Deck 11: Monetary Policy and the Fed

Question 1

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will

A) increase interest rates and increase the bond prices.
B) increase interest rates and decrease the bond prices
C) decrease interest rates and increase the bond prices
D) decrease interest rates and decrease the bond prices

Answer 1

decrease interest rates and increase the bond prices

Question 2

Which of the following are monetary policy goals?
I. maintain high interest rates
II. keep unemployment rates low
III. reduce the size of the banking sector
IV. prevent high rates of inflation

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

Answer 2

II and IV

Question 3

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will

A) increase real GDP and increase the price level.
B) increase real GDP and decrease the price level.
C) decrease real GDP and increase the price level.
D) decrease real GDP and decrease the price level.

Answer 3

increase real GDP and increase the price level.

Question 4

Historical actions indicate that the Fed's primary goal of monetary policy over the past 30 years has been to

A) maintain high interest rates.
B) keep employment rates low.
C) limit the availability of consumer credit.
D) prevent high rates of inflation.

Question 5

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will

A) increase investment and increase interest rates.
B) increase investment and decrease interest rates.
C) decrease investment and increase interest rates.
D) decrease investment and decrease interest rates.

Question 6

Figure 11-1
Refer to Figure 11-1. If the Fed wants to achieve the results shown in Panel (a), it should

A) raise the discount rate.
B) increase reserve requirements.
C) sell government bonds in the open market.
D) buy government bonds in the open market.

Question 7

The congressional act passed in 1978 that established specific numerical goals for the unemployment rate and the inflation rate to be achieved by 1983 was the

A) Federal Reserve Act.
B) Gramm-Rudman Act.
C) Employment Act.
D) Humphrey-Hawkins Act.

Question 8

The first official statement of goals for macroeconomic performance in the United States came with the passage of the

A) Federal Reserve Act of 1913.
B) Employment Act of 1946.
C) Great Depression Act of 1933.
D) Full Employment and Balanced Growth Act of 1978.

Question 9

The major tools of monetary policy available to the Federal Reserve System are

A) reserve requirements, margin regulations, and moral suasion.
B) reserve requirements, open-market operations, and the discount rate.
C) open-market operations, margin regulations, and moral suasion.
D) the discount rate, margin regulations, and moral suasion.

Question 10

Figure 11-1
Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a). What happens to the interest rate?

A) It will increase.
B) It will decrease.
C) It remains unchanged.
D) Short-term interest rates will decrease but long-term interest rates will increase.

Question 11

According to the text, in many respects, the single most powerful economic policymaker in the United States is

A) Congress.
B) the Federal Reserve.
C) the President.
D) the Supreme Court.

Question 12

Suppose the economy experiences a recessionary gap. Expansionary monetary policy will

A) increase interest rates and increase exchange rates.
B) increase interest rates and decrease exchange rates.
C) decrease interest rates and increase exchange rates.
D) decrease interest rates and decrease exchange rates.

Question 13

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the following except

A) buying mortgage-backed securities.
B) buying long-term Treasury bills.
C) creating other new credit facilities to make credit more easily available to households and small businesses.
D) lowering the reserve requirement to encourage banks to create loans.

Question 14

The congressional act that established the U.S. central banking system in 1913 was the

A) Federal Reserve Act.
B) Gramm-Rudman Act.
C) Employment Act.
D) Humphrey-Hawkins Act.

Question 15

If the Fed buys government bonds through open-market operations, it will

A) increase the demand for bonds in the bond market.
B) decrease the demand for bonds in the bond market.
C) increase the supply of bonds in the bond market.
D) decrease the supply of bonds in the bond market.

Question 16

The congressional act passed in 1946 that contained the first official statement of goals for economic performance in the United States was the

A) Federal Reserve Act.
B) Gramm-Rudman Act.
C) Employment Act.
D) Humphrey-Hawkins Act.

Question 17

The monetary policy tool that involves the buying and selling of government bonds is

A) moral suasion.
B) reserve requirements.
C) the discount rate.
D) open-market operations.

Question 18

Which of the following is a tool used by the Fed in the conduct of monetary policy?

A) changes in the prime rate
B) issuing new government bonds and retiring old ones
C) buying and selling corporate bonds
D) buying and selling federal government bonds

Question 19

Toward the end of 2008, the U.S. economy was characterized by all of the following except

A) credit tightening by banks.
B) rising inflation.
C) falling real GDP.
D) an unprecedented federal funds rate below 1%.

Question 20

If the Fed purchases federal government bonds on the open market, bank reserves will

A) decrease leading to a decrease in the money supply.
B) increase leading to a decrease in the money supply.
C) increase leading to an increase in the money supply.
D) decrease leading to an increase in the money supply.

Question 21

Figure 11-1
Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b). As a result, the interest rate

A) increases and investment increases.
B) increases and investment decreases.
C) decreases and investment increases.
D) decreases and investment decreases.

Question 22

Figure 11-1
Refer to Figure 11-1. If the Fed wants to achieve the results shown in Panel (b), it should

A) lower the discount rate.
B) decrease margin requirements.
C) decrease reserve requirements.
D) sell government bonds in the open market.

Question 23

When the Fed sells bonds in the open market, in the product market (the aggregate demand- aggregate supply model),

A) real GDP will fall and the price level will rise.
B) real GDP and the price level will rise.
C) real GDP and the price level will fall.
D) real GDP will rise and the price level will fall.

Question 24

When the Fed buys bonds in the open market, in the product market (the aggregate demand- aggregate supply model),

A) real GDP will fall and the price level will rise.
B) real GDP and the price level will rise.
C) real GDP and the price level will fall.
D) real GDP will rise and the price level will fall.

Question 25

Figure 11-1
Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b). What happens to the interest rate?

A) It increases.
B) It decreases.
C) It remains unchanged.
D) Short-term interest rates will increase but long-term interest rates will decrease.

Question 26

When the Fed buys bonds in the open market, we can expect

A) bond prices and interest rates to fall.
B) bond prices to rise and interest rates to fall.
C) bond prices to fall and interest rates to rise.
D) bond prices and interest rates to rise.

Question 27

Figure 11-4
Refer to Figure 11-4. Which of the following actions by the Fed could have caused the movement from AD₁ to AD₂ in Panel (a)?

A) selling government bonds in the open market
B) buying government bonds in the open market
C) increasing the discount rate
D) increasing the federal funds rate

Question 28

Figure 11-4
Refer to Figure 11-4. Suppose the economy is initially at Y₁ in Panel (a). It is experiencing

A) an inflationary gap.
B) a recessionary gap.
C) an actual unemployment rate that is less than the natural unemployment rate.
D) a situation that warrants a decrease in the money supply.

Question 29

When the Fed sells bonds in the open market, we can expect

A) bond prices and interest rates to fall.
B) bond prices to rise and interest rates to fall.
C) bond prices to fall and interest rates to rise.
D) bond prices and interest rates to rise.

Question 30

Figure 11-3
Refer to Figure 11-3. By shifting the supply curve from S₁ to S₂, the Fed is exercising

A) expansionary monetary policy in order to lower interest rates.
B) expansionary monetary policy in order to increase interest rates.
C) contractionary monetary policy in order to increase interest rates.
D) contractionary monetary policy in order to lower interest rates.

Question 31

Figure 11-2
Refer to Figure 11-2. To shift the demand curve from D₁ to D₂, the Fed will be

A) buying bonds in the open market which decrease the money supply.
B) selling bonds in the open market which decrease the money supply.
C) buying bonds in the open market which increases the money supply.
D) selling bonds in the open market which increases the money supply.

Question 32

When the Fed sells bonds in the open market, we can expect the

A) exchange rate to rise and interest rates to fall.
B) exchange rate and interest rates to rise.
C) exchange rate to fall and interest rates to rise.
D) exchange rate and interest rates to fall.

Question 33

When the Fed buys bonds in the open market, we can expect

A) investment and net exports to rise.
B) investment will rise and net exports to fall.
C) investment will fall and net exports to rise.
D) investment and net exports fall.

Question 34

When the Fed sells bonds in the open market, we can expect

A) investment and net exports to rise.
B) investment to rise and net exports to fall.
C) investment to fall and net exports to rise.
D) investment and net exports to fall.

Question 35

Figure 11-3
Refer to Figure 11-3. By shifting the supply curve from S₁ to S₂, the Fed will be

A) buying bonds in the open market which decreases the money supply.
B) selling bonds in the open market which decreases the money supply.
C) buying bonds in the open market which increases the money supply.
D) selling bonds in the open market which increases the money supply.

Question 36

Figure 11-3
Refer to Figure 11-3. By shifting the supply curve from S₁ to S₂, the Fed is attempting to

A) expand the economy by increasing interest rates.
B) contract the economy by increasing interest rates.
C) contract the economy by decreasing interest rates.
D) expand the economy by decreasing interest rates.

Question 37

Figure 11-2
Refer to Figure 11-2. By shifting the demand curve from D₁ to D₂, the Fed is attempting to

A) contract the economy by increasing interest rates.
B) expand the economy by increasing interest rates.
C) contract the economy by decreasing interest rates.
D) expand the economy by decreasing interest rates.

Question 38

If the Fed sells government bonds, bank reserves will

A) decrease leading to a decrease in the money supply.
B) increase leading to a decrease in the money supply.
C) increase leading to an increase in the money supply.
D) decrease leading to an increase in the money supply.

Question 39

Figure 11-2
Refer to Figure 11-2. By shifting the demand curve from D₁ to D₂, the Fed is exercising

A) contractionary monetary policy to lower interest rates.
B) expansionary monetary policy to lower interest rates.
C) contractionary monetary policy to increase interest rates.
D) expansionary monetary policy to increase interest rates.

Question 40

Figure 11-1
Refer to Figure 11-1. Suppose the Fed takes action that shifts the demand curve from D to D′, as illustrated in Panel (a). As a result, the interest rate

A) increases and investment increases.
B) increases and investment decreases.
C) decreases and investment increases.
D) decreases and investment decreases.

Question 41

Figure 11-5
Refer to Figure 11-5. If the economy is at point c, the Federal Reserve can close the output gap

A) by pursuing an expansionary monetary policy to raise the interest rate and increase short-run aggregate supply.
B) by pursuing a contractionary monetary policy to drive down the interest rate and increase aggregate demand.
C) by pursuing an expansionary monetary policy to drive down the interest rate and increase aggregate demand.
D) by pursuing a contractionary monetary policy to raise the interest rate and short-run aggregate supply.

Question 42

Figure 11-5
Refer to Figure 11-5. If the economy is at point c, an open market purchase would cause

A) a shift of the short-run aggregate supply curve from AS₁ to AS₂.
B) a shift of the short-run aggregate supply curve from AS₂ to AS₁.
C) a shift of the aggregate demand curve from AD₁ to AD₂.
D) a shift of the aggregate demand curve from AD₂ to AD₁.

Question 43

Figure 11-5
Refer to Figure 11-5. Long-run equilibrium positions occur at points

A) a and d.
B) a and b.
C) c and d.
D) b and d.

Question 44

Which of the following result from a change in the money supply brought about by an open market sale?

A) lower interest rate, higher exchange rate, decreased demand for investment and net exports
B) higher interest rate, higher exchange rate, decreased demand for investment and decreased demand for net exports
C) lower interest rate, lower exchange rate, increased demand for investment and net exports
D) higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports

Question 45

Figure 11-5
Refer to Figure 11-5. Short-run but not long-run equilibrium positions occur at points

A) a and b.
B) b and c.
C) c and d.
D) a and c.

Question 46

If inflation is a threat, then the Fed will be expected to engage in

A) expansionary monetary policy.
B) contractionary monetary policy.
C) policies to increase the money supply.
D) policies to lower the rate of interest.

Question 47

If the economy experiences an inflationary gap, a contractionary monetary policy will

A) increase interest rates and increase the bond prices.
B) increase interest rates and decrease the bond prices.
C) decrease interest rates and increase the bond prices.
D) decrease interest rates and decrease the bond prices.

Question 48

Figure 11-5
Refer to Figure 11-5. If the economy is at point c,

A) it is in a recessionary gap.
B) it is at natural level of employment.
C) the level of employment is greater than the natural level of employment.
D) the unemployment rate is negative.

Question 49

If the economy experiences an inflationary gap, a contractionary monetary policy will

A) increase real GDP and increase the price level.
B) increase real GDP and decrease the price level.
C) decrease real GDP and increase the price level.
D) decrease real GDP and decrease the price level.

Question 50

Figure 11-5
Refer to Figure 11-5. If the economy is at point c, the Federal Reserve can close the output gap by buying bonds. In the bond market,

A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Question 51

If the economy experiences an inflationary gap, a contractionary monetary policy will

A) increase interest rates and increase exchange rates.
B) increase interest rates and decrease exchange rates.
C) decrease interest rates and increase exchange rates.
D) decrease interest rates and decrease exchange rates.

Question 52

Which of the following result from a change in the money supply brought about by an open market purchase?

A) lower interest rate, higher exchange rate, decreased demand for investment and net exports
B) higher interest rate, higher exchange rate, increased demand for investment and decreased demand for net exports
C) lower interest rate, lower exchange rate, increased demand for investment and net exports
D) higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports

Question 53

Figure 11-4
Refer to Figure 11-4. In Panel (b), assume that the price of bonds rises from P₁ to P₂. Now, in Panel (c), the higher price of bonds will

A) reduce the demand for and increase the supply of dollars and cause the exchange rate to increase.
B) reduce the demand for and increase the supply of dollars and cause the exchange rate to rise.
C) increase the demand for and reduce the supply of dollars and cause the exchange rate to increase.
D) reduce the demand for and increase the supply of dollars and cause the exchange rate to fall.

Question 54

Holding all else constant, higher interest rates in the United States would

A) decrease the demand for U.S. dollars in the foreign exchange market. In turn, this will lead to a decrease in the exchange rate, and subsequently, U.S. net exports would rise.
B) increase the demand for U.S. dollars in the foreign exchange market. In turn, this will lead to an increase in the exchange rate, and subsequently, U.S. net exports would fall.
C) increase the demand for U.S. dollars in the foreign exchange market. In turn, this will lead to a decrease in the exchange rate, and subsequently, U.S. net exports would rise.
D) decrease the demand for U.S. dollars in the foreign exchange market. In turn, this will lead to an increase in the exchange rate, and subsequently, U.S. net exports would fall.

Question 55

If inflation is a threat, then the Fed will conduct monetary policy aimed at

A) increasing the interest rate which then will shift aggregate demand to the right.
B) decreasing the interest rate which then will shift aggregate demand to the right.
C) decreasing the interest rate which then will shift aggregate demand to the left.
D) increasing the interest rate which then will shift aggregate demand to theleft.

Question 56

Figure 11-4
Refer to Figure 11-4. The shift in the demand for bonds from D₁ to D₂, in Panel (b) will result in a

A) lower interest rate and no change in investment.
B) higher interest rate and lower investment.
C) lower interest rate and higher investment.
D) higher interest rate and higher investment.

Question 57

Figure 11-4
Refer to Figure 11-4. If a nonintervention policy were adopted in Panel (a),

A) the aggregate demand curve would have eventually shifted as shown.
B) the short-run aggregate supply curve would have eventually shifted to the left and restored full employment.
C) the short-run aggregate supply curve would have eventually shifted to the right and restored full employment.
D) both the aggregate demand curve and the short-run aggregate supply curve would have eventually shifted to the left.

Question 58

Figure 11-4
Refer to Figure 11-4. If the Fed acts to close the output gap in Panel (a), it would

A) sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate.
B) buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate.
C) buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate.
D) sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate.

Question 59

Figure 11-5
Refer to Figure 11-5. If the economy is at point a,

A) employment is greater than the natural level of employment.
B) it is at the natural level of employment.
C) it is in a recessionary gap.
D) the unemployment rate is negative.

Question 60

If the economy experiences an inflationary gap, a contractionary monetary policy will

A) increase investment and increase interest rates.
B) increase investment and decrease interest rates.
C) decrease investment and increase interest rates.
D) decrease investment and decrease interest rates.

Question 61

The lag in realizing that a macroeconomic problem exists is called

A) the recognition lag.
B) the implementation lag.
C) the impact lag.
D) the market lag.

Question 62

The time it takes for the Fed or government policymakers to enact policies to correct unemployment or inflation problems is a source of which lag?

A) the implementation lag
B) the recognition lag
C) the government lag
D) the impact lag

Question 63

Figure 11-5
Refer to Figure 11-5. If the economy is at point b,

A) the unemployment rate is negative.
B) the unemployment rate is zero.
C) the level of employment is greater than the natural level of employment.
D) it is at the natural level of employment.

Question 64

The delay between the time at which an event occurs and the time at which policymakers become aware of it is called

A) the impact lag.
B) the implementation lag.
C) the government lag.
D) the recognition lag.

Question 65

The delay between the time a policy is enacted and the time the policy has its effect on the economy is called

A) the impact lag.
B) the implementation lag.
C) the government lag.
D) the recognition lag.

Question 66

The delay between the time at which a problem is recognized and the time at which a policy to deal with it is enacted is called

A) the impact lag.
B) the implementation lag.
C) the government lag.
D) the recognition lag.

Question 67

The time it takes to collect and process data is the biggest source of which lag?

A) implementation lag
B) recognition lag
C) government lag
D) impact lag

Question 68

Which of the following statements about the structure of the Fed is an advantage from the perspective of conducting monetary policy?

A) The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work very closely with other political institutions.
B) The two policymaking bodies of the Fed are deliberately large to allow for different viewpoints and they work relatively independently of other political institutions.
C) The two policymaking bodies of the Fed are small to allow deliberations in private and they work relatively independently of other political institutions.
D) The two policymaking bodies of the Fed are small to allow members to work closely with other political institutions.

Question 69

Figure 11-5
Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap

A) by pursuing an expansionary monetary policy to raise the interest rate and decrease short-run aggregate supply.
B) by pursuing a contractionary monetary policy to drive down the interest rate and decrease aggregate demand.
C) by pursuing an expansionary monetary policy to drive down the interest rate and decrease short-run aggregate supply.
D) by pursuing a contractionary monetary policy to raise the interest rate and reduce aggregate demand.

Question 70

The lag between the time at which a policy is put in place and the time that policy affects the economy is called

A) the recognition lag.
B) the impact lag.
C) the implementation lag.
D) the theoretical lag.

Question 71

On October 12, 1987, the Dow Jones Industrial Average plunged 508 points, wiping out more than $500 billion in a few hours. How did the Fed respond to this drastic fall in the stock market index?

A) The Fed responded precisely as it did when faced with a similar situation in 1929, that is, it deemed that no action was necessary.
B) To encourage the business community to invest in the stock market, the Fed announced that it will sell federal securities to raise the interest rate.
C) In an attempt to ward off a recession, the Fed announced that it will provide adequate liquidity, by buying federal securities.
D) The Fed provided long-term loans to those corporations that experienced significant decreases in their stock value.

Question 72

Which of the following explains why the monetary policy implementation lag is relatively short?
I. The FOMC meets several times a year and policymakers are easily able to confer in between meetings.
II. Open market operations, one of the Fed's policy instruments can be put into effect
Jimmediately.
III. The Chairman of the Fed works in close collaboration with the President.
IV. Most financial institutions are member banks and will not hesitate to put into effect any new monetary policy.

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

Question 73

The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the

A) impact lag.
B) recognition lag.
C) implementation lag.
D) theory lag.

Question 74

Which of the following is perhaps the greatest obstacle facing the Fed in discharging monetary policy?

A) the difficulties involved in regulating the complex structure of financial institutions
B) the problem of monetary policy lags
C) the problem of identifying a monetary measure that is closely linked to real GDP
D) the problem of coordinating monetary and fiscal policy

Question 75

The shortest of the three lags for monetary policy is

A) the impact lag.
B) the implementation lag.
C) the government lag.
D) the recognition lag.

Question 76

What are the three types of monetary policy lags?

A) the recognition lag, the identification lag, and the implementation lag
B) the recognition lag, the inflation lag, and the impact lag
C) the recognition lag, the implementation lag, and the government lag
D) the recognition lag, the implementation lag, and the impact lag

Question 77

Figure 11-5
Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,

A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Question 78

Figure 11-5
Refer to Figure 11-5. Assume that the economy is at point b. A decrease in the money supply would cause

A) a shift of the aggregate demand curve from AD₁ to AD₂.
B) a shift of the aggregate demand curve from AD₂ to AD₁.
C) a shift of the short-run aggregate supply curve from AS₁ to AS₂.
D) a shift of the short-run aggregate supply curve from AS₂ to AS₁.

Question 79

What are the two policy making bodies of the Federal Reserve?

A) the Board of Governors and the U.S. Congress
B) the Board of Governors and the Federal Open Market Committee
C) the Board of Governors and the Presidents' office
D) the Federal Open Market Committee and the U.S. Congress

Question 80

Following the U.S. financial crisis in 2008, some observers assert that the policies of Fed Chairman Greenspan contributed to the crisis. Which of the following is a criticism of Greenspan's policies?
I. The very low interest rates used to fight the 2001 recession were maintained for too long, leading to the real estate bubble.
II. The Fed provided real estate developers with liquidity to encourage property development and offered tax breaks to first-time home buyers, which in turn fueled the real estate bubble.
III. The Fed did not promote appropriate regulations to deal with the new financial instruments that were created in the early 2000s.

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