Question 1

If the Federal Reserve chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation,which of the following would you expect to see?

Accepted Answer

An upward shift of the short-run Phillips curve can occur when firms and consumers expect inflation to increase due to expansionary monetary policy. This expectation can lead to higher wage demands and prices, moving the economy along the Phillips curve to a point with higher inflation and potentially lower unemployment in the short run.

Question 2

If the economy experiences a(n)________,inflation will rise and real GDP will fall.

Accepted Answer

A negative supply shock, such as a natural disaster or an increase in input prices, will cause a decrease in the quantity of goods and services supplied. This leads to a decrease in real GDP and an increase in inflation, as producers raise prices to cover their higher production costs.

Question 3

Expansionary monetary policy will result in

Accepted Answer

Expansionary monetary policy involves increasing the money supply, which in turn leads to a lower interest rate. This is because there is more money available for borrowing, leading to increased competition and lower rates. However, expansionary monetary policy may also lead to higher rates of inflation due to the increased availability of money, which can drive up prices. It is unlikely to result in a decrease in aggregate demand as it is intended to stimulate the economy.

Question 4

One criticism of the Fed's quantitative easing policy is that low interest rates ________ the return to saving.One key reason people save is to finance their retirement.Retired people typically favor low-risk investments,such as bank certificates of deposit or Treasury bonds.But with the interest rates on these assets reduced to historically low levels,many retired people were forced to either ________ their spending or buy riskier investments.

Accepted Answer

Low interest rates reduce the return to saving, which can force retired people to either reduce their spending or buy riskier investments.

Question 5

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 found that countries with highly independent central banks had lower inflation rates compared to countries whose central banks had little independence.

Question 6

Deflation refers to

Accepted Answer

Deflation refers to a persistent decrease in the general price level of goods and services over a period of time. It is the opposite of inflation, which is an increase in the general price level. Therefore, option B is the correct answer. Option A is incorrect because a decrease in the rate of inflation may still indicate that prices are rising, just at a slower rate.

Question 7

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 one of the actions identified as contributing to the financial crisis. This low interest rate environment encouraged excessive risk-taking and contributed to the housing bubble.

Question 8

Which of the following is an appropriate policy for a central bank to follow if the economy is plagued with deflation?

Accepted Answer

If the economy is plagued with deflation, then the appropriate policy for the central bank to follow is to consistently pursue policy to promote the credibility of the central bank. This is because deflation causes a decrease in the general price level, which leads to a decrease in demand for goods and services. Pursuing policy to promote the credibility of the central bank helps to increase consumer and investor confidence in the economy, which can stimulate spending and investment. Increasing the target interest rate on overnight loans or using contractionary monetary policy to drive up interest rates may further decrease demand, exacerbating the deflation problem. Gradually raising the required reserve rate may have a similar effect.

Question 9

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

Accepted Answer

The Federal Reserve has enhanced its credibility by revealing its target for the federal funds rate, which allows the public and financial markets to have more transparency into the Fed's decision-making process. This transparency can help build trust and credibility with the public. The other options, such as not following through with announced changes or keeping meeting minutes confidential, could potentially harm the Fed's credibility. Marketing and increased expenditure on advertising may raise public awareness, but may not necessarily enhance credibility in conducting monetary policy.

Question 10

If the Federal Reserve announces that its target for the federal funds rate is falling from 3 percent to 2.25 percent,how do you expect workers and firms to react?

Accepted Answer

When the Federal Reserve announces a decrease in the federal funds rate target, it means that it is trying to stimulate the economy by encouraging firms and individuals to borrow and spend more. As a result, workers and firms are likely to increase their consumption and investment spending in response to the lower interest rates. This increase in spending will boost aggregate demand and may lead to higher inflation. However, the credibility of the Fed's announcement is crucial in determining how individuals and firms will respond. If they do not believe the Fed will follow through on its policy, they may not alter their behavior accordingly.

Question 11

The experience of Paul Volcker's fight against inflation during the late 1970s and early 1980s indicates that firms and workers

Accepted Answer

The experience of Paul Volcker's fight against inflation during the late 1970s and early 1980s showed that firms and workers had adaptive expectations, meaning that they adjusted their behavior based on their past experiences with inflation. They did not have rational expectations and did not fully trust Fed announcements. Additionally, they preferred high unemployment to high inflation.

Question 12

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

Accepted Answer

When the Fed began working closely with the Treasury Department during the 2008 financial crisis, it led to concerns about the Fed's independence. Some believed that the Fed was taking on too much responsibility in coordinating with the Treasury Department and that it was compromising its ability to make independent decisions. This perception was further reinforced when the Fed undertook unconventional monetary policy measures like quantitative easing, which involved purchasing large amounts of government securities to stimulate economic growth.

Question 13

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

If the Fed reversed its policy actions implemented during the recession, it would be increasing interest rates and reducing the money supply, which would likely lead to higher inflation. This action would be an attempt to prevent an increase in inflation, rather than to address unemployment or deflation.

Question 14

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 independence refers to its ability to make decisions based on its own analysis and judgment, without being subject to political pressure or influence from the White House. If the Fed were to change its policy actions faster than what the White House suggested, it would indicate that it is making independent decisions.

Question 15

In August 1979,President Jimmy Carter appointed ________ as chairman of the Board of Governors of the Federal Reserve System.

Accepted Answer

Paul Volcker was appointed as the chairman of the Board of Governors of the Federal Reserve System by President Jimmy Carter in August 1979.

Question 16

If the current unemployment rate is 5%,under which of the following circumstances would you expect the Fed to use contractionary monetary policy?

Accepted Answer

The answer of If the current unemployment rate is 5%,under...

Question 17

Which of the following could decrease unemployment and inflation simultaneously?

Accepted Answer

A decrease in oil prices would lower the cost of production and transportation, which could lead to a decrease in prices and an increase in economic activity. This could result in an increase in employment and a decrease in inflation. Expansionary monetary policy (B) is aimed at increasing economic activity by lowering interest rates and increasing the money supply, which could lead to an increase in both employment and inflation. Contractionary monetary policy (C) is aimed at decreasing economic activity by increasing interest rates and decreasing the money supply, which could lead to a decrease in both employment and inflation. An increase in the real wage (D) could decrease employment because it would increase labor costs for employers, and it could also increase inflation because it would increase production costs for goods and services. Therefore, A is the best choice for decreasing unemployment and inflation simultaneously.

Question 18

Disinflation refers to

Accepted Answer

Disinflation refers to a reduction in the rate of inflation. It does not refer to a decrease in the price level, which would be deflation, or a rapid increase in the price level, which would be inflation. Nor does it refer to an increase in the rate of inflation.

Question 19

One criticism of the Fed's quantitative easing policy is that a prolonged period of low interest rates could lead to speculative bubbles.Some economists argued that as interest rates fell and prices of long-term Treasury bonds rose,financial markets were experiencing a "Treasury bubble." These economists worried that investors,banks,other financial firms,and pension funds were underestimating the likelihood that long-term interest rates would eventually ________,causing substantial ________ in the prices of Treasury bonds.

Accepted Answer

The answer of One criticism of the Fed's quantitative easing...

Question 20

All of the following have enhanced the Fed's credibility in conducting monetary policy except

Accepted Answer

Discontinuing the policy of announcing whether it considered the economy to be at greater risk of inflation or recession following each FOMC meeting has actually reduced the Fed's transparency and potentially undermined its credibility. The other options listed have increased the Fed's transparency and credibility.

Quiz 17: Inflation, unemployment, and Federal Reserve Policy