Question 1

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 2

Monetarists think that the Fed should use ________ as a target when conducting monetary policy.

Accepted Answer

Monetarists, such as Milton Friedman, advocate for targeting the money supply as they believe it directly impacts inflation and economic activity, making it the most effective tool for conducting monetary policy.

Question 3

If the Federal Reserve targets the interest rate and the money demand curve shifts to the left,then the Fed

Accepted Answer

If the money demand curve shifts to the left, this means that people want to hold less money at any given interest rate. This will cause the interest rate to rise in order to entice people to hold onto their money. If the Fed wants to maintain their targeted interest rate, they will have to decrease the quantity of money supply in circulation. Therefore, Option B is the best choice.

Question 4

The supporters of a monetary growth rule believe that active monetary policy

Accepted Answer

Supporters of a monetary growth rule argue that active monetary policy (frequent adjustments in monetary policy in response to economic changes) can destabilize the economy. They believe that it can lead to more frequent and severe recessions by introducing uncertainty and making it harder for businesses and consumers to plan for the future.

Question 5

With a monetary growth rule as proposed by the monetarists,during a recession the rate of growth of the money supply would

Accepted Answer

Monetarists advocate for a steady rate of growth in the money supply, not adjusting it based on economic cycles such as recessions or expansions. This approach aims to provide stability and predictability in the monetary policy.

Question 6

Suppose that the Federal Reserve Open Market Committee adheres to the ideas expressed by ________.If the economy moves into a recession,the Fed would recommend that the federal funds target rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation.

Accepted Answer

This statement aligns with the principles of inflation targeting, which involves setting a publicly announced target for inflation and adjusting monetary policy (such as the federal funds rate) to achieve that target. Inflation targeting proponents argue that maintaining low, stable inflation is key to promoting long-term economic growth and stability. The other options (gold standard, monetarist school of thought, and the Taylor Rule) do not necessarily advocate for this specific approach to monetary policy in a recession.

Question 7

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 a contractionary 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 8

The Federal Reserve cannot target both the money supply and the interest rate because it does not control

Accepted Answer

The Federal Reserve can manipulate the money supply through open market operations, but it cannot control the demand for money, which affects interest rates. Therefore, it can either target the money supply or the interest rate, but not both simultaneously. The other options listed - bank reserves and the discount rate - are tools that the Fed uses to implement monetary policy but are not the primary determinants of whether the Fed targets the money supply or interest rates.

Question 9

Most of the pressure for a monetary growth rule has disappeared because since 1980

Accepted Answer

The relationship between movements in the money supply and movements in real GDP and the price level have become much weaker since 1980. This means that controlling the money supply alone may not be an effective way to stabilize the economy and control inflation. As a result, the pressure for a monetary growth rule has decreased.

Question 10

Table 17-8
 $\begin{array}{|c|c|c|c|}
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2018 & \$ 18.5 \text { trillion } & \$ 18.5 \text { trillion } & 142 \
\hline 2019 & 19.0 \text { trillion } & 19.4 \text { trillion } & 150 \
\hline
\end{array}$
-Refer to Table 17-8.The hypothetical information in the table shows what the values for real GDP and the price level would have been in 2019 if the Federal Reserve did not use monetary policy:
a.If the Fed wanted to keep real GDP at its potential level in 2019,should it have used an expansionary policy or a contractionary policy? Should the trading desk have bought T-bills or sold them?
b.Suppose the Fed's policy was successful in keeping real GDP at its potential level in 2019.State whether each of the following would 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 2018 and 2019; SRAS curves 2018 and 2019; AD curve for 2018 and 2019,with and without monetary policy actions; and equilibrium real GDP and the price level in 2019 with and without policy.

Accepted Answer

The answer of Table 17-8
 \(\begin{array}{|c|c|c|c|}
\hline \text { Year }...

Question 11

The Taylor rule links the Federal Reserve's target for the

Accepted Answer

The Taylor rule is a monetary policy rule that links the Federal Reserve's target for the federal funds rate to economic variables such as inflation, output, and potential output. It is a guideline for how the central bank should set short-term interest rates in response to changes in economic conditions. It does not directly link the money supply or interest rates to economic variables.

Question 12

Table 17-7
 $\begin{array}{|c|l|l|l|}
\hline \text { Year } & \text { Potential Real GDP } & {\text { Real GDP }} & \text { Price Level } \
\hline 2018 & \$ 19.2 \text { trillion } & \$ 19.2 \text { trillion } & 154 \
\hline 2019 & 19.8 \text { trillion } & 19.6 \text { trillion } & 156 \
\hline
\end{array}$
-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 2019.Draw an aggregate demand and supply curve to illustrate your answer.

Accepted Answer

The answer of Table 17-7
 \(\begin{array}{|c|l|l|l|}
\hline \text { Year }...

Question 13

Under the monetary growth rule proposed by the monetarists,the money supply would grow each year at a constant rate equal to the long-run rate of growth of

Accepted Answer

According to the monetary growth rule proposed by the monetarists, the money supply should grow at a constant rate equal to the long-run rate of growth of real GDP. This is because they believe that changes in the money supply have a direct impact on the level of economic activity, and therefore the money supply needs to grow in line with the growth of the economy to avoid causing inflation or recession.

Question 14

Table 17-4
 $\begin{array}{|l|l|l|l|}
\hline \text { Year } & \text { Potential Real GDP } & {\text { Real GDP }} & \text { Price Level } \
\hline 2018 & \$ 18.1 \text { trillion } & \$ 18.1 \text { trillion } & 150 \
\hline 2019 & 18.4 \text { trillion } & 18.3 \text { trillion } & 153 \
\hline
\end{array}$
-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 2019,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}{|l|l|l|l|}
\hline \text { Year }...

Question 15

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 16

Most economists believe that the best monetary policy target is

Accepted Answer

Most economists believe that targeting an interest rate is the best monetary policy because it provides more flexibility to respond to changing economic conditions. By adjusting the interest rate, central banks can influence borrowing and spending behavior, which in turn affects inflation, economic growth, and employment levels. Targeting the money supply or total bank reserves can be more difficult to control and may not have as direct an impact on the broader economy. The discount rate is a tool used by the central bank to lend money to commercial banks, and while it can have an impact on the economy, it is not considered the best target for monetary policy.

Question 17

Table 17-6
 $\begin{array}{|c|l|l|l|}
\hline \text { Year } & \text { Potential Real GDP } & {\text { Real GDP }} & \text { Price Level } \
\hline 2018 & \$ 18.1 \text { trillion } & \$ 18.1 \text { trillion } & 150 \
\hline 2019 & 18.4 \text { trillion } & 18.6 \text { trillion } & 155 \
\hline
\end{array}$
-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 2019,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|l|l|l|}
\hline \text { Year }...

Question 18

Table 17-5
 $\begin{array}{|c|l|l|l|}
\hline \text { Year } & \text { Potential Real GDP } & {\text { Real GDP }} & \text { Price Level } \
\hline 2018 & \$ 18.4 \text { trillion } & \$ 18.4 \text { trillion } & 144 \
\hline 2019 & 18.7 \text { trillion } & 18.5 \text { trillion } & 146 \
\hline
\end{array}$
-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 2019.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|l|l|l|}
\hline \text { Year }...

Question 19

If the Federal Reserve targets the money supply,and the money demand curve shifts to the left,then the Fed

Accepted Answer

When the demand for money decreases (shifts to the left), the Federal Reserve can still maintain its money supply target, but this will result in a lower equilibrium interest rate. This is because, with lower demand for money, the same amount of money supply will now meet the demand at a lower interest rate.

Question 20

The Federal Reserve does not target both the money supply and an interest rate because

Accepted Answer

The Fed cannot achieve a target for both the money supply and an interest rate at the same time because they are intertwined and affect each other. The Fed can only target one at a time to avoid conflicting policy goals.

Quiz 17: Monetary Policy