Question 1

Table 26-2
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2016 & \$ 18.0 \text { trillion } & \$ 18.0 \text { trillion } & 150 \
\hline 2017 & 18.5 \text { trillion } & 18.2 \text { trillion } & 152 \
\hline
\end{array}$$
-Refer to Table 26-2.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2017,it should

Accepted Answer

To increase real GDP to its potential level, the Fed should buy Treasury securities, which increases the money supply and lowers interest rates, stimulating economic activity.

Question 2

Table 26-3
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & { \text { Real GDP } } & \text { Price Level } \
\hline 2016 & \$ 18.0 \text { trillion } & \$ 18.0 \text { trillion } & 150 \
\hline 2017 & 18.5 \text { trillion } & 18.8 \text { trillion } & 154 \
\hline
\end{array}$$
-Refer to Table 26-3.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2017,it should

Accepted Answer

If the Fed wants to keep real GDP at its potential level in 2017, it should sell Treasury securities to decrease the money supply and increase the interest rates. This will lead to a decrease in aggregate demand and an eventual decrease in real GDP.

Question 3

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 4

Table 26-4
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2016 & \$ 18.1 \text { trillion } & \$ 18.1 \text { trillion } & 150 \
\hline 2017 & 18.4 \text { trillion } & 18.3 \text { trillion } & 153 \
\hline
\end{array}$$
-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 2017,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
 \[\begin{array} { | l |...

Question 5

Table 26-7
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2012 & \$ 14.2 \text { trillion } & \$ 14.2 \text { trillion } & 154 \
\hline 2013 & 14.8 \text { trillion } & 14.6 \text { trillion } & 156 \
\hline
\end{array}$$
-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
 \[\begin{array} { | l |...

Question 6

Table 26-5
 $$\begin{array} { | c | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2016 & \$ 18.4 \text { trillion } & \$ 18.4 \text { trillion } & 144 \
\hline 2017 & 18.7 \text { trillion } & 18.5 \text { trillion } & 146 \
\hline
\end{array}$$
-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 2017.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
 \[\begin{array} { | c |...

Question 7

Table 26-3
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & { \text { Real GDP } } & \text { Price Level } \
\hline 2016 & \$ 18.0 \text { trillion } & \$ 18.0 \text { trillion } & 150 \
\hline 2017 & 18.5 \text { trillion } & 18.8 \text { trillion } & 154 \
\hline
\end{array}$$
-Refer to Table 26-3.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 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 2017,which of the following will be lower than if the Fed had taken no action?

Accepted Answer

If the Fed takes no action, real GDP will fall below potential GDP resulting in a recession and high unemployment. In this scenario, the inflation rate will be low due to weak aggregate demand. However, if the Fed uses monetary policy to keep real GDP at its potential level, it is likely that the inflation rate will increase slightly, but real GDP will be higher than if the Fed had taken no action. Therefore, the only option that will be lower than if the Fed had taken no action is real GDP and the inflation rate (Option B).

Question 8

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

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates, which can stimulate economic growth and reduce unemployment. However, if there is already a shortage of goods and services due to the recession, increasing the money supply can lead to more demand without a corresponding increase in supply, causing prices to rise and inflation to increase.

Question 9

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

Accepted Answer

Contractionary monetary policy involves reducing the money supply, increasing interest rates, and decreasing spending to slow down economic growth and control inflation. Therefore, the Fed can use contractionary monetary policy to keep inflation from increasing.

Question 10

In reality,the Fed is unable to use monetary policy to keep real GDP exactly at its potential level.

Accepted Answer

The Fed's monetary policy tools may influence economic activity, but there are many other factors that affect real GDP and the Fed cannot control all of them. Additionally, it is difficult to accurately measure potential GDP.

Question 11

Table 26-7
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2012 & \$ 14.2 \text { trillion } & \$ 14.2 \text { trillion } & 154 \
\hline 2013 & 14.8 \text { trillion } & 14.6 \text { trillion } & 156 \
\hline
\end{array}$$
-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
 \[\begin{array} { | l |...

Question 12

Figure 26-15 
-Refer to Figure 26-15.In the figure above,suppose the economy in Year 1 is at point A and is 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 26-15 
-Refer to Figure 26-15.In the...

Question 13

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, which involves lowering interest rates or increasing the money supply, is used to stimulate economic growth. This typically results in higher inflation due to increased spending and demand, and higher real GDP as economic activity expands.

Question 14

Table 26-8
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2013 & \$ 13.5 \text { trillion } & \$ 13.5 \text { trillion } & 142 \
\hline 2014 & 14.0 \text { trillion } & 14.4 \text { trillion } & 150 \
\hline
\end{array}$$
-Refer to Table 26-8.The hypothetical information in the table shows what the values for real GDP and the price level would have been in 2014 if the Federal Reserve did not use monetary policy:
a.If the Fed wanted to keep real GDP at its potential level in 2014,should it have used an expansionary policy or a contractionary policy? Should the trading desk have bought T-bills or sold them?
b.Suppose the Fed's policy was successful in keeping real GDP at its potential level in 2014.State whether each of the following would 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
 \[\begin{array} { | c |...

Question 15

Table 26-6
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } &  { \text { Real GDP } } & \text { Price Level } \
\hline 2016 & \$ 18.1 \text { trillion } & \$ 18.1 \text { trillion } & 150 \
\hline 2017 & 18.4 \text { trillion } & 18.6 \text { trillion } & 155 \
\hline
\end{array}$$
-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 2017,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
 \[\begin{array} { | l |...

Question 16

Table 26-2
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2016 & \$ 18.0 \text { trillion } & \$ 18.0 \text { trillion } & 150 \
\hline 2017 & 18.5 \text { trillion } & 18.2 \text { trillion } & 152 \
\hline
\end{array}$$
-Refer to Table 26-2.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 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 2017,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 2017, real GDP would be higher than if the Fed had taken no action. However, this would lead to an increase in aggregate demand, which could cause an increase in the inflation rate. Therefore, real GDP and the inflation rate would be higher than if the Fed had taken no action. Option A is incorrect because the unemployment rate is not mentioned in the question or the table. Option C is incorrect because potential GDP will remain the same regardless of Fed action. Option D is incorrect because if the Fed successfully uses monetary policy to keep real GDP at its potential level, it would likely lead to a decrease in the inflation rate, not an increase.

Question 17

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

To counteract the anticipated slower growth in aggregate demand compared to long-run aggregate supply, the Federal Reserve would likely decrease interest rates. This action encourages borrowing and spending, which can help increase aggregate demand to better match the growth in aggregate supply.

Question 18

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 19

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

Accepted Answer

When the Fed implements expansionary monetary policy, it increases the money supply and lowers interest rates, which can encourage consumers and businesses to borrow and spend more. This can stimulate aggregate demand and help boost economic growth.

Question 20

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 a contractionary monetary policy.Briefly explain the condition of the economy and what the Federal Reserve is attempting to do.

Accepted Answer

The answer of Use the dynamic aggregate demand and aggregate...

Quiz 26: Monetary Policy