Question 1

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

Accepted Answer

Paul Volcker was appointed as chairman of the Board of Governors of the Federal Reserve System by President Jimmy Carter in August 1979.

Question 2

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

A decrease in the federal funds rate signals to the market that the Fed is loosening its monetary policy, which encourages firms and consumers to increase their consumption and investment spending. This in turn increases aggregate demand and can lead to higher inflation. As long as the Fed's announcement is credible, workers and firms will expect interest rates to be lower in the future and will respond accordingly.

Question 3

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 foundational principle of its policymaking. While the White House may provide guidance and suggestions, the ultimate decision-making power rests with the Fed. If the Fed chose to diverge from the White House's suggested timing, it would not necessarily indicate a lack of credibility or a change in monetary policy target. It may simply reflect the Fed's assessment of the economic conditions and the appropriate timing of policy actions. The notion of a "frictional relationship" with the White House is subjective and not necessarily supported by this scenario.

Question 4

Forward guidance refers to central banks

Accepted Answer

Forward guidance involves central banks indicating to the public their future plans for monetary policy. This guidance can help shape expectations and affect economic behavior, such as spending and investment decisions. It does not involve setting long-term interest rates (A), trying to simultaneously reduce unemployment and inflation (C), or offsetting negative side-effects of fiscal policies (D).

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 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 6

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%,under...

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 can help to combat deflation by promoting confidence in the central bank and its ability to stabilize the economy. Increasing the target interest rate or using contractionary monetary policy can actually exacerbate deflation by reducing spending and economic activity. Gradually raising the required reserve rate can also be contractionary and slow down lending, which can further contribute to deflation.

Question 8

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 policy actions implemented during the heart of the recession could lead to an increase in inflation. During a recession, the Fed typically implements policies to stimulate the economy and keep interest rates low. However, if these policies continue for too long, they may lead to an increase in inflation as the economy recovers. Reversing these policies is a way for the Fed to prevent inflation from getting out of control.

Question 9

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 would not enhance the Fed's credibility in conducting monetary policy. This policy helped to provide transparency and greater understanding of the Fed's decision-making process. The other options (A, B, and C) all contribute to enhancing the Fed's credibility by increasing transparency and accountability in its actions and decisions.

Question 10

One criticism of the Fed's policy of forward guidance during the recession of 2007-2009 is that it contributed to a prolonged period of abnormally low interest rates,leading to speculative bubbles in stocks or other financial assets as investors

Accepted Answer

Forward guidance by the Fed during the recession of 2007-2009 signaled to investors that interest rates would remain low for a prolonged period. This encouraged borrowing at low interest rates, which in turn led to increased demand for financial assets such as stocks, bonds, and real estate. This led to speculative bubbles in these assets, as investors borrowed at low interest rates to buy them, hoping to sell them later at higher prices. Therefore, choice B is the best answer.

Question 11

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 12

The policy which holds that the federal government should not allow large financial firms to fail,for fear of damaging the financial system,is known as the ________ policy.

Accepted Answer

The policy which holds that the federal government should not allow large financial firms to fail, for fear of damaging the financial system, is known as the too-big-to-fail policy. Option A refers to a financial reform law passed in 2010, option B is not a commonly used term in economics, and option D refers to a theory regarding how individuals and firms make decisions. Therefore, option C is the best choice.

Question 13

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

Accepted Answer

A negative supply shock is a sudden and unexpected decrease in the availability of inputs (such as natural disasters disrupting supply chains) or an increase in the cost of production (such as a sudden increase in oil prices). This leads to a decrease in short-run aggregate supply, causing prices to rise (inflation) and real GDP to fall. Positive supply shocks, such as improved technology or an increase in natural resources, lead to an increase in short-run aggregate supply and can lower inflation and increase real GDP. An increase in short-run aggregate supply (choice C) would also lead to a decrease in inflation and an increase in GDP. A decrease in aggregate demand (choice D) would lead to a decrease in both inflation and real GDP.

Question 14

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 has been identified as one action by the Fed that contributed to the financial crisis in 2008. This low interest rate environment encouraged risky borrowing and lending practices, particularly in the housing market, which eventually led to a housing bubble and eventual collapse.

Question 15

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 16

Which of the following could decrease unemployment and inflation simultaneously?

Accepted Answer

A decrease in oil prices reduces the cost of production for firms, which could lead to an increase in output and employment. Additionally, lower oil prices can reduce transportation costs and prices of goods and services, thereby reducing inflationary pressures. Expansionary monetary policy (B) could increase employment, but it may also lead to increased inflation. On the other hand, contractionary monetary policy (C) could reduce inflation, but it can also lead to decreased employment. An increase in real wage (D) could potentially increase unemployment, as it would raise the cost of labor for firms.

Question 17

Disinflation refers to

Accepted Answer

Disinflation refers to a reduction in the rate of inflation, not necessarily a decrease in the price level itself. It means that the rate of increase in prices is slowing down, but prices may still be increasing overall.

Question 18

Deflation refers to

Accepted Answer

Deflation refers to a falling price level, which means that prices of goods and services are decreasing over time. It is the opposite of inflation, which refers to an increase in the general price level of goods and services in an economy. Option A is incorrect as a decrease in the rate of inflation is not the same as deflation.

Question 19

A provision of the Dodd-Frank Act of 2010 revised the Federal Reserve Act to

Accepted Answer

The answer of A provision of the Dodd-Frank Act of...

Question 20

Expansionary monetary policy will result in

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates to stimulate economic growth. This increased money supply can lead to an increase in aggregate demand, causing prices to rise and potentially contributing to inflation. However, the lower interest rates can also make borrowing cheaper and encourage investment and consumption, which can boost economic activity. So, the correct option is A, lower interest rates.

Quiz 28: Inflation, unemployment, and Federal Reserve Policy