Question 1

Which of the following could decrease unemployment and inflation simultaneously?

Accepted Answer

A decrease in oil prices would decrease the cost of production for firms, which would lower prices for consumers and decrease inflation. At the same time, firms may hire more workers to increase production, which would decrease unemployment. Expansionary monetary policy may also decrease unemployment, but it could increase inflation. Contradictory monetary policy would decrease inflation, but it could also increase unemployment. An increase in the real wage would likely only decrease unemployment, but it may also increase inflation.

Question 2

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, as it would reduce transparency and potentially undermine market confidence in the Fed's decision-making process. On the other hand, following through with changes it has announced, revealing the Fed's target for the federal funds rate, and making the minutes of the open market committee meetings public would all help increase transparency and accountability, which are key factors in enhancing the Fed's credibility.

Question 3

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. The Dodd-Frank Act is a regulatory law governing financial markets and institutions passed in 2010. A mandatory bailout policy does not exist. Rational expectations refer to the assumption that people make decisions based on all available information and that they do so in the most optimal way.

Question 4

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 5

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 6

Expansionary monetary policy will result in

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates to stimulate economic activity. This leads to increased borrowing and investment, which ultimately increases aggregate demand. Lower interest rates also make it cheaper for consumers and businesses to borrow, which further increases spending. Therefore, choice A is correct as expansionary monetary policy results in lower interest rates. Choices B and C are incorrect as expansionary monetary policy is meant to increase rates of inflation and aggregate demand rather than decrease them.

Question 7

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

When the Federal Reserve announces a decrease in the federal funds rate target, it means that borrowing and lending costs will decrease. This incentivizes workers and firms to increase their consumption and investment spending, leading to an increase in aggregate demand and potentially inflation. As long as the Fed's announcement is credible, workers and firms will likely respond in this way.

Question 8

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

Accepted Answer

When a negative supply shock occurs, it causes a decrease in the supply of goods and services. This causes the prices of those goods and services to rise, which leads to inflation. At the same time, the decrease in supply will also cause a decrease in real GDP as there are fewer goods and services being produced. A positive supply shock, on the other hand, would increase the supply of goods and services and decrease prices, leading to an increase in real GDP. An increase in short-run aggregate supply or a decrease in aggregate demand would also lead to an increase in real GDP, but would not necessarily impact inflation.

Question 9

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 10

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 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

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

The policy of forward guidance, which signaled that interest rates would remain low for an extended period of time, encouraged investors to borrow money at these low rates to buy financial assets, including stocks, bonds, and real estate. This increased demand for these assets drove their prices up, creating a speculative bubble.

Question 13

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

The policy actions implemented during the heart of the recession were designed to stimulate the economy by increasing the money supply and lowering interest rates. A reversal of these actions would entail a decrease in the money supply and an increase in interest rates, which would work to curb inflationary pressures. Therefore, if the Fed decided to reverse its policy actions, it would be acting to prevent an increase in inflation.

Question 14

Deflation refers to

Accepted Answer

Deflation refers to a falling price level, so B is correct. A decrease in the rate of inflation (A) does not necessarily mean deflation is occurring, so A is incorrect. Therefore, the correct choice is B.

Question 15

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 is an appropriate policy for a central bank to follow if the economy is plagued with deflation. This can lead to an increase in confidence in the central bank and its policies, which can help to alleviate deflationary pressures. Increasing the target interest rate and using contractionary monetary policy would only exacerbate deflation, while gradually raising the required reserve rate might not be effective enough on its own.

Question 16

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 17

Forward guidance refers to central banks

Accepted Answer

Forward guidance involves central banks providing clear and transparent communication about their future monetary policy decisions to the public. This helps businesses and households plan their economic activities accordingly, which can influence consumption, investment, and borrowing decisions. It does not involve setting long-term interest rates (A), simultaneously reducing unemployment and inflation (C), or engaging in monetary policy to offset the negative side-effects of government's fiscal policies (D).

Question 18

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

If the Fed chose to change its policy actions faster than the White House suggested, it would indicate that the Fed is exercising its independence and making decisions based on its own analysis of the economy instead of succumbing to political pressure. This is a key feature of the Fed's role as an independent central bank.

Question 19

Disinflation refers to

Accepted Answer

Disinflation is a reduction in the rate of inflation, not a decrease in the price level (A) or a rapid increase in the price level (B). It also does not involve an increase in the rate of inflation (D).

Question 20

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

Keeping the federal funds rate at 1 percent for a long period of time led to easy credit and a housing bubble, which eventually burst and caused the financial crisis in 2008. Decreasing the money supply would have had the opposite effect of tightening credit and potentially preventing the bubble from forming. Working to stabilize exchange rates and financing a war by printing money are not directly related to the causes of the financial crisis in 2008.

Quiz 17: Inflation,unemployment,and Federal Reserve Policy