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

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.

Answer 2

C

Question 3

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

Answer 3

B

Question 4

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

Question 5

The ____ indicators tend to occur after a business cycle.

A)leading
B)lagging
C)coincident
D)none of the above

Question 6

The ____ indicators tend to occur before a business cycle.

A)leading
B)lagging
C)coincident
D)none of the above

Question 7

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 8

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 9

Which of the following best describes the relationship between the Fed and the Administration?

A)The Fed must receive approval by the Administration before conducting monetary policy.
B)The Fed must implement a monetary policy specifically to the support the Administration's policy.
C)The Administration must receive approval from the Fed before implementing fiscal policy.
D)A and C
E)none of the above

Question 10

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

A)Gross domestic product (GDP)
B)National income
C)The unemployment rate
D)The industrial production index

Question 11

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 GNP and inflation.
D)a positive relationship between GNP and unemployment.

Question 12

The time between when the Fed adjusts the money supply and when interest rates change reflects the

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

Question 13

The ____ indicators tend to occur before a business cycle.

A)leading
B)lagging
C)coincident
D)none of the above

Question 14

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

Question 15

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.

Question 16

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

Question 17

The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the

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

Question 18

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 19

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 20

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

Question 21

Global crowding out is described in the text to mean the impact of

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

Question 22

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 23

When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., 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 24

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

A)a reduction in interest rates.
B)an increase in interest rates.
C)no effect on the interest rates.
D)the impact on interest rates cannot be determined.

Question 25

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)monetizes the debt.
B)maintains a stable money supply.
C)uses a tight-money policy.
D)uses a loose-money policy.

Question 26

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 27

The Fed is usually more willing to monetize the debt when inflation is relatively high.

Question 28

Which of the following is true?

A)Federal deficits require that the Fed purchase government securities.
B)Federal deficits will always result in an increase in money supply.
C)The Federal Reserve monetizes debt by selling securities which ultimately increases money supply.
D)An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases.
E)None of the above.

Question 29

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

A)it increases money supply substantially.
B)it reduces money supply substantially.
C)it allows the economy to fix itself.
D)it focuses on monetizing the debt.

Question 30

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

Question 31

If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects

A)the crowding-out effect.
B)dynamic open market operations.
C)defensive open market operations.
D)monetizing the debt.

Question 32

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 complete focus on inflation could result in a much higher unemployment level.
C)The Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth.
D)All of the above are disadvantages of inflation targeting.

Question 33

When the Fed uses open market operations by purchasing Treasury securities from various financial institutions in the U.S., 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 inward shift in the demand schedule for loanable funds.

Question 34

A ____ dollar tends to exert inflationary pressure in the U.S.

A)stable
B)strong
C)weak
D)both A and B

Question 35

According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase.

A)higher; reduce
B)higher; increase
C)lower; reduce
D)lower; increase

Question 36

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

A)unfavorably; decreases
B)unfavorably; increases
C)favorably; increases
D)Answer A and C are correct.

Question 37

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 38

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

A)recognition
B)adjustment
C)implementation
D)none of the above

Question 39

Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.

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

Question 40

International flows of funds can affect the Fed's monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel compelled to use a ____ monetary policy.

A)inflows; loose
B)inflows; tight
C)outflows; loose
D)outflows; tight
E)none of the above

Question 41

Which of the following is not true with respect to inflation targeting?

A)The Fed could lose credibility is the inflation rate deviates substantially from the Fed's target inflation rate.
B)A complete focus on inflation could result in a much higher unemployment rate.
C)Inflation targeting may not only satisfy the inflation goal, but could also achieve the employment stabilization goal in the long run.
D)If unemployment is slightly higher than normal, while inflation is at the peak of the target range, and inflation targeting approach would like advocate a loose monetary policy.

Question 42

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 43

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

Question 44

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 45

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

Question 46

The ____ is not an indicator of economic growth.

A)producer price index
B)gross domestic product
C)national income
D)unemployment rate
E)All of the above are indicators of economic growth.

Question 47

When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions.

A)increase; offsetting decreases
B)increase; no offsetting decreases
C)decrease; offsetting increases
D)decrease; no offsetting increases

Question 48

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

Question 49

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

Question 50

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

Question 51

One of the disadvantages of inflation targeting is that the Fed could lose credibility is the U.S. inflation rate deviates substantially from the Fed's target inflation rate.

Question 52

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

Question 53

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)1-year certificate of deposit rate.

Question 54

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

Question 55

Which of the following is probably not a goal the Fed is trying to achieve consistently?

A)low inflation
B)high interest rates
C)steady GNP growth
D)low unemployment

Question 56

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

Question 57

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 the above

Question 58

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 59

A weak dollar would 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 the above

Question 60

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.

Question 61

In 2012, the Fed stated that it would continue to purchase Treasury bonds in the financial markets until GDP growth increased to a target level.

Question 62

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 encourage individuals to increase their savings.

Question 63

In the "operation twist" strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities.

A)long-term; short-term
B)short-term; long-term
C)short-term; long-term
D)long-term; short-term

Question 64

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 65

Which of the following was not true of the eurozone during the Greek crisis?

A)Fear of a financial crisis throughout Europe discouraged investors and firms from moving funds into Europe.
B)By using a more stimulative monetary policy than it desired, the European Central Bank aroused concerns about potential inflation in the eurozone.
C)There was concern that the austerity conditions could weaken the country's economy further.
D)Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to stimulate their economies.

Question 66

The intent of the Fed's operation twist strategy in 2011 and 2012 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 long-term interest rates.