Question 1

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

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

Question 2

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 3

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 4

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

Accepted Answer

Working closely with the Treasury Department during the financial crisis of 2008 has led some to believe that the Fed lost some of its independence. The concern is that the Fed may have acted in concert with the Treasury instead of acting solely based on its mandate to stabilize inflation and employment.

Question 5

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 enhanced its credibility by being transparent about its actions and goals. This increased transparency can help build trust in the public and financial markets, which can ultimately help the Fed achieve its objectives. The other choices do not enhance the Fed's credibility, as they involve either not following through on announced changes, keeping information confidential, or using marketing to influence perceptions.

Question 6

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 7

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

Accepted Answer

Consistently pursuing policy to promote the credibility of the central bank is an appropriate policy for a central bank to follow if the economy is plagued with deflation. This can provide reassurance to consumers and investors that the central bank is committed to maintaining the stability of prices and can help prevent a deflationary spiral. Increasing interest rates or using contractionary monetary policy can worsen deflation by reducing spending and investment, while gradually raising the required reserve rate may not be effective in stimulating economic activity.

Question 8

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 is a key feature of the US central bank, allowing it to make decisions on monetary policy that are free from political influence. If the Fed chose to change its policies faster than suggested by the White House, this would demonstrate that it is assertive in its independence and is making policy decisions based on economic factors rather than political pressure.

Question 9

Disinflation refers to

Accepted Answer

Disinflation is a reduction in the rate of inflation, meaning that the rate of price level increase is slowing down. It is not the same as deflation, which refers to a decrease in the price level.

Question 10

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 actually decreased the Fed's transparency and therefore could decrease its credibility in the eyes of the public. The other options (A, B, and C) have all increased the Fed's transparency and credibility.

Question 11

Which of the following could decrease unemployment and inflation simultaneously?

Accepted Answer

A decrease in oil prices would decrease the cost of production for firms, which would lower prices for consumers and decrease inflation. At the same time, firms may hire more workers to increase production, which would decrease unemployment. Expansionary monetary policy may also decrease unemployment, but it could increase inflation. Contradictory monetary policy would decrease inflation, but it could also increase unemployment. An increase in the real wage would likely only decrease unemployment, but it may also increase inflation.

Question 12

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

Accepted Answer

A negative supply shock is an unexpected decrease in the availability of a key resource that leads to an increase in the cost of production. This tends to cause a decrease in the quantity of goods and services that can be produced and therefore a fall in real GDP. At the same time, the increase in production costs tends to push up prices, leading to an increase in inflation.

Question 13

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%,...

Question 14

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

Accepted Answer

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

Question 15

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 Fed announces a decrease in the federal funds rate target, it means that they are trying to stimulate the economy by increasing borrowing and lending, which will cause interest rates to fall. As a result, workers and firms will have more incentives to increase their consumption and investment spending, which will increase aggregate demand and inflation. This assumes that the Fed's announcement is credible and that they have the power to achieve their target.

Question 16

Deflation refers to

Accepted Answer

Deflation refers to a falling price level, so option B is correct. Option A is incorrect because it refers to a decrease in the rate of inflation, not deflation. Option C is incorrect because only option B is correct. Option D is incorrect because option B is correct.

Question 17

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 18

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 were to reverse its policy actions implemented during the recession, it would be acting to try to prevent an increase in inflation. The purpose of the Fed's expansionary policy during the recession was to stimulate economic growth and prevent deflation, but if those policies were continued during a period of economic expansion and low unemployment, it could lead to inflationary pressures. Thus, the Fed may need to reverse those policies to prevent inflation from getting too high.

Question 19

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 potentially contributed to the financial crisis. This low interest rate environment encouraged risky lending and borrowing practices, contributing to the housing bubble and subsequent collapse in 2008.

Question 20

Expansionary monetary policy will result in

Accepted Answer

Expansionary monetary policy involves increasing the money supply, which leads to lower interest rates as it becomes easier to access credit. This, in turn, leads to increased investment and consumption, leading to a higher aggregate demand. However, this may also result in increased inflation rates. Therefore, option B is incorrect, and option C is contradictory to the nature of expansionary monetary policy.

Quiz 28: Inflation, Unemployment, and Federal Reserve Policy

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.

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?

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

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

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

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

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

Disinflation refers to

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

Which of the following could decrease unemployment and inflation simultaneously?

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

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

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

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?

Deflation refers to

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

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?

Expansionary monetary policy will result in