Question 1

The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year.

Accepted Answer

The dynamic aggregate demand and aggregate supply model incorporates expectations about inflation, leading to an upward shift in the aggregate supply and aggregate demand curves each year, which accounts for the rising price level annually.

Question 2

Figure 26-15 
-Refer to Figure 26-15. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Accepted Answer

The answer of Figure 26-15 
-Refer to Figure 26-15. In...

Question 3

In reality, the Fed is unable to use monetary policy to keep real GDP exactly at its potential level.

Accepted Answer

The Fed can influence economic growth through monetary policy, but there are many factors that affect GDP that are beyond the Fed's control, such as changes in technology, international events, and natural disasters. Therefore, it is impossible for the Fed to keep real GDP at its potential level at all times.

Question 4

Figure 26-14 
-Refer to Figure 26-14. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Accepted Answer

Buying Treasury bills is an expansionary monetary policy that increases the money supply, lowers interest rates, and stimulates economic activity, which can help move the economy from point B to point C.

Question 5

The Fed can use contractionary monetary policy in an attempt to keep inflation from increasing.

Accepted Answer

Contractionary monetary policy involves actions taken by the Fed to decrease the money supply and increase interest rates, which can help to reduce inflationary pressures in the economy.

Question 6

Table 26-3
 
-Refer to Table 26-3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should

Accepted Answer

The answer of Table 26-3
 
-Refer to Table 26-3. Consider...

Question 7

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates to encourage borrowing and spending, which can stimulate aggregate demand.

Question 8

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

Accepted Answer

If the Federal Reserve anticipates that aggregate demand will grow significantly faster than long-run aggregate supply, it would lead to an inflationary gap. To avoid this situation, the Federal Reserve would increase interest rates to decrease aggregate demand and prevent inflation. This would shift the aggregate demand curve to the left and restore the long-run equilibrium. Options A and B are related to fiscal policy, which is not the responsibility of the Federal Reserve.

Question 9

Figure 26-12 
-Refer to Figure 26-12. In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

Accepted Answer

The answer of Figure 26-12 
-Refer to Figure 26-12. In...

Question 10

Table 26-3
 
-Refer to Table 26-3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2019, which of the following will be lower than if the Fed had taken no action?

Accepted Answer

If the Fed uses monetary policy to keep real GDP at its potential level, the inflation rate will be lower than if no action was taken, as the economy would not overheat. Real GDP would remain at its potential level, not lower.

Question 11

Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

Contractionary monetary policy, aimed at reducing inflation and slowing down an overheating economy, would lead to lower inflation rates as demand decreases. Additionally, it would result in lower real GDP as the economy cools down and growth slows.

Question 12

Figure 26-12 
-Refer to Figure 26-12. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely

Accepted Answer

If the economy is moving from point A to point B, it likely indicates an overheating economy with rising inflation, prompting the Federal Reserve to increase interest rates to cool down the economy.

Question 13

Figure 26-12 
-Refer to Figure 26-12. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B

Accepted Answer

At point B, the economy is operating above its potential output, which means firms are producing above capacity.

Question 14

Table 26-1
 
-Refer to Table 26-1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2019 if the Fed does not use monetary policy. Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2019?

Accepted Answer

Lowering the target for the federal funds rate is an expansionary monetary policy that can increase real GDP to its potential level by encouraging borrowing and spending.

Question 15

Figure 26-13 
-Refer to Figure 26-13. In the figure above, if the economy in Year 1 is at point A and is expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

Accepted Answer

If the economy is moving from point A to point B, it likely indicates an overheating economy or rising inflation. Raising interest rates would help cool down the economy by making borrowing more expensive, thus reducing spending and investment.

Question 16

Table 26-2
 
-Refer to Table 26-2. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should

Accepted Answer

Buying Treasury securities increases the money supply, which can help boost real GDP to its potential level by lowering interest rates and encouraging investment and consumption.

Question 17

Table 26-2
 
-Refer to Table 26-2. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2019, which of the following will be higher than if the Fed had taken no action?

Accepted Answer

The answer of Table 26-2
 
-Refer to Table 26-2. Consider...

Question 18

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

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates, which encourages borrowing and spending. This results in increased aggregate demand and higher real GDP. However, the increased demand can also lead to higher prices and inflation. Therefore, real GDP would be higher, but inflation would also be higher.

Question 19

Expansionary monetary policy enacted during a recession will cause the inflation rate to increase.

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates, which stimulates economic activity and can lead to higher prices for goods and services, causing the inflation rate to increase.

Question 20

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. This action encourages borrowing and spending, which can help increase aggregate demand to better match the growth in aggregate supply.

Quiz 26: Monetary Policy

The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year.

Figure 26-15 -Refer to Figure 26-15. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

In reality, the Fed is unable to use monetary policy to keep real GDP exactly at its potential level.

Figure 26-14 -Refer to Figure 26-14. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

The Fed can use contractionary monetary policy in an attempt to keep inflation from increasing.

Table 26-3 -Refer to Table 26-3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.

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

Figure 26-12 -Refer to Figure 26-12. In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be and real GDP to be .

Figure 26-12 -Refer to Figure 26-12. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely

Figure 26-12 -Refer to Figure 26-12. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B

Table 26-1 -Refer to Table 26-1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2019 if the Fed does not use monetary policy. Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2019?

Figure 26-13 -Refer to Figure 26-13. In the figure above, if the economy in Year 1 is at point A and is expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

Table 26-2 -Refer to Table 26-2. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should

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

Expansionary monetary policy enacted during a recession will cause the inflation rate to increase.

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