Question 1

Previous variables used by the Fed for monetary policy since 1970 include all of the following except
A) money supply growth rates.
B) nominal interest rates.
C) average long-term inflation rates.
D) business cycle fluctuations.
E) none of the above; each has been used at some time during the past three decades.

Accepted Answer

Since 1970, the Federal Reserve has indeed considered all of these variables—money supply growth rates, nominal interest rates, average long-term inflation rates, and business cycle fluctuations—as part of its monetary policy toolkit at different times.

Question 2

The Taylor rule has stabilizing effects on
A) output.
B) interest rates.
C) inflation.
D) all of the above.
E) only a and c.

Accepted Answer

The Taylor rule is designed to stabilize both output and inflation by adjusting interest rates in response to changes in economic conditions, specifically deviations from target inflation and output levels.

Question 3

The harder the Fed applies the brakes of restrictive monetary policy in an attempt to reduce an excessive rate of inflation,
A) the larger is the resulting gap between actual and potential GDP in the short run.
B) the tighter is the spiral of recovery as the economy moves quickly toward equilibrium at a lower rate of inflation with a minimum of overshooting.
C) the wider is the spiral of recovery as the economy more-dramatically overshoots equilibrium on the low side of the long-run rate of inflation.
D) a and c only.
E) a and b only.

Accepted Answer

When the Fed applies restrictive monetary policy, it can lead to a larger gap between actual and potential GDP (A) and can cause the economy to overshoot equilibrium on the low side of inflation (C).

Question 4

The Federal Reserve, like other central banks, considers the role of monetary policy to be one of
A) maintaining low and stable inflation.
B) achieving a targeted level of real GDP and unemployment over the long run.
C) maintaining a constant level of long-run monetary growth, thus keeping inflation in check.
D) influencing real GDP and unemployment in the short run.
E) both a and d.

Accepted Answer

The Federal Reserve uses monetary policy primarily to maintain low and stable inflation (A) and to influence real GDP and unemployment in the short run (D). These goals help manage economic activity and ensure stability.

Question 5

Each of the following statements describes the behavior of the Taylor rule, which does not belong? A) The Taylor rule works equally well in the context of either an open or a closed economy. B) One way for exchange rate fluctuations show up in the Taylor rule is through the behavior of Y^{^}. C) One way for exchange rate fluctuations show up in the Taylor rule is through the behavior of . D) One way for exchange rate fluctuations show up in the Taylor rule is through the behavior of r. E) The Taylor rule requires a flexible exchange rate.

Accepted Answer

The answer of Each of the following statements describes the...

Question 6

Each of the following statements about the principles underlying the Taylor rule is true except
A) the Fed desires to minimize inflation deviation from its target level.
B) the Fed desires to minimize real output fluctuations.
C) the Fed desires to minimize unemployment fluctuations.
D) the Fed desires to minimize interest rate fluctuations.
E) the Fed desires to minimize inflation fluctuations.

Accepted Answer

The Taylor rule primarily focuses on stabilizing inflation around a target level and minimizing the gap between actual and potential output. It does not specifically aim to minimize interest rate fluctuations; rather, interest rates are adjusted as a means to achieve the other objectives.

Question 7

A decision on the part of the FOMC to raise interest rates must necessarily be followed by
A) Fed open market purchases, which lower the money supply and reduce interest rates.
B) Fed open market purchases, which increase the money supply and reduce interest rates.
C) Fed open market sales, which lower the money supply and increase interest rates.
D) Fed open market sales, which increase the money supply and reduce interest rates.

Accepted Answer

When the FOMC decides to raise interest rates, it typically does so by selling securities in open market operations, which decreases the money supply and, as a result, increases interest rates.

Question 8

Since the mid-1980s, the FOMC's chief policy focus has been the behavior of
A) the growth rate of the money supply.
B) the federal funds rate.
C) margin requirements on stock purchases.
D) the discount rate.
E) reserve requirements.

Accepted Answer

Since the mid-1980s, the Federal Open Market Committee (FOMC) has primarily focused on the federal funds rate as its chief policy tool for influencing monetary conditions and the economy. The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. Adjusting this rate influences other interest rates, economic activity, and inflation.

Question 9

Given a monetary policy rule of the form r = p + 0.5Y^{^}+ 0.5p - p*) + 0.03, a negative aggregate demand shock resulting in a -5 percent GDP gap leads the Fed to A) lower nominal interest rates by 5 percent. B) lower the real interest rate target by 2.5 percent. C) lower nominal interest rates by 2.5 percent. D) lower the inflation target by 2.5 percent. E) wait and see if the shock turned out to be a permanent change.

Accepted Answer

The Fed's policy rule implies that a -5 percent GDP gap would lead to a 2.5 percent decrease in the real interest rate target.

Question 10

Suppose government deficits increase such that real interest rates rise by 1.5 percentage points. According to the Taylor rule, if inflation targets remain unchanged, then nominal interest rates should rise by
A) less than 1 percent.
B) between 1 and 1.5 percent.
C) exactly 1.5 percent.
D) between 1.5 and 2 percent.
E) more than 2 percent.

Accepted Answer

The Taylor rule suggests that for each 1 percentage point increase in inflation, the central bank should raise the nominal interest rate by more than 1 percentage point to maintain the real interest rate. However, if the real interest rate rises by 1.5 percentage points due to government deficits and the inflation target remains unchanged, the nominal interest rate should increase by exactly 1.5 percentage points to match the increase in the real interest rate, assuming other factors in the Taylor rule equation remain constant.

Question 11

The Taylor principle describes Fed behavior that nominal
Interest rates _ .
A) raises, by the same amount as inflation
B) lowers, by less than the amount of inflation
C) lowers, by more than the amount of inflation
D) raises, by less than the amount of inflation
E) raises, by more than the amount of inflation

Accepted Answer

The Taylor principle suggests that central banks (like the Fed) should raise nominal interest rates by more than the increase in inflation to stabilize the economy. This approach helps in maintaining the real interest rate and controlling inflationary pressures.

Question 12

Given the monetary policy rule, r = p + 0.5Y^{^}+ 0.5p - p*) + 3 and Assuming Y^{^}= 0 and p = p*, let inflation increase by 2 percentage points. By how much would the Fed increase interest rates? A) 6 percentage points B) 2 percentage points C) 3 percentage points D) 5 percentage points E) Less than 2 percentage points

Accepted Answer

The answer of Given the monetary policy rule, r =...

Question 13

Since the late 1980s, under Alan Greenspan, the Fed's operating instructions to the New York trading desk typically took the form of A) a short-term interest rate target. B) ^{an M}1 ^target. C) ^{an M}3 ^target. D) a nominal GDP target. E) a real GDP target.

Accepted Answer

Since the late 1980s, under Alan Greenspan, the Federal Reserve's operating instructions typically focused on targeting a short-term interest rate, such as the federal funds rate, as their primary monetary policy tool.

Question 14

Each of the following statements about the principles underlying the Taylor rule is true except
A) the Fed desires to maintain real output approximately at potential GDP.
B) the Fed desires to maintain unemployment at its natural rate.
C) the Fed desires to maintain inflation at its target level.
D) the Fed desires to maintain interest rates at their target level.
E) all of the above statements are true.

Accepted Answer

The Taylor rule primarily focuses on stabilizing inflation around a target level and output around its potential level. It does not directly aim to maintain interest rates at a target level; instead, it suggests how central banks should adjust nominal interest rates in response to deviations of inflation from its target and output from its potential.

Question 15

The Federal Reserve, like other central banks, has several objectives. Which of the following does not belong?
A) low and stable inflation
B) low unemployment
C) low monetary growth
D) low levels of real GDP fluctuations
E) low inflation targets

Accepted Answer

C) Low monetary growth is not a primary objective of the Federal Reserve. The main goals are to manage inflation, minimize unemployment, and stabilize the economy, which involves managing GDP fluctuations and setting inflation targets. Low monetary growth is not a direct objective but rather a means to achieving these ends.

Question 16

The Taylor rule describes a Fed that raises real interest rates when
A) real output exceeds potential real output.
B) interest rates fall unexpectedly.
C) inflation is expected to rise.
D) inflation rises about its targeted level.
E) both a and d.

Accepted Answer

The Taylor rule suggests that the Federal Reserve (or any central bank) should raise real interest rates when the economy is overheating (i.e., real output exceeds potential output) and when inflation rises above its target level. This approach helps in controlling inflation and stabilizing the economy.

Question 17

The Taylor rule describes a Fed that raises real interest rates when
A) real output falls short of potential real output.
B) interest rates fall unexpectedly.
C) inflation is expected to rise.
D) inflation rises about its targeted level.
E) both c and d.

Accepted Answer

The answer of The Taylor rule describes a Fed that...

Question 18

For a macroeconomic policy curve of the forY ^ˆ higher inflation means A) lower aggregate demand because the Fed raises interest rates according to its policy rule. B) higher aggregate demand because higher interest rates produce higher levels of net exports. C) higher aggregate demand because higher interest rates increase personal consumption. D) b and c. E) none of the above.

Accepted Answer

Higher inflation typically leads to the Federal Reserve (or any central bank) raising interest rates to control inflation. This increase in interest rates can dampen aggregate demand by making borrowing more expensive, thereby reducing spending on investment and consumption.

Question 19

Given a monetary policy rule of the form r = p + 0.5Y^{^}+ 0.5p - p*) + 0.03 and assuming that the output gap equals zero, an unexpected price shock of A) raise nominal interest rates by 5 percent. B) raise the real interest rate target by 2.5 percent. C) raise nominal interest rates by 7.5 percent. D) raise the inflation target by 2.5 percent. E) wait and see if the shock turned out to be a permanent change.

Accepted Answer

The answer of Given a monetary policy rule of the...

Question 20

A decision on the part of the FOMC to lower interest rates must necessarily be followed by
A) Fed open market purchases, which lower the money supply and reduce interest rates.
B) Fed open market purchases, which increase the money supply and reduce interest rates.
C) Fed open market sales, which lower the money supply and reduce interest rates.
D) Fed open market sales, which increase the money supply and reduce interest rates.
E) Fed open market purchases, which increase the money supply and increase interest rates.

Accepted Answer

To lower interest rates, the Federal Open Market Committee (FOMC) would engage in open market purchases. This action increases the money supply in the economy, which in turn reduces interest rates.

Quiz 16: The Macroeconomic Policy Model

Previous variables used by the Fed for monetary policy since 1970 include all of the following except

The Taylor rule has stabilizing effects on

The harder the Fed applies the brakes of restrictive monetary policy in an attempt to reduce an excessive rate of inflation,

The Federal Reserve, like other central banks, considers the role of monetary policy to be one of

Each of the following statements describes the behavior of the Taylor rule, which does not belong?

Each of the following statements about the principles underlying the Taylor rule is true except

A decision on the part of the FOMC to raise interest rates must necessarily be followed by

Since the mid-1980s, the FOMC's chief policy focus has been the behavior of

Given a monetary policy rule of the form r = p + 0.5Y^{^}+ 0.5p - p*) + 0.03, a negative aggregate demand shock resulting in a -5 percent GDP gap leads the Fed to

Suppose government deficits increase such that real interest rates rise by 1.5 percentage points. According to the Taylor rule, if inflation targets remain unchanged, then nominal interest rates should rise by

The Taylor principle describes Fed behavior that nominal Interest rates _ .

Given the monetary policy rule, r = p + 0.5Y^{^}+ 0.5p - p) + 3 and Assuming Y^{^}= 0 and p = p, let inflation increase by 2 percentage points. By how much would the Fed increase interest rates?

Since the late 1980s, under Alan Greenspan, the Fed's operating instructions to the New York trading desk typically took the form of

Each of the following statements about the principles underlying the Taylor rule is true except

The Federal Reserve, like other central banks, has several objectives. Which of the following does not belong?

The Taylor rule describes a Fed that raises real interest rates when

The Taylor rule describes a Fed that raises real interest rates when

For a macroeconomic policy curve of the forY ^ˆ higher inflation means

Given a monetary policy rule of the form r = p + 0.5Y^{^}+ 0.5p - p*) + 0.03 and assuming that the output gap equals zero, an unexpected price shock of

A decision on the part of the FOMC to lower interest rates must necessarily be followed by

Quiz 16: The Macroeconomic Policy Model

Previous variables used by the Fed for monetary policy since 1970 include all of the following except

The Taylor rule has stabilizing effects on

The harder the Fed applies the brakes of restrictive monetary policy in an attempt to reduce an excessive rate of inflation,

The Federal Reserve, like other central banks, considers the role of monetary policy to be one of

Each of the following statements describes the behavior of the Taylor rule, which does not belong?

Each of the following statements about the principles underlying the Taylor rule is true except

A decision on the part of the FOMC to raise interest rates must necessarily be followed by

Since the mid-1980s, the FOMC's chief policy focus has been the behavior of

Given a monetary policy rule of the form r = p + 0.5Y^ + 0.5p - p*) + 0.03, a negative aggregate demand shock resulting in a -5 percent GDP gap leads the Fed to

Suppose government deficits increase such that real interest rates rise by 1.5 percentage points. According to the Taylor rule, if inflation targets remain unchanged, then nominal interest rates should rise by

The Taylor principle describes Fed behavior that nominal Interest rates _ .

Given the monetary policy rule, r = p + 0.5Y^ + 0.5p - p*) + 3 and Assuming Y^ = 0 and p = p*, let inflation increase by 2 percentage points. By how much would the Fed increase interest rates?

Since the late 1980s, under Alan Greenspan, the Fed's operating instructions to the New York trading desk typically took the form of

Each of the following statements about the principles underlying the Taylor rule is true except

The Federal Reserve, like other central banks, has several objectives. Which of the following does not belong?

The Taylor rule describes a Fed that raises real interest rates when

The Taylor rule describes a Fed that raises real interest rates when

For a macroeconomic policy curve of the forY ˆ higher inflation means

Given a monetary policy rule of the form r = p + 0.5Y^ + 0.5p - p*) + 0.03 and assuming that the output gap equals zero, an unexpected price shock of

A decision on the part of the FOMC to lower interest rates must necessarily be followed by

Given a monetary policy rule of the form r = p + 0.5Y^{^}+ 0.5p - p*) + 0.03, a negative aggregate demand shock resulting in a -5 percent GDP gap leads the Fed to

Given the monetary policy rule, r = p + 0.5Y^{^}+ 0.5p - p) + 3 and Assuming Y^{^}= 0 and p = p, let inflation increase by 2 percentage points. By how much would the Fed increase interest rates?

For a macroeconomic policy curve of the forY ^ˆ higher inflation means

Given a monetary policy rule of the form r = p + 0.5Y^{^}+ 0.5p - p*) + 0.03 and assuming that the output gap equals zero, an unexpected price shock of