Question 1

One problem with deflation is that it can raise the real value of debt.

Accepted Answer

When prices fall, the value of money increases which means that borrowers will find it harder to repay their loans since they will have to pay more valuable money back to their lenders. This can lead to defaults, decreased borrowing and investment, and an overall slowdown in economic activity.

Question 2

Assume the actual unemployment rate is equal to the nonaccelerating inflation rate of unemployment (NAIRU)of 5 percent.If the Fed wants to raise the inflation rate permanently from 1 percent to 3 percent,it should ________ the target for the federal funds rate so the economy's equilibrium moves ________ along the short-run Phillips curve.

Accepted Answer

If the goal is to permanently raise the inflation rate from 1 percent to 3 percent, the Fed needs to push the actual unemployment rate below the NAIRU. This means shifting the economy's equilibrium "up" along the short-run Phillips curve. To achieve this, the Fed should lower the target for the federal funds rate. Therefore, choice C (lower; up) is the best answer.

Question 3

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 is seen as a potential compromise of the Fed's independence, as it may have been influenced by political pressures to take certain actions. This has raised concerns among some economists and lawmakers that the Fed may be susceptible to political interference in its decision-making. The other options do not necessarily involve compromises of the Fed's independence in the same way.

Question 4

What actions could the Federal Reserve take to achieve consistent growth in real GDP at 4 percent per year?

Accepted Answer

The long-term growth rate of real GDP is driven by factors such as increases in productivity, population growth, and technological progress. The Federal Reserve can influence economic growth in the short run by adjusting monetary policy to affect spending and investment, but it does not have direct control over long-run economic growth. Therefore, choice D is the correct answer.

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 than countries whose central banks had little independence.

Question 6

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

Reversing its policy actions implemented during the heart of the recession would imply tightening the monetary policy, which would aim to prevent an increase in inflation.

Question 7

Some economists are concerned that by holding its target for the federal funds rate close to zero for three years,the Fed's policy is actually

Accepted Answer

The answer of Some economists are concerned that by holding...

Question 8

If inflation falls from 11% to 5%,there is deflation.

Accepted Answer

Inflation falling from 11% to 5% is not deflation, but rather a decrease in the rate of inflation. Deflation is a decrease in the general price level of goods and services, which would require a negative inflation rate.

Question 9

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 identified as one of the actions by the Fed that contributed to the financial crisis in 2008. This low interest rate policy encouraged risky lending and borrowing practices, which contributed to the housing bubble and eventual collapse of the mortgage market.

Question 10

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

Accepted Answer

The Federal Reserve enhanced its credibility by revealing the Fed's target for the federal funds rate, which provides transparency to the public and market participants on the direction of monetary policy. This allows them to align their expectations and behavior with the Fed's objectives, ultimately creating a more effective and efficient monetary policy. Choices A, C, and D do not enhance the Fed's credibility and may even undermine it.

Question 11

Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain.

Accepted Answer

The answer of Can the Federal Reserve achieve both low...

Question 12

The FOMC no longer sets targets for M1 and M2 to meet its goals of price stability and high employment.

Accepted Answer

The FOMC no longer sets targets for M1 and M2. Instead, it focuses on the federal funds rate as its key policy tool for achieving price stability and high employment.

Question 13

How would you expect the Fed to respond to a negative supply shock in the economy?

Accepted Answer

The answer of How would you expect the Fed to...

Question 14

If the Federal Reserve wants to reduce inflation from 4 percent to 3 percent permanently,how can that goal be achieved,and what impact will that have on employment in the short run and the long run? Support your answer with a graph of the Phillips curve in the short run and the long run.

Accepted Answer

The answer of If the Federal Reserve wants to reduce...

Question 15

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 the ability to make policy decisions without political interference. If the Fed were to change its policy actions faster than what is suggested by the White House, it would imply that the Fed is exercising its independence rather than being influenced by politicians.

Quiz 28: Inflation, unemployment, and Federal Reserve Policy