Question 1

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 2

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 can influence the level of real GDP, but there are many other factors that affect the economy, such as productivity, technological changes, and global events. Therefore, it is not possible for the Fed to keep real GDP exactly at its potential level using monetary policy alone.

Question 3

Table 15-2
 
-Refer to Table 15-2.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

According to the table, real GDP is below potential GDP in 2017. To increase real GDP to its potential level, the Fed should use expansionary monetary policy. Buying Treasury securities is a tool of expansionary monetary policy that increases the money supply, lowers interest rates, and stimulates borrowing and spending by households and businesses. As a result, aggregate demand increases and real GDP rises. Therefore, choice A is the best answer. Selling Treasury securities, increasing the required reserve ratio, and increasing income taxes are tools of contractionary monetary and fiscal policies that reduce the money supply, raise interest rates, and discourage borrowing and spending. These policies would further depress real GDP below its potential level.

Question 4

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 next year's aggregate demand growth will be slower than long-run aggregate supply, they may fear potential deflation. One way to combat deflation is to stimulate demand by lowering interest rates. This can incentivize borrowing and investment, leading to increased economic activity and higher prices. Therefore, the most likely action for the Federal Reserve would be to decrease interest rates.

Question 5

Table 15-8
 
-Refer to Table 15-8.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 15-8
 
-Refer to Table 15-8.The hypothetical...

Question 6

Table 15-3
 
-Refer to Table 15-3.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 uses monetary policy successfully to keep real GDP at its potential level in 2017, the inflation rate will be lower than if the Fed had taken no action. This is because if the Fed keeps real GDP at its potential level, there will be no output gap and therefore no excess demand in the economy, which would lead to higher prices. Therefore, real GDP and the inflation rate will both be lower than if the Fed had taken no action.

Question 7

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

Accepted Answer

Expansionary monetary policy involves the Federal Reserve increasing the money supply and lowering interest rates to encourage borrowing and spending. This can help stimulate aggregate demand and boost economic activity.

Question 8

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

Accepted Answer

Contractionary monetary policy, such as raising interest rates and reducing the money supply, can help control inflation by making borrowing harder and reducing spending, which slows down economic growth and decreases demand for goods and services.

Question 9

Table 15-4
 
-Refer to Table 15-4.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 15-4
 
-Refer to Table 15-4.Suppose the...

Question 10

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...

Question 11

Table 15-6
 
-Refer to Table 15-6.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 15-6
 
-Refer to Table 15-6.Suppose the...

Question 12

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 stimulates spending and investment. This can cause an increase in aggregate demand, leading to an increase in prices and the inflation rate.

Question 13

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 14

Table 15-7
 
-Refer to Table 15-7.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 15-7
 
-Refer to Table 15-7.Suppose the...

Question 15

Table 15-2
 
-Refer to Table 15-2.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 Fed uses monetary policy successfully to keep real GDP at its potential level in 2017, real GDP will be higher than it would have been without Fed intervention. However, this increase in real GDP could cause an increase in the inflation rate. Therefore, the only option that includes both real GDP and the inflation rate as being higher than if the Fed had taken no action is option B.

Question 16

Table 15-7
 
-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 15-7
 
-Use the dynamic aggregate demand...

Question 17

Table 15-3
 
-Refer to Table 15-3.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 real GDP is currently above its potential level, then the economy is experiencing an inflationary gap. To bring real GDP back to its potential level, the Fed should use contractionary monetary policy, which involves selling Treasury securities. This will decrease the money supply, increase interest rates, decrease investment and consumption spending, and ultimately decrease aggregate demand and bring real GDP back to its potential level. Option A is incorrect because buying Treasury securities would increase the money supply, stimulate investment and consumption spending, and exacerbate the inflationary gap. Option C is incorrect because decreasing the required reserve ratio would also increase the money supply, stimulate investment and consumption spending, and exacerbate the inflationary gap. Option D is incorrect because decreasing income taxes would stimulate consumption spending, increase aggregate demand, and exacerbate the inflationary gap.

Question 18

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, lowers interest rates, and encourages consumer and business borrowing and spending. This results in higher aggregate demand and an increase in real GDP towards potential real GDP. However, when the economy reaches or exceeds potential real GDP, expansionary monetary policy increases demand beyond supply capacity, causing an increase in the price level (inflation). Therefore, the inflation rate will be higher, and real GDP will be higher as well.

Question 19

Figure 15-15 
-Refer to Figure 15-15.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 15-15 
-Refer to Figure 15-15.In the...

Question 20

Table 15-5
 
-Refer to Table 15-5.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 15-5
 
-Refer to Table 15-5.Suppose the...

Quiz 15: Monetary Policy

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?

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

Table 15-2 -Refer to Table 15-2.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

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

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

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

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

The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year.

Table 15-3 -Refer to Table 15-3.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

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 .

Figure 15-15 -Refer to Figure 15-15.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?