Question 1

Figure 17-15
 
-Refer to Figure 17-15.In the figure above,suppose the economy in Year 1 is at point A and 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 Federal Reserve could use open market operations, such as buying Treasury bills, to increase the money supply and stimulate aggregate demand, thus moving the economy from point B to point C. Decreasing income taxes or increasing the required-reserve ratio would not have a direct impact on the money supply or aggregate demand in the short run. Selling Treasury bills would decrease the money supply and further reduce aggregate demand, moving the economy away from point C.

Question 2

Table 17-4
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 15.1 \text { trillion } & \$ 15.1 \text { trillion } & 150 \
\hline 2015 & 15.4 \text { trillion } & 15.3 \text { trillion } & 153 \
\hline
\end{array}$$
-Refer to Table 17-4.Suppose the following table illustrates the values of real and potential GDP and the price level,if the Fed does not vote to change their current policy to be more contractionary or expansionary.If the Fed wants to keep real GDP at its potential level in 2015,should the Fed use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal?

Accepted Answer

The answer of Table 17-4
 \[\begin{array} { | c |...

Question 3

Table 17-2
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.0 \text { trillion } & \$ 14.0 \text { trillion } & 150 \
\hline 2015 & 14.5 \text { trillion } & 14.2 \text { trillion } & 152 \
\hline
\end{array}$$
-Refer to Table 17-2.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 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 2015,which of the following will be higher than if the Fed had taken no action?

Accepted Answer

If the Fed did not take any action, real GDP would be below its potential level in 2015. By using monetary policy to keep real GDP at its potential level, real GDP will increase. However, this increase in output could lead to an increase in prices, resulting in a higher inflation rate. Therefore, the correct answer is (B) real GDP and the inflation rate.

Question 4

Table 17-6
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 15.1 \text { trillion } & \$ 15.1 \text { trillion } & 150 \
\hline 2015 & 15.4 \text { trillion } & 15.6 \text { trillion } & 155 \
\hline
\end{array}$$
-Refer to Table 17-6.Suppose the table above illustrates the values of real and potential GDP and the price level,if the Fed does not vote to change their current policy to be more contractionary or expansionary.If the Fed wants to keep real GDP at its potential level in 2015,should the Fed use a contractionary or expansionary policy? Should it raise or lower its interest rate target? How should it conduct open market operations to achieve its goal?

Accepted Answer

The answer of Table 17-6
 \[\begin{array} { | c |...

Question 5

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

Accepted Answer

When the Fed implements expansionary monetary policy, it aims to increase the money supply and lower interest rates. This can make it cheaper for consumers to borrow money, which can lead to increased spending and investment, ultimately stimulating aggregate demand.

Question 6

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

Accepted Answer

Contractionary monetary policy involves decreasing the money supply, which can lead to higher interest rates and slower economic growth. This can help to prevent inflation from increasing.

Question 7

Table 17-3
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.0 \text { trillion } & \$ 14.0 \text { trillion } & 150 \
\hline 2015 & 14.5 \text { trillion } & 14.8 \text { trillion } & 154 \
\hline
\end{array}$$
-Refer to Table 17-3.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2015,it should

Accepted Answer

Since real GDP has already exceeded its potential level, the economy is experiencing an inflationary gap (discussed in Chapter 17). To bring the real GDP back to its potential level, the Fed needs to decrease aggregate demand (AD). Selling Treasury securities decreases the reserves in the banking system, leading to a contraction of money supply, which reduces AD. Therefore, option B is the correct answer. Options A, C, and D all increase AD, which would lead to a further expansion of real GDP and worsening of the inflationary gap.

Question 8

Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending,as in the 2001 recession,than in a recession caused by an increase in oil prices,as in the 1974-75 recession?

Accepted Answer

The answer of Would the Federal Reserve respond more aggressively...

Question 9

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, which involves lowering interest rates or increasing the money supply, is used to stimulate economic growth. This typically results in higher inflation due to increased spending and demand, and higher real GDP as economic activity expands.

Question 10

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.

Question 11

Table 17-3
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.0 \text { trillion } & \$ 14.0 \text { trillion } & 150 \
\hline 2015 & 14.5 \text { trillion } & 14.8 \text { trillion } & 154 \
\hline
\end{array}$$
-Refer to Table 17-3.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 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 2015,which of the following will be lower than if the Fed had taken no action?

Accepted Answer

If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, the inflation rate will be lower than if the Fed had taken no action. This is because the price level is expected to rise from 150 to 154 in 2015 without any monetary policy action. However, with successful monetary policy, real GDP will remain at its potential level, keeping inflation in check. As a result, both real GDP and the inflation rate will be lower than if the Fed had taken no action.

Question 12

Table 17-8
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2013 & \$ 13.5 \text { trillion } & \$ 13.5 \text { trillion } & 142 \
\hline 2014 & 14.0 \text { trillion } & 14.4 \text { trillion } & 150 \
\hline
\end{array}$$
-Refer to Table 17-8.The hypothetical information in the table shows what the values for real GDP and the price level will be in 2014 if the Federal Reserve does not use monetary policy:
a.If the Fed wants to keep real GDP at its potential level in 2014,should it use an expansionary policy or a contractionary policy? Should the trading desk buy T-bills or sell them?
b.Suppose the Fed's policy is successful in keeping real GDP at its potential level in 2014.State whether each of the following will be higher or lower than if the Fed had taken no action:
(i) Real GDP
(ii) Full-employment real GDP
(iii) The inflation rate
(iv) The unemployment rate
c.Draw an aggregate demand and aggregate supply graph to illustrate your answer.Be sure that your graph contains LRAS curves for 2013 and 2014; SRAS curves 2013 and 2014; AD curve for 2013 and 2014,with and without monetary policy actions; and equilibrium real GDP and the price level in 2014 with and without policy.

Accepted Answer

The answer of Table 17-8
 \[\begin{array} { | c |...

Question 13

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

Accepted Answer

This is due to various factors that are outside the control of the Fed, including changes in technology, shifts in consumer preferences, and fluctuations in international trade. As a result, there will always be some degree of "output gap" between actual GDP and potential GDP.

Question 14

Table 17-2
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.0 \text { trillion } & \$ 14.0 \text { trillion } & 150 \
\hline 2015 & 14.5 \text { trillion } & 14.2 \text { trillion } & 152 \
\hline
\end{array}$$
-Refer to Table 17-2.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2015,it should

Accepted Answer

To increase real GDP to its potential level, the Fed should buy Treasury securities, which increases the money supply and lowers interest rates, stimulating economic activity.

Question 15

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium.For Year 2,graph aggregate demand,long-run aggregate supply,and short-run aggregate supply such that the condition of the economy will induce the Federal Reserve to conduct an expansionary monetary policy.Briefly explain the condition of the economy and what the Federal Reserve is attempting to do.

Accepted Answer

The answer of Use the dynamic aggregate demand and aggregate...

Question 16

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 incentivizes borrowing and spending. This can lead to an increase in demand for goods and services, which can push prices up, causing inflation.

Question 17

Table 17-5
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.4 \text { trillion } & \$ 14.4 \text { trillion } & 144 \
\hline 2015 & 14.7 \text { trillion } & 14.5 \text { trillion } & 146 \
\hline
\end{array}$$
-Refer to Table 17-5.Suppose the table above illustrates the values of real and potential GDP and the price level,if the Fed does not vote to change their current policy to be more contractionary or expansionary.Suppose that the Fed uses an appropriate policy and is successful in keeping real GDP at potential in 2015.State whether each of the following will be higher or lower than if the Fed had taken no action:
a.Real GDP
b.Potential real GDP
c.The price level
d.The unemployment rate

Accepted Answer

The answer of Table 17-5
 \[\begin{array} { | c |...

Question 18

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 19

Table 17-7
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2012 & \$ 14.2 \text { trillion } & \$ 14.2 \text { trillion } & 154 \
\hline 2013 & 14.8 \text { trillion } & 14.6 \text { trillion } & 156 \
\hline
\end{array}$$
-Refer to Table 17-7.Suppose the table above illustrates the values of real and potential GDP and the price level,if the Fed did not vote to change their current policy to be more contractionary or expansionary.Suppose that the Fed used an appropriate policy and was successful in keeping real GDP at potential in 2013.Draw an aggregate demand and supply curve to illustrate your answer.

Accepted Answer

The answer of Table 17-7
 \[\begin{array} { | c |...

Question 20

Figure 17-16
 
-Refer to Figure 17-16.In the figure above,suppose the economy in Year 1 is at point A and 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 17-16
 
-Refer to Figure 17-16.In the...

Quiz 17: Monetary Policy

Figure 17-15 -Refer to Figure 17-15.In the figure above,suppose the economy in Year 1 is at point A and 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?