the following is NOT a reason that a stimulative monetary policy may be ineffective?

A)The effects of a stimulative policy may be disrupted by expectations of inflation.
B)Retirees who rely on interest income may restrict their spending.
C)Lending institutions may increase their standards for borrowers, so some potential borrowers may not qualify for loans.
D)Higher interest rates caused by the stimulative policy might reduce economic growth.

Question 48

Which of the following is true with respect to inflation targeting?

A)Inflation targeting would allow the Fed more control over inflation caused by excessive aggregate demand.
B)Inflation targeting would require the Fed to maintain very strong economic growth.
C)Inflation targeting could control the inflation caused by higher oil prices.
D)Inflation targeting would allow the Fed to have more control over the unemployment rate.

Question 49

To correct excessive inflation, the Fed could use open market operations by buying Treasury securities in the secondary market.

Question 50

The Fed needs the approval of the presidential administration to make decisions.

Question 51

The interest rate that the Fed targets for its monetary policy is the

A)commercial paper rate.
B)federal funds rate.
C)Treasury bond coupon rate.
D)one-year certificate of deposit rate.

Question 52

Which of the following might be monitored as an indicator of inflation?

A)consumer price index
B)gold prices
C)oil prices
D)All of these may be indicators of inflation.

Question 53

A purchase of Treasury securities by the Fed leads to a(n)____ in interest rates and a(n)____ in the level of business investment.

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

Question 54

When the Fed wants to encourage businesses to increase their spending on long-term projects, it may use a stimulative policy focused on reducing long-term Treasury yields.

Question 55

The Fed normally controls the money supply by buying and selling ________.

A)Federal Reserve notes
B)Treasury securities
C)certificates of deposit
D)federal fund notes

Question 56

The Fed's monetary policy is primarily intended to regulate commercial loans.

Question 57

The intent of the Fed's strategy to resolve the credit crisis in 2008-2009 was to

A)increase long-term interest rates.
B)require corporations to issue more commercial paper.
C)require bond rating agencies to impose higher standards on their ratings.
D)reduce interest rates.

Question 58

A weak dollar can stimulate ____, discourage ____, and ____ the U.S. economy.

A)U.S. exports; U.S. imports; weaken
B)U.S. exports; U.S. imports; stimulate
C)U.S. imports; U.S. exports; stimulate
D)None of these are correct.