Question 1

Contractionary monetary policy refers to the Fed's decreasing the money supply and decreasing interest rates to decrease real GDP.

Accepted Answer

Contractionary monetary policy involves the Fed increasing interest rates and decreasing the money supply to reduce inflation and slow down economic growth, which in turn may decrease real GDP.

Question 2

Figure 26-11 
-Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely

Accepted Answer

The answer of Figure 26-11 
-Refer to Figure 26-11. In...

Question 3

If the Fed orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy:
a. The money supply
b. Interest rates
c. Investment
d. Consumption
e. Net Exports
f. The aggregate demand curve
g. Real GDP
h. The price level

Accepted Answer

The answer of If the Fed orders a contractionary monetary...

Question 4

Figure 26-11 
-Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B

Accepted Answer

At point B, the economy is operating at its potential output or full employment level of output, and the intersection of AD and SRAS curves is at the long-run equilibrium level. As the economy moves from point A to point B, there is a shift in AD, causing an increase in output and a decrease in unemployment, but in the long run, the SRAS curve also shifts up due to expectations of higher wages and prices, leading to higher inflation and returning the economy to its full employment level of output. Therefore, there is no pressure on wages and prices to rise, the unemployment rate is not very, very low, firms are not operating above their normal capacity, and incomes and profits may or may not be rising depending on the nature of the shift in AD.

Question 5

Table 26-1
 
-Refer to Table 26-1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2015 if the Fed does not use monetary policy. Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2015?

Accepted Answer

Lowering the target for the federal funds rate is expansionary monetary policy, which would increase spending and investment, potentially increasing real GDP. Selling Treasury securities or pursuing contractionary policy would reduce spending and investment, potentially decreasing real GDP. Lowering capital gains taxes is a fiscal policy, not a monetary policy, and would not directly affect real GDP in 2015.

Question 6

Figure 26-12 
-Refer to Figure 26-12. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely

Accepted Answer

Point B represents a higher level of output than point A, which indicates an increase in aggregate demand. This increase in aggregate demand can lead to inflationary pressures in the economy. To combat inflation, the Federal Reserve would most likely increase interest rates, which would lead to a decrease in consumption and investment spending and a decrease in aggregate demand. This would help to bring the economy back to a sustainable output level without overheating and causing inflation. Therefore, the correct answer is A) increase interest rates.

Question 7

Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

Contractionary monetary policy, aimed at reducing inflation and slowing down an overheating economy, would lead to lower inflation rates as demand decreases. Additionally, it would result in lower real GDP as the economy cools down and growth slows.

Question 8

Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Accepted Answer

The answer of Use a graph to show the effects...

Question 9

If the Fed orders an expansionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy:
a. The money supply
b. Interest rates
c. Investment
d. Consumption
e. Net Exports
f. The aggregate demand curve
g. Real GDP
h. The price level

Accepted Answer

The answer of If the Fed orders an expansionary monetary...

Question 10

Your income will increase if the Federal Reserve buys a Treasury bill from you and pays you with a check from the Fed.

Accepted Answer

The answer of Your income will increase if the Federal...

Question 11

When the Federal Reserve increases the money supply, people spend more because they now have more money.

Accepted Answer

The answer of When the Federal Reserve increases the money...

Question 12

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Accepted Answer

The answer of Use a graph to show the effects...

Question 13

What actions should the Fed take if it believes the economy is about to fall into recession?

Accepted Answer

The answer of What actions should the Fed take if...

Question 14

Figure 26-12 
-Refer to Figure 26-12. In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

Accepted Answer

The answer of Figure 26-12 
-Refer to Figure 26-12. In...

Question 15

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply, then the Federal Reserve would most likely

Accepted Answer

If the Federal Reserve anticipates that aggregate demand will grow faster than long-run aggregate supply, then they would want to take measures to slow down the growth of aggregate demand to avoid inflation. One way to do this would be to increase interest rates, which would make borrowing more expensive and discourage consumer spending and investment.

Question 16

What actions should the Fed take if it believes the economy is about to experience a high rate of inflation?

Accepted Answer

The answer of What actions should the Fed take if...

Question 17

Figure 26-11 
-Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

Accepted Answer

The answer of Figure 26-11 
-Refer to Figure 26-11. In...

Question 18

Figure 26-12 
-Refer to Figure 26-12. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B

Accepted Answer

The answer of Figure 26-12 
-Refer to Figure 26-12. In...

Question 19

Figure 26-14 
-Refer to Figure 26-14. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

Accepted Answer

Point B indicates that the economy is facing an inflationary gap, as output is beyond its potential level. To combat inflation, the Federal Reserve should use contractionary monetary policy, which involves raising interest rates to reduce borrowing and spending. This would decrease aggregate demand and shift the economy back towards its potential output level. Therefore, the appropriate monetary policy in this scenario would be to raise interest rates (option B).

Question 20

Figure 26-13 
-Refer to Figure 26-13. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

Accepted Answer

The economy is expected to move from point A to point B, which is a movement from a point below the full-employment level of output to a point above the full-employment level of output. To prevent the economy from overheating, the Federal Reserve should raise interest rates.

Quiz 26: Monetary Policy

Contractionary monetary policy refers to the Fed's decreasing the money supply and decreasing interest rates to decrease real GDP.

Figure 26-11 -Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely

Figure 26-11 -Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B

Table 26-1 -Refer to Table 26-1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2015 if the Fed does not use monetary policy. Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2015?

Figure 26-12 -Refer to Figure 26-12. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely

Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be and real GDP to be .

Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Your income will increase if the Federal Reserve buys a Treasury bill from you and pays you with a check from the Fed.

When the Federal Reserve increases the money supply, people spend more because they now have more money.

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

What actions should the Fed take if it believes the economy is about to fall into recession?

Figure 26-12 -Refer to Figure 26-12. In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply, then the Federal Reserve would most likely

What actions should the Fed take if it believes the economy is about to experience a high rate of inflation?

Figure 26-11 -Refer to Figure 26-11. In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

Figure 26-12 -Refer to Figure 26-12. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B

Figure 26-14 -Refer to Figure 26-14. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

Figure 26-13 -Refer to Figure 26-13. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to