Question 1

Figure 26-16 
-Refer to Figure 26-16. 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 26-16 
-Refer to Figure 26-16. In...

Question 2

Table 26-3
 
-Refer to Table 26-3. 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

If the Fed wants to keep real GDP at its potential level in 2015, it should sell Treasury securities. The table shows that real GDP is above its potential level in 2015, indicating that the economy is operating above its capacity. Selling Treasury securities would decrease the supply of money, causing interest rates to increase and reducing spending and inflationary pressure. This would help bring real GDP back to its potential level. Buying Treasury securities (choice A) would increase the money supply, causing interest rates to decrease and potentially increasing inflationary pressure. Decreasing the required reserve ratio (choice C) would increase the money supply, also potentially increasing inflationary pressure. Decreasing income taxes (choice D) would increase disposable income and potentially increase spending, exacerbating the inflationary pressure.

Question 3

Table 26-7
 
-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 Table 26-7
 
-Use the dynamic aggregate demand...

Question 4

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 5

Table 26-5
 
-Refer to Table 26-5. 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 26-5
 
-Refer to Table 26-5. Suppose...

Question 6

Table 26-2
 
-Refer to Table 26-2. 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

Buying Treasury securities increases the money supply, which lowers interest rates and stimulates investment and consumption, helping to increase real GDP to its potential level.

Question 7

Table 26-4
 
-Refer to Table 26-4. 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 26-4
 
-Refer to Table 26-4. Suppose...

Question 8

Table 26-6
 
-Refer to Table 26-6. 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 26-6
 
-Refer to Table 26-6. Suppose...

Question 9

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

If the Federal Reserve anticipates that aggregate demand will grow significantly slower than long-run aggregate supply, then there is a risk of deflationary pressures and a potential decrease in output and employment. To counteract this, the Federal Reserve would likely decrease interest rates to stimulate spending and investment, which would help to increase aggregate demand and stabilize the economy.

Question 10

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 increases the money supply, which leads to lower interest rates and encourages borrowing and spending. This increase in aggregate demand leads to higher prices (inflation) and an increase in real GDP, which helps prevent it from falling below potential real GDP. Therefore, the correct answer is A, as the inflation rate would be higher and real GDP would be higher as a result of expansionary monetary policy.

Question 11

Table 26-3
 
-Refer to Table 26-3. 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 use monetary policy, real GDP would be above potential GDP, which would cause inflation to increase. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, real GDP would be lower than if the Fed had taken no action, but the inflation rate would also be lower. Therefore, choice B is the correct answer.

Question 12

Table 26-2
 
-Refer to Table 26-2. 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 Federal Reserve uses monetary policy successfully to keep real GDP at its potential level in 2015, real GDP will be higher than if the Fed had taken no action. However, without monetary policy, the price level may increase due to the excess demand for goods and services. As a result, the inflation rate would be higher. Therefore, the only choice that makes sense is B, where real GDP and the inflation rate are both higher than if the Fed had taken no action.

Question 13

Table 26-7
 
-Refer to Table 26-7. 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 26-7
 
-Refer to Table 26-7. Suppose...

Question 14

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

Accepted Answer

Expansionary monetary policy, such as lowering interest rates or increasing the money supply, is designed to increase economic growth and reduce unemployment during a recession. However, this policy can also increase inflation as demand for goods and services increases and prices rise.

Question 15

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

Accepted Answer

Contractionary monetary policy involves decreasing the money supply and increasing interest rates in order to slow down economic growth and decrease inflation. Therefore, it can be used to keep inflation from increasing.

Question 16

Figure 26-15 
-Refer to Figure 26-15. 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, leading to an increase in aggregate demand, which could shift the economy from point B to point C. Decreasing income taxes and increasing the required-reserve ratio would have either no effect on the money supply or a contractionary effect, which would move the economy away from point C. Selling Treasury bills would have a contractionary effect on the money supply, which would also move the economy away from point C.

Question 17

Table 26-8
 
-Refer to Table 26-8. 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 26-8
 
-Refer to Table 26-8. The...

Question 18

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 activity and help stabilize the economy, but there are many factors that affect real GDP beyond the control of the Fed, such as structural changes, natural disasters, and global events. Additionally, the Fed's ability to implement monetary policy is limited by factors such as the zero lower bound on interest rates and the effectiveness of transmission channels. Therefore, while the Fed can aim to keep real GDP close to its potential level, it cannot do so with complete precision.

Question 19

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 20

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

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates to encourage spending and investment, which in turn stimulates aggregate demand.

Quiz 26: Monetary Policy

Figure 26-16 -Refer to Figure 26-16. 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?

Table 26-3 -Refer to Table 26-3. 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