Question 1

If the Federal Reserve raises or lowers interest rates too late, it could result in a ________ policy that destabilizes the economy.

Accepted Answer

A procyclical policy refers to a situation where the government or central bank implements policies that exacerbate the economic cycle. If the Federal Reserve raises or lowers interest rates too late, it could amplify the effects of the current economic cycle, resulting in a procyclical policy that destabilizes the economy.

Question 2

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

Accepted Answer

The Fed would pursue an expansionary monetary policy by purchasing Treasury bills through open market operations, which would increase the money supply in the economy and lower interest rates, making borrowing more attractive.

B) is incorrect because selling Treasury bills would decrease the money supply and raise interest rates, which is the opposite of an expansionary policy.
 
C) is incorrect because raising the discount rate would also raise interest rates and decrease borrowing, which is the opposite of an expansionary policy.

D) is incorrect because raising the reserve requirement would reduce the amount of money banks have available to lend, making borrowing more difficult and also the opposite of an expansionary policy.

Question 3

Lowering the interest rate will

Accepted Answer

Lowering the interest rate will make it cheaper for firms to borrow money, therefore increasing their willingness to invest in new projects. This will lead to an increase in investment spending by firms.

Question 4

Contractionary monetary policy on the part of the Fed results in

Accepted Answer

Contractionary monetary policy involves reducing the money supply, typically by increasing interest rates. This leads to a decrease in GDP as borrowing becomes more expensive and businesses and consumers are less likely to invest and spend.

Question 5

Figure 26-7 
-Refer to Figure 26-7. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the basic AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from

Accepted Answer

The economy is above potential GDP, indicating an overheating economy with low unemployment and rising inflation. The Fed should implement contractionary monetary policy to reduce aggregate demand, moving from point C to point B.

Question 6

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve

Accepted Answer

The Federal Reserve cannot realistically fine tune the economy to prevent recessions, but it does seek to keep recessions shorter and milder than they would otherwise be. Its main focus is on maintaining price stability and preventing inflation.

Question 7

Figure 26-7 
-Refer to Figure 26-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the basic AD-AS model in the figure above, this would be depicted as a movement from

Accepted Answer

An expansionary monetary policy would shift the AD curve to the right, from A to B.

Question 8

When calculating GDP, the Bureau of Economic Analysis revises its quarterly data

Accepted Answer

The Bureau of Economic Analysis revises its quarterly data many times over the next several years as more complete and accurate information becomes available. This is because the initial estimates of GDP are based on incomplete data and assumptions, and as more data become available, the estimates are revised to provide a more accurate picture of the economy's performance.

Question 9

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.

Accepted Answer

Expansionary monetary policy means increasing the money supply and lowering interest rates, which in turn stimulates consumption and investment. This causes an increase in aggregate demand and can lead to higher real GDP. However, if the supply of goods and services cannot keep up with the increase in demand, inflation can occur. Therefore, to prevent inflation from being too high, the central bank can use contractionary monetary policy (higher interest rates, lower money supply) to cool down the economy. Overall, expansionary monetary policy would lead to higher real GDP and relatively higher inflation.

Question 10

Figure 26-7 
-Refer to Figure 26-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

Accepted Answer

The answer of Figure 26-7 
-Refer to Figure 26-7. Suppose...

Question 11

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely

Accepted Answer

To counteract the anticipated slower growth in aggregate demand compared to long-run aggregate supply, the Federal Reserve would likely decrease interest rates. Lowering interest rates makes borrowing cheaper, which can stimulate investment and consumption, thereby increasing aggregate demand to better match the growth in aggregate supply.

Question 12

The economy suffered a mild recession in 2001. Despite the recession, home sales and durable goods sales remained high. Which of the following is a plausible explanation?

Accepted Answer

The reduction in the federal funds rate by the Fed could have led to lower interest rates, making it more affordable for consumers to purchase homes and durable goods, leading to high sales despite the recession.

Question 13

Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

Accepted Answer

A significant decrease in investment spending would indicate a slowdown in economic growth and potentially lead to a recession. To combat this, the Federal Reserve may conduct expansionary monetary policy, such as lowering interest rates, to encourage borrowing and spending to stimulate the economy.

Question 14

Monetary policy could be procyclical if the Federal Reserve

Accepted Answer

If the Federal Reserve is late recognizing that a recession has begun and conducts expansionary monetary policy, it may end up exacerbating the boom and bust cycle by increasing the money supply and lowering interest rates when the economy is already growing. This would be an example of procyclical monetary policy.

Question 15

Figure 26-7 
-Refer to Figure 26-7. Suppose the Fed lowers its target for the federal funds rate. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

Accepted Answer

The Fed lowering its target for the federal funds rate would increase the money supply, shifting the AD curve to the right. This would move the equilibrium from point B to point A.

Question 16

Expansionary monetary policy refers to the ________ to increase real GDP.

Accepted Answer

Expansionary monetary policy involves the Federal Reserve increasing the money supply and decreasing interest rates to encourage borrowing and spending, which can lead to an increase in real GDP. A and B are examples of fiscal policy, which involves the government's decisions regarding taxation and spending. D is the opposite of expansionary monetary policy and would likely lead to a decrease in real GDP.

Question 17

Figure 26-6 
-Refer to Figure 26-6. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to

Accepted Answer

If the economy is at point A, it likely indicates a recessionary gap where output is below potential. Lowering interest rates would stimulate investment and consumption, helping to increase aggregate demand and move the economy towards full employment.

Question 18

When the Fed uses contractionary policy

Accepted Answer

Contractionary policy is used by the Fed to decrease the money supply and slow down economic growth. This leads to a decrease in spending and a decrease in aggregate demand, which ultimately results in a lower price level. Therefore, the price level rises less than it would if the Fed did not pursue contractionary policy.

Question 19

Figure 26-7 
-Refer to Figure 26-7. Suppose the economy is in a recession and no policy is pursued. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

Accepted Answer

The answer of Figure 26-7 
-Refer to Figure 26-7. Suppose...

Question 20

Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

Accepted Answer

Increasing the money supply lowers the interest rate, which makes it cheaper to borrow money. This encourages firms to increase investment spending because it becomes easier and more affordable to finance projects.

Quiz 26: Monetary Policy

If the Federal Reserve raises or lowers interest rates too late, it could result in a ________ policy that destabilizes the economy.

Which of the following describes what the Fed would do to pursue an expansionary monetary policy?

Lowering the interest rate will

Contractionary monetary policy on the part of the Fed results in

Figure 26-7 -Refer to Figure 26-7. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the basic AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve

Figure 26-7 -Refer to Figure 26-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the basic AD-AS model in the figure above, this would be depicted as a movement from

When calculating GDP, the Bureau of Economic Analysis revises its quarterly data

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively and real GDP to be relatively .

Figure 26-7 -Refer to Figure 26-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from