Question 1

If the Federal Reserve wants to reduce inflation from 4 percent to 3 percent permanently,how can that goal be achieved,and what impact will that have on employment in the short run and the long run? Support your answer with a graph of the Phillips curve in the short run and the long run.

Accepted Answer

The answer of If the Federal Reserve wants to reduce...

Question 2

Assume the actual unemployment rate is equal to the nonaccelerating inflation rate of unemployment (NAIRU)of 5 percent.If the Fed wants to raise the inflation rate permanently from 1 percent to 3 percent,it should ________ the target for the federal funds rate so the economy's equilibrium moves ________ along the short-run Phillips curve.

Accepted Answer

If the goal is to permanently raise the inflation rate from 1 percent to 3 percent, the Fed needs to push the actual unemployment rate below the NAIRU. This means shifting the economy's equilibrium "up" along the short-run Phillips curve. To achieve this, the Fed should lower the target for the federal funds rate. Therefore, choice C (lower; up) is the best answer.

Question 3

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 the heart of the recession would mean withdrawing the injection of liquidity and lowering of interest rates. This could lead to an increase in inflation, as the supply of money would decrease and demand would remain constant or even increase due to a growing economy. Therefore, the Fed would be acting to prevent an increase in inflation.

Question 4

Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain.

Accepted Answer

The answer of Can the Federal Reserve achieve both low...

Question 5

What actions could the Federal Reserve take to achieve consistent growth in real GDP at 4 percent per year?

Accepted Answer

While the Federal Reserve can influence short-term economic conditions, in the long run, real GDP growth is determined by factors such as productivity, technology, and population growth. The Fed can't directly control these factors, so it can't ensure consistent growth in real GDP at 4 percent per year.

Question 6

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 ability to implement policy actions independently of White House suggestions is a reflection of its independence. A faster change in policy actions does not necessarily indicate lack of credibility, changing of monetary policy targets, or a frictional relationship with the White House.

Question 7

Some economists and lawmakers believe the Fed lost some of its independence when it

Accepted Answer

Working closely with the Treasury Department can be seen as blurring the lines between the Fed's role as a monetary policy maker and the Treasury's role in fiscal policy. This collaboration during the financial crisis raised concerns about the Fed's independence and potential politicization.

Question 8

If inflation falls from 11% to 5%,there is deflation.

Accepted Answer

A decrease in inflation from 11% to 5% is a decrease in the rate of price increase, but it is not deflation, which is a sustained decrease in the overall price level. Deflation occurs when there is negative inflation, or a decrease in the general price level over time.

Question 9

In conducting monetary policy,how has the Federal Reserve enhanced its credibility?

Accepted Answer

By revealing the Fed's target for the federal funds rate, the Federal Reserve has increased transparency and accountability, which has in turn enhanced its credibility. This allows markets and businesses to make more informed decisions and reduces uncertainty. The other options (not following through with changes, keeping minutes confidential, and increased advertising) do not necessarily enhance credibility and can even potentially harm it.

Question 10

How would you expect the Fed to respond to a negative supply shock in the economy?

Accepted Answer

The answer of How would you expect the Fed to...

Question 11

The FOMC no longer sets targets for M1 and M2 to meet its goals of price stability and high employment.

Accepted Answer

The FOMC no longer sets specific targets for M1 and M2 money supply measures, but it does use them as indicators of the overall state of the economy and inflation. The FOMC primarily uses the federal funds rate target to achieve its dual mandate of price stability and high employment.

Question 12

Some economists are concerned that by holding its target for the federal funds rate close to zero for three years,the Fed's policy is actually

Accepted Answer

Keeping the federal funds rate close to zero can lead to increased borrowing and spending, which may drive up demand and potentially cause inflation to increase.

Question 13

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 conducted by Alberto Alesina and Lawrence Summers concluded that countries with highly independent central banks had lower inflation rates than countries whose central banks had little independence.

Question 14

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 from June 2003 to June 2004 is considered one of the actions that contributed to the financial crisis in 2008. This low-interest rate policy fueled the housing bubble by making it easy for people to borrow money to buy homes, leading to an increase in housing prices and eventually a collapse when many homeowners defaulted on their mortgages.

Question 15

One problem with deflation is that it can raise the real value of debt.

Accepted Answer

Deflation reduces the overall price level, which means that the purchasing power of money increases. However, if a person has taken a loan at a higher price level, the real value of their debt increases as prices decrease. This can make it harder for borrowers to repay their debts and lead to defaults.

Quiz 17: Inflation, unemployment, and Federal Reserve Policy