Question 1

Businesses become convinced that future profits from investment will be less than initially believed. This conviction leads to a change in aggregate ________ and so the Fed should ________ the federal funds rate if it wants to try to offset this change.

Accepted Answer

When businesses become convinced that future profits from investment will be less than initially believed, they will reduce their investment spending which will lead to a decrease in aggregate demand. Therefore, to offset this change, the Fed should lower the federal funds rate. Lowering the federal funds rate will encourage borrowing and investment spending, which will boost aggregate demand.

Question 2

-Which aggregate supply-aggregate demand diagram above shows the effect on real GDP and the price level of monetary policy when it is used to fight a recession?

Accepted Answer

The answer of 
-Which aggregate supply-aggregate demand diagram above shows...

Question 3

During the financial crisis of 2008-2009, the Fed was concerned about

Accepted Answer

During the financial crisis of 2008-2009, the Fed was primarily concerned with providing the banking system with enough liquidity. This was because many banks were struggling due to the collapse of the housing market and needed access to funds to continue operating. The Fed took a number of steps to inject liquidity into the banking system, including purchasing large amounts of mortgage-backed securities and other assets. The Fed's actions were aimed at restoring confidence in the financial system and preventing a wider collapse. While concerns about asset bubbles, interest rates, and bank deposits were certainly important, providing liquidity was the Fed's primary focus during the crisis.

Question 4

-In the above figure, suppose point C is the original equilibrium. If the Fed increases the federal funds rate, the new equilibrium is given by point

Accepted Answer

The answer of 
-In the above figure, suppose point C...

Question 5

In the short run, the Fed's actions to fight an inflationary gap shift the

Accepted Answer

To combat an inflationary gap, the Federal Reserve (Fed) would typically increase interest rates or use other contractionary monetary policies. These actions are intended to reduce spending and investment, which in turn decreases the aggregate demand, shifting the aggregate demand curve leftward.

Question 6

Suppose that initially real GDP equals potential GDP. Then an increase in aggregate demand occurs. According to the Taylor rule, the Fed should ________ the federal funds rate by ________ government securities in the open market.

Accepted Answer

When aggregate demand increases, it can lead to inflationary pressures. According to the Taylor rule, the Federal Reserve should respond by raising the federal funds rate to cool down the economy. The Fed raises the federal funds rate by selling government securities in the open market, which decreases the money supply and increases interest rates.

Question 7

In the short run, a rise in the federal funds rate ________ the price level and ________ real GDP.

Accepted Answer

When the federal funds rate increases, it becomes more expensive for banks to borrow money, which leads to a decrease in the money supply. This decrease in the money supply leads to a decrease in spending, which puts downward pressure on the price level. Additionally, the decrease in spending leads to a decrease in real GDP, as firms reduce their production in response to lower demand.

Question 8

One problem with the ripple effect from the Fed's monetary policy is

Accepted Answer

The problem with the ripple effect is that the transmission process, which is the way in which monetary policy decisions influence the economy, is long and drawn out. This means that there is often a delay between when the Fed implements a policy change and when it actually has an effect on the economy, making it difficult to predict and manage the impact of these decisions.

Question 9

The Fed's actions to fight an inflation shift the

Accepted Answer

The Fed fights inflation by reducing the money supply or raising interest rates, which decreases overall spending and investment. This leads to a leftward shift in the aggregate demand curve, as consumers and businesses reduce spending.

Question 10

Which of the following is a problem in pursuing monetary policy?

Accepted Answer

The statements A, B, and C are incorrect as they misrepresent aspects of monetary policy. The lag between a change in the quantity of money and its effect on economic activity is often considered too long rather than too short, the Federal Reserve operates independently of Congress for monetary policy decisions, and the Fed does indeed have control over the federal funds rate through open market operations and other tools.

Question 11

-In the above figure, the economy experiences an increase in aggregate demand so that the aggregate demand curve shifts from AD? to AD?. If the Fed wants to offset this change, it would ________.

Accepted Answer

To offset an increase in aggregate demand and stabilize the economy, the Federal Reserve would sell government securities on the open market. This action reduces the money supply, increases interest rates, and consequently dampens spending and investment, which helps to prevent inflationary pressures that might arise from the increased aggregate demand.

Question 12

A worldwide recession reduces the amount of U.S. exports, and as a result, aggregate demand decreases. To move U.S. GDP back to potential GDP, the Fed should

Accepted Answer

Lowering the federal funds rate would stimulate borrowing and spending, which would increase aggregate demand and help move the GDP back to potential GDP. Raising the federal funds rate would have the opposite effect, further decreasing aggregate demand. Increasing the government's budget deficit and decreasing the quantity of money are also options for stimulating the economy, but they are more long-term solutions that may not have an immediate impact on GDP.

Question 13

During the financial crisis of 2008-2009, the Fed's actions to supply reserves to the banking system was an attempt to

Accepted Answer

The Fed's actions to supply reserves to the banking system during the 2008-2009 financial crisis were primarily aimed at ensuring that banks had enough liquidity to avoid collapse. This was especially important given the widespread panic and loss of confidence in the banking system that occurred during this period. By providing banks with the necessary reserves, the Fed helped ensure that they had the resources needed to continue operating and meeting the demands of their customers.

Question 14

Suppose that initially real GDP equals potential GDP. Then a decrease in aggregate demand occurs. According to the Taylor rule, the Fed should ________ the federal funds rate by ________ government securities in the open market.

Accepted Answer

According to the Taylor rule, when there is a decrease in aggregate demand, the Fed should lower the federal funds rate. To achieve this, the Fed should buy government securities in the open market, which increases the money supply and leads to lower interest rates.

Question 15

-In the above figure, the economy experiences a decrease in aggregate demand so that the aggregate demand curve shifts from AD? to AD?. If the Fed wants to offset this change, it would ________.

Accepted Answer

To offset a decrease in aggregate demand, the Federal Reserve (Fed) would aim to increase the money supply and stimulate economic activity. Purchasing government securities on the open market is a monetary policy tool that increases the money supply, encouraging spending and investment, which can help counteract the decrease in aggregate demand.

Question 16

Uncertainty about monetary policy

Accepted Answer

Uncertainty about monetary policy can keep investors cautious about investing, which can lower investment levels. This can be due to fear of future changes in interest rates or inflation rates, which can affect the profitability of investments. However, uncertainty about monetary policy was not the sole factor that started the financial crisis in 2008. The Fed also uses inflation rate targeting as a guide for its monetary policy, so uncertainty about monetary policy alone cannot explain why it does not use this tool exclusively. The safety of bank deposits can be influenced by a variety of factors, not just uncertainty about monetary policy.

Question 17

In the short run, a rise in the federal funds rate shifts the

Accepted Answer

A rise in the federal funds rate reduces the quantity of money in circulation, which leads to higher interest rates and lower investment and consumption spending, causing a leftward shift in the aggregate demand (AD) curve.

Question 18

A rise in the federal funds rate

Accepted Answer

A rise in the federal funds rate typically leads to an increase in other interest rates, including the long-term real interest rate, as it reflects tighter monetary policy which increases the cost of borrowing.

Question 19

Consumer confidence in the economy rises, and as a result, real GDP increases above potential GDP. To move U.S. GDP back to potential GDP, the Fed should

Accepted Answer

If consumer confidence in the economy rises and real GDP increases above potential GDP, it suggests that there is an overheating of the economy which may lead to inflationary pressures. In this case, the Fed should raise the federal funds rate to slow down economic growth and bring GDP back to its potential level. This will help to prevent an inflationary spiral from taking hold in the economy. Lowering the federal funds rate or increasing the government's budget deficit may stimulate economic growth further, which is not desirable when GDP is already above potential. Decreasing the government's budget deficit may lead to tighter fiscal policy, which may slow down economic growth to an undesirable level.

Question 20

A widespread fall in asset prices means that banks might become

Accepted Answer

A widespread fall in asset prices can lead to a decrease in the value of banks' assets, which can cause them to become insolvent if their liabilities exceed their assets.

Quiz 14: Monetary Policy

Businesses become convinced that future profits from investment will be less than initially believed. This conviction leads to a change in aggregate and so the Fed should the federal funds rate if it wants to try to offset this change.