Question 1

Table 15-3
 
-Refer to Table 15-3.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

According to the table, the actual real GDP in 2015 is expected to be above the potential real GDP, which indicates an inflationary gap. To decrease the inflationary gap and bring real GDP back to its potential level, the Federal Reserve should implement contractionary monetary policy by selling Treasury securities, which would decrease the money supply and increase interest rates, thereby reducing aggregate demand and inflationary pressures. Buying Treasury securities or decreasing the required reserve ratio would have the opposite effect of increasing the money supply and stimulating aggregate demand, which would exacerbate the inflationary gap. Decreasing income taxes is a fiscal policy tool and not directly related to the Federal Reserve's monetary policy.

Question 2

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

Accepted Answer

When the Fed uses expansionary monetary policy, such as lowering the federal funds rate or buying government securities, it increases the money supply and lowers interest rates, which encourages borrowing and spending by individuals and businesses, ultimately stimulating aggregate demand.

Question 3

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 in order to stimulate economic growth. This can lead to an increase in demand for goods and services, resulting in higher prices and inflation.

Question 4

Table 15-7
 
-Refer to Table 15-7.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 15-7
 
-Refer to Table 15-7.Suppose the...

Question 5

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 6

Figure 15-15 
-Refer to Figure 15-15.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

Buying Treasury bills would increase the money supply, shifting the AD curve to the right and moving the economy to point C. Decreasing income taxes would increase disposable income and shift the AD curve to the right, but it would not necessarily move the economy to point C. Increasing the required reserve ratio and selling Treasury bills would both decrease the money supply, shifting the AD curve to the left and moving the economy further away from point C.

Question 7

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 8

Table 15-8
 
-Refer to Table 15-8.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 15-8
 
-Refer to Table 15-8.The hypothetical...

Question 9

Table 15-3
 
-Refer to Table 15-3.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 does not take any action, real GDP will remain below potential GDP in 2015, leading to a lower inflation rate but higher unemployment. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, it will lead to a lower inflation rate, but real GDP will still be lower than potential GDP, indicating a slower economic growth rate overall. Therefore, the only option that fits is B, where real GDP and the inflation rate will be lower if the Fed takes action to keep real GDP at potential.

Question 10

Table 15-4
 
-Refer to Table 15-4.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 15-4
 
-Refer to Table 15-4.Suppose the...

Question 11

Table 15-6
 
-Refer to Table 15-6.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 15-6
 
-Refer to Table 15-6.Suppose the...

Question 12

Table 15-2
 
-Refer to Table 15-2.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 keep real GDP at its potential level, the Fed should buy Treasury securities to increase the money supply, lower interest rates, and stimulate economic activity.

Question 13

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

Accepted Answer

When the Fed uses contractionary monetary policy, it reduces the money supply, makes it more difficult to obtain credit, and raises interest rates. This makes borrowing more expensive and decreases the amount of money available to spend on goods and services, which can help to slow down the economy and prevent inflation from increasing too rapidly.

Question 14

Figure 15-16 
-Refer to Figure 15-16.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 15-16 
-Refer to Figure 15-16.In the...

Question 15

Table 15-2
 
-Refer to Table 15-2.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 uses monetary policy to keep real GDP at its potential level in 2015, real GDP will be higher than it would have been without intervention. However, this may also result in higher inflation rates as an increase in demand may lead to higher prices. Therefore, real GDP and inflation rate will be higher than if the Fed had taken no action. The other options (A, C, and D) are incorrect as they do not reflect the likely outcome of monetary policy intervention.

Question 16

Table 15-5
 
-Refer to Table 15-5.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 15-5
 
-Refer to Table 15-5.Suppose the...

Question 17

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

Accepted Answer

Monetary policy can influence economic growth and inflation to some extent, but it cannot precisely control real GDP at its potential level due to various factors such as changes in consumer behavior, global economic conditions, and government policies.

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

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 20

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 will lower interest rates, which in turn, increases investment and consumption expenditures. As a result, real GDP would increase to reach potential real GDP. However, the increase in aggregate demand would cause an increase in prices which leads to a higher inflation rate.

Quiz 15: Monetary Policy

Table 15-3 -Refer to Table 15-3.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

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

Expansionary monetary policy enacted during a recession will cause the inflation rate to increase.

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

Figure 15-15 -Refer to Figure 15-15.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?

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?

Table 15-2 -Refer to Table 15-2.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

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

Figure 15-16 -Refer to Figure 15-16.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?

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

The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year.

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 .