Question 1

Expansionary monetary policy will result in

Accepted Answer

Expansionary monetary policy is when a central bank (such as the Federal Reserve in the US) increases the money supply by buying government bonds or decreasing interest rates. This leads to lower interest rates, making it cheaper for people and firms to borrow money and spend/invest. The increase in spending/investment leads to an increase in aggregate demand, which may then lead to an increase in prices (inflation). Therefore, B and C are incorrect answer choices.

Question 2

Deflation refers to

Accepted Answer

Deflation refers to a falling price level, so only choice B is correct. A decrease in the rate of inflation would still result in prices increasing, just at a slower rate.

Question 3

If the Federal Reserve chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation, which of the following would you expect to see?

Accepted Answer

An upward shift of the short-run Phillips curve can occur when firms and consumers expect inflation to increase due to expansionary monetary policy. This expectation can lead to higher wage demands and prices, moving the economy along the Phillips curve to a point with higher inflation and potentially lower unemployment in the short run.

Question 4

If the Fed chose to change its policy actions implemented during the heart of the recession faster than the timing suggested by the White House, this would be an indication of the Fed's

Accepted Answer

The Fed's independence is an important characteristic of the central bank. If the Fed chose to change its policy actions faster than the White House suggested, it would demonstrate the Fed's independence from political pressures and its ability to make decisions based on its own assessment of the state of the economy. This independence is essential for the long-term credibility and effectiveness of the Fed in achieving its objectives.

Question 5

Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008. Which of the following was one of those actions?

Accepted Answer

The decision to keep the federal funds rate at 1 percent for a year may have contributed to the housing bubble and the subsequent financial crisis by keeping borrowing costs low and encouraging risky lending and borrowing practices.

Question 6

All of the following have enhanced the Fed's credibility in conducting monetary policy except

Accepted Answer

Discontinuing the policy of announcing whether it considered the economy to be at greater risk of inflation or recession following each FOMC meeting could potentially decrease the Fed's credibility, as it may make their decision-making process less transparent and leave markets uncertain about their outlook. The other options, such as following through with changes, revealing targets, and making minutes public, all increase transparency and can enhance the Fed's credibility in conducting monetary policy.

Question 7

If the current unemployment rate is 5%, under which of the following circumstances would you expect the Fed to use contractionary monetary policy?

Accepted Answer

The answer of If the current unemployment rate is 5%,...

Question 8

One criticism of the Fed's policy of forward guidance during the recession of 2007-2009 is that it contributed to a prolonged period of abnormally low interest rates, leading to speculative bubbles in stocks or other financial assets as investors

Accepted Answer

The criticism of the Fed's forward guidance policy is that it led to abnormally low interest rates, which incentivized investors to borrow at low rates and invest in stocks or other financial assets in search of higher returns. This could contribute to speculative bubbles in these assets, as investors chase higher returns and bid up prices. Therefore, choice B is the best answer.

Question 9

If the economy experiences a(n) ________, inflation will rise and real GDP will fall.

Accepted Answer

A negative supply shock is a sudden decrease in the supply and increase in the cost of key inputs such as oil, causing a decrease in short-run aggregate supply, which leads to both higher prices (inflation) and a decrease in real GDP.

Question 10

A study conducted by Alberto Alesina and Lawrence Summers concluded that countries with highly independent central banks had ________ than countries whose central banks had little independence.

Accepted Answer

The study by Alesina and Summers found that countries with highly independent central banks had lower inflation rates than countries whose central banks had little independence. Therefore, option D is the correct choice.

Question 11

Forward guidance refers to central banks

Accepted Answer

Forward guidance refers to central banks communicating to the public what future monetary policy will be. This can include indicating a target for interest rates or inflation, as well as outlining the expected path of monetary policy in order to influence expectations and guide economic behavior.

Question 12

If the Federal Reserve announces that its target for the federal funds rate is falling from 3 percent to 2.25 percent, how do you expect workers and firms to react?

Accepted Answer

When the Federal Reserve announces a decrease in the federal funds rate, this means that it is easier and cheaper for banks to borrow from each other, which means that they will have more money to lend to consumers and businesses. This can lead to an increase in consumption and investment spending, which will increase aggregate demand and inflation. However, this assumes that workers and firms believe that the Fed's announcement is credible and that inflation is likely to rise as a result of its policy.

Question 13

It has been argued that the experience of Paul Volcker's fight against inflation during the late 1970s and early 1980s indicates that firms and workers

Accepted Answer

During that time, firms and workers were observed to have adaptive expectations. This means that they changed their expectations of future inflation only after the current inflation rate had fallen. This suggests that they did not have rational expectations and did not fully trust Fed announcements. Option B is incorrect because it assumes that firms and workers had rational expectations and trusted Fed's announcements. Option C is also incorrect because high unemployment would cause economic hardship for workers and firms, and thus, they would prefer low unemployment and low inflation simultaneously. Therefore, option A is the correct answer.

Question 14

In August 1979, President Jimmy Carter appointed ________ as chairman of the Board of Governors of the Federal Reserve System.

Accepted Answer

Paul Volcker was appointed as chairman of the Board of Governors of the Federal Reserve System by President Jimmy Carter in August 1979.

Question 15

Which of the following is an appropriate policy for a central bank to follow if the economy is plagued with deflation?

Accepted Answer

In the case of deflation, the appropriate policy for a central bank would be to consistently pursue policy to promote the credibility of the central bank. This would allow the central bank to convey its commitment to price stability and ensure that market participants have confidence in the bank's ability to control inflation and deflation. Increasing interest rates (choices A and B) would be contractionary and likely worsen deflation, and gradually raising the required reserve rate (choice D) would not necessarily address the main issue of a lack of consumer demand.

Question 16

A provision of the Dodd-Frank Act of 2010 revised the Federal Reserve Act to

Accepted Answer

The answer of A provision of the Dodd-Frank Act of...

Question 17

Disinflation refers to

Accepted Answer

Disinflation refers to a reduction in the rate of inflation, not necessarily a decrease in the price level.

Question 18

Which of the following could decrease unemployment and inflation simultaneously?

Accepted Answer

A decrease in oil prices would decrease the cost of production for firms, which would lower prices for consumers and decrease inflation. At the same time, firms may hire more workers to increase production, which would decrease unemployment. Expansionary monetary policy may also decrease unemployment, but it could increase inflation. Contradictory monetary policy would decrease inflation, but it could also increase unemployment. An increase in the real wage would likely only decrease unemployment, but it may also increase inflation.

Question 19

The policy which holds that the federal government should not allow large financial firms to fail, for fear of damaging the financial system, is known as the ________ policy.

Accepted Answer

The policy which holds that the federal government should not allow large financial firms to fail, for fear of damaging the financial system, is known as the too-big-to-fail policy. Dodd-Frank is a financial reform law enacted in response to the financial crisis of 2008-2009. Mandatory bailout and rational expectations are not relevant to this policy.

Question 20

If the Fed decided to reverse its policy actions implemented during the heart of the recession, the Fed would be acting to try to prevent

Accepted Answer

Reversing policy actions implemented during a recession generally involves reducing interest rates and increasing the money supply, which could lead to an increase in inflation. Therefore, the Fed would be acting to prevent an increase in inflation.

Quiz 28: Inflation, Unemployment, and Federal Reserve Policy