Deck 5: Monetary Policy

Question 1

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 1

B

Question 2

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.

Answer 2

C

Question 3

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.

Answer 3

C

Question 4

____ 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 5

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 6

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 7

Which of the following best describes the relationship between the Fed and the presidential 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 8

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

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

Question 9

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 10

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 funds curve.
D) None of the above

Question 11

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

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

Question 12

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

A) Recognition
B) Adjustment
C) Implementation
D) none of the above

Question 13

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 14

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 15

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

A) Stable
B) Strong
C) Weak
D) both A and B

Question 16

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

Question 17

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 18

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 19

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 20

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 21

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

Question 22

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 23

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 could result in much higher interest rates, which would discourage economic growth.
D) All of the above are disadvantages of inflation targeting.

Question 24

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

Question 25

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 26

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

Question 27

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

Question 28

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 29

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.

Question 30

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

Question 31

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

Question 32

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 33

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 34

During the 2008-2015 period, the Fed reduced the federal funds rate to 6 percent in an effort to stimulate the economy.

Question 35

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

Question 36

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 37

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

Question 38

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 39

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 40

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

Question 41

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

A) The Fed could lose credibility if the inflation rate deviates substantially from the Fed's target inflation rate.
B) A 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, an inflation targeting approach would like advocate a loose monetary policy.

Question 42

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 43

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 raisestheTreasury 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 44

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 45

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 46

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 47

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 the above may be indicators of inflation.

Question 48

The Fed's purchase of Treasury securities is primarily intended to ensure liquidity in the commercial paper market.

Question 49

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 50

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 51

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 52

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 53

The Fed's main focus in the years 2010-2014 following the credit crisis was on controlling inflation.

Question 54

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.

Question 55

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