Deck 16: Inflation and Monetary Policy

Question 1

The Fed's goal is

A) moderate and stable inflation
B) zero inflation
C) a low price level
D) an inflation rate that diminishes over time
E) low and stable inflation

Answer 1

low and stable inflation

Question 2

The cost of cyclical unemployment is

A) spread broadly among the U.S.population
B) the inflationary impact of increased federal expenditures on the unemployed
C) growing as the U.S.population ages
D) especially felt by recent college graduates
E) the lost output that results

Answer 2

the lost output that results

Question 3

A fluctuating rate of inflation

A) will cause a downturn in the housing sector
B) redistributes income from creditors to debtors
C) redistributes income from the employed to the unemployed
D) was the problem that originally led to the creation of the Federal Reserve System
E) interferes with long-run planning

Answer 3

interferes with long-run planning

Question 4

What would happen if the Fed tried to keep employment above the full-employment level?

A) The long-run aggregate supply curve would shift to the right.
B) The aggregate supply curve would shift downward.
C) Unemployment would increase.
D) The price level would increase.
E) The aggregate demand curve would shift to the left.

Question 5

Which of the following is an opportunity cost of cyclical unemployment?

A) A higher wage rate
B) A lower interest rate
C) Lower taxes paid by the employed
D) Costs of updating prices
E) Lost earnings of the unemployed.

Question 6

Which of the following is true?

A) Structural unemployment is caused by the fact that it takes a short time to search for a job.
B) Cyclical unemployment is caused by the fact that it takes a short time to search for a job.
C) Frictional unemployment is caused by a lack of skills or information about jobs.
D) Structural unemployment is caused by a lack of skills or information about jobs.
E) Cyclical unemployment is caused by a lack of skills or information about jobs.

Question 7

The natural rate of unemployment never changes.

Question 8

The Fed's efforts to attain full employment are complicated by

A) the persistence of cyclical unemployment
B) the instability of the inflation rate
C) new legislation that attempts to avoid financial panics
D) the difficulty of determining what normal unemployment means
E) conflicting objectives among its member banks

Question 9

The natural rate is natural in the sense that macroeconomic policy

A) sees it all the time
B) can ignore it
C) can't do much about it
D) is a natural reaction to unemployment
E) has always recognized that some workers will be voluntarily unemployed

Question 10

The natural rate of unemployment in the United States

A) has consistently equaled 6 percent
B) has increased as the federal budget deficit has fallen
C) is similar to the natural rate in European countries
D) has increased in recent years
E) is now unusually high because so many women have entered the labor force

Question 11

The natural rate of unemployment

A) is a specific unemployment rate that can be a target for the Fed
B) changes as the inflation rate changes
C) is natural because it does not change from period to period
D) is a measure of the quality of the Fed's performance
E) changes as the efficiency of job searches change

Question 12

Since the Federal Reserve Banking Act of 1978,what has been the Fed's chief responsibility?

A) Encouraging investment
B) Regulating foreign trade
C) Minimizing the interest payments on the national debt
D) Achieving a low and stable rate of inflation
E) Keeping the interest rate low.

Question 13

When the Federal Reserve System was first established,which of the following was its chief responsibility?

A) Keeping the inflation rate low and stable
B) Ensuring the stability of the banking system
C) Achieving full employment of the labor force
D) Keeping the interest rate low and stable
E) Keeping output growth high and stable.

Question 14

If unemployment is below the natural rate,GDP is below potential output.

Question 15

The Federal Reserve Banking Act of 1978

A) attempted to guarantee stability of the banking system
B) was a reaction to the savings and loan crisis
C) added full employment to the list of objectives for the Fed
D) strengthened deposit insurance programs
E) pledged the Fed to keep the inflation rate low

Question 16

Which of the following are equivalent terms?

A) The absence of structural unemployment and the absence of cyclical unemployment
B) Normal employment and the absence of structural unemployment
C) Full employment and the absence of cyclical unemployment
D) Normal employment and the absence of frictional unemployment
E) Null employment and the absence of frictional unemployment.

Question 17

If the inflation rate is higher than expected,real income is redistributed from lenders to borrowers.

Question 18

The Fed's objectives have remained the same since its inception.

Question 19

If cyclical unemployment is eliminated

A) GDP is at its full-employment level
B) GDP is at its equilibrium level
C) the loanable funds market is in equilibrium
D) the aggregate supply curve shifts upward
E) potential output has increased

Question 20

The Fed does not try to reduce frictional unemployment because it

A) is easier to eliminate with fiscal policy
B) is not a serious social problem
C) has microeconomic solutions
D) signals a strong economy
E) rarely exceeds a 1 percent rate

Question 21

In its day-to-day operations,the Fed focuses on

A) an unemployment rate target
B) an inflation rate target
C) an interest rate target
D) a money demand curve target
E) several economic targets together

Question 22

The historical record of the Fed's success in controlling inflation has been

A) consistently strong
B) inconsistent
C) consistently disappointing
D) shaped primarily by supply shocks
E) incapable of measurement

Question 23

To stabilize real GDP when the money demand curve shifts on its own,the Fed must change the money supply.

Question 24

Which of the following is an accurate description of the U.S.inflation rate since 1950?

A) The rate has always been below 4 percent.
B) Inflation was low in the 1970s.
C) Episodes of high inflation occurred in the 1970s and early 1980s.
D) Inflation rates were very high in the 1960s.
E) Episodes of high inflation occurred in the 1990s.

Question 25

If the Fed wanted to prevent a change in money demand from affecting real GDP,which of the following rules would be feasible and allow the Fed to attain its goal?

A) Keep government spending constant
B) Keep the money supply constant
C) Keep money demand constant
D) Keep taxes constant
E) Keep the interest rate constant.

Question 26

If the Fed wanted to prevent a change in money demand from affecting real GDP,which of the following responses would it choose?

A) A neutralization response
B) A constant interest rate response
C) A constant money supply response
D) A constant tax rate response
E) A constant government spending response.

Question 27

If the demand for money decreases,a constant interest rate policy requires the Fed to

A) consult with leaders in the financial markets to see whether it should introduce credit controls
B) watch to see whether the investment spending decreases
C) move quickly to prevent a recession
D) decrease the supply of money
E) decrease the interest rate.

Question 28

If there is a leftward shift of the money demand curve,which of the following should the Fed do if it wants to keep the price level stable?

A) Lower its interest rate target
B) Sell bonds in the open market
C) Wait,since the price level does not usually change when the money demand curve shifts
D) Raise its interest rate target
E) Buy bonds in the open market.

Question 29

The Fed responds to money demand shocks by

A) changing the velocity of money
B) changing the money supply
C) following the money creation rules responsible for its success in the past two decades
D) increasing the required reserve ratio
E) changing its definition of the natural rate of unemployment

Question 30

At present,what is the approximate natural rate of unemployment in the United States?

A) 4.5 percent
B) 5.5 percent
C) 7 percent
D) 8.5 percent
E) 2.5 percent

Question 31

If money demand decreases due to greater use of credit cards,which of the following would most likely happen under a neutralization policy?

A) The money supply would decrease,real GDP would not change,and neither would the interest rate.
B) The money supply would increase,real GDP would not change,and neither would the interest rate.
C) The money supply would decrease,real GDP would increase,and the interest rate would decrease.
D) The money supply would increase,real GDP would not change,and the interest rate would decrease.
E) The money supply would decrease,real GDP would decrease,but the interest rate would not change.

Question 32

If people start to use cash because of an increase in credit card fraud,which of the following would we expect to happen under a neutralization policy?

A) The money supply would decrease,real GDP would not change,and the interest rate would not change.
B) The money supply would increase,real GDP would not change,and the interest rate would not change.
C) The money supply would decrease,real GDP would increase,and the interest rate would decrease.
D) The money supply would increase,real GDP would not change,and the interest rate would decrease.
E) The money supply would decrease,real GDP would decrease,and the interest rate would not change.

Question 33

The Federal Reserve has been quite successful in keeping the inflation rate low for the past 20 years.

Question 34

If money demand falls on its own (i.e. ,not in response to a spending shock),what must the Fed do to stabilize GDP?

A) Increase the money supply
B) Decrease the money supply
C) Leave the money supply and money demand unchanged
D) Increase money demand
E) Decrease money demand.

Question 35

Which of the following would lead to a rightward shift of the money demand curve?

A) Expectations that the interest rate will fall
B) New substitutes for money become popular
C) The use of electronic money increases
D) Substitutes for money become less popular
E) The use of credit cards increases.

Question 36

The Federal Reserve has been quite consistently successful in keeping the inflation rate low over its entire history.

Question 37

If money demand changes for some reason other than a spending shock,the Fed can stabilize

A) GDP without changing the interest rate
B) GDP,but at the expense of interest rate stability
C) GDP by keeping the interest rate stable
D) the price level by keeping the interest rate stable
E) the price level and GDP by stabilizing the interest rate

Question 38

To stabilize real GDP when the money demand curve shifts up on its own,the Fed must increase the money supply.

Question 39

Over the past twenty years the Fed's policy experience

A) has been good and improving
B) is an indicator that economic policy is confused
C) shows a focus on full employment
D) reveals a lack of concern about unemployment
E) has been generally poor and deteriorating

Question 40

Which of the following is a reason why the money demand curve might shift?

A) an increase in the interest rate
B) a change in the money supply
C) open market purchases of bonds by the Federal Reserve
D) changes in the required reserve ratio
E) new methods of making payments that replace money

Question 41

If the Fed responds to an increase in government spending with the goal of stable prices and output,which of the following would be the result?

A) A larger multiplier effect than normal
B) Partial crowding out
C) An increase in consumption and investment spending
D) No crowding out
E) Complete crowding out.

Question 42

The AD curve shifts to the right when

A) the Fed alters its fiscal policy rules
B) any economic shock disrupts the economy
C) the AS curve does not shift
D) new trade legislation is passed
E) positive demand shocks occur

Question 43

The Fed's objectives present it with a true dilemma when

A) there are demand shocks caused by shifts in money demand
B) there are demand shocks caused by changes in spending
C) there are negative supply shocks
D) cyclical unemployment exists
E) there is member bank opposition

Question 44

If there is a sudden increase in government spending,which of the following should the Fed do if it wants to keep output unchanged?

A) Do nothing,since the self-correcting mechanism will adjust the economy
B) Sell bonds in the open market
C) Wait,since output usually does not change when government spending increases
D) Decrease the required reserve ratio
E) Buy bonds in the open market.

Question 45

The Fed prefers to change its interest rate target only rarely because

A) those targets affect productivity in the labor force
B) a fluctuating stock and bond market signals a recession
C) interest rates are greatly overrated as a measure of economic performance
D) it is so difficult to do so
E) the changes destabilize the financial markets

Question 46

The prices of stocks and bonds move

A) in opposite directions to the Fed's interest rate target
B) in opposite directions to the spending patterns of Congress
C) in similar directions to the Fed's interest rate targets
D) in similar directions to the spending patterns of Congress
E) whenever the Open Market Committee threatens a change in the money supply

Question 47

The Fed can determine how the money demand curve has shifted by

A) studying interest rate changes
B) looking at the number of new loans
C) studying unemployment compensation claims
D) experimenting with changes in credit conditions
E) checking the size of the federal budget deficit

Question 48

Revisions in the interest rate target

A) occur on a daily basis
B) have widespread impacts on the financial markets
C) require Congressional approval
D) are based solely on data gathered in previous quarters
E) are a no-lose opportunity for the Fed

Question 49

Newspaper reports about good news in the economy are often followed by declines in stock and bond prices because

A) the Fed reacts in anticipation of the news to prevent speculation
B) financial markets are often irrational
C) financial markets prefer recessions to spending shocks
D) stock and bond holders fear the Fed's reaction to possible overheating
E) newspapers may be confused about the performance of financial markets

Question 50

Which of the following is the Fed's best strategy for dealing with demand shocks?

A) Maintain a money supply target
B) Decrease the money supply
C) Maintain a passive monetary policy
D) Neutralize the impact with an increase in the money supply
E) Increase the interest rate.

Question 51

To stabilize real GDP,the Fed must increase the money supply in response to a

A) positive demand shock
B) low level of unemployment
C) sudden upsurge in inflation
D) rise in the interest rate
E) negative demand shock

Question 52

If the Federal Reserve unexpectedly raised its interest rate target,which of the following would most likely occur?

A) The interest rate would increase and bond prices would rise.
B) The interest rate would decrease and bond prices would rise.
C) The interest rate would increase and bond prices would fall.
D) The interest rate would decrease and bond prices would fall.
E) The interest rate would increase but bond prices would not change.

Question 53

Negative supply shocks confront the Fed with a dilemma because

A) full employment is no longer possible
B) the costs of fulfilling one objective are paid in terms of failure to meet the other
C) inflation cannot be prevented considering the reduced supply
D) all policy choices are equally undesirable
E) such shocks are entirely unpredictable

Question 54

Which of the following is the Fed's best strategy for dealing with shifts of the money demand curve?

A) A neutralization response
B) Decrease the money supply
C) Maintain a constant money value target
D) Maintain a money supply target
E) Increase the interest rate.

Question 55

If there is a sudden increase in government spending,which of the following should the Fed do if it wants to keep the price level steady?

A) Do nothing,since the self-correcting mechanism will adjust the economy
B) Sell bonds in the open market
C) Wait,since the price level usually does not change when government spending increases
D) Decrease the required reserve ratio
E) Buy bonds in the open market.

Question 56

If the Fed has a goal of stable real GDP and the government announces a tax cut,which of the following would occur?

A) Money demand would not change,real GDP would not change,the interest rate would decrease,and there would be partial crowding out.
B) Money demand would not change,real GDP would not change,the interest rate would increase,and there would be complete crowding out.
C) Money demand would increase,real GDP would not change,the interest rate would increase,and there would be partial crowding out.
D) Money demand would not change,real GDP would increase,the interest rate would decrease,and there would be complete crowding out.
E) Money demand would increase,real GDP would not change,the interest rate would decrease,and there would be complete crowding out.

Question 57

Inflation doves lean in the direction of milder recessions and are more willing to tolerate higher inflation.

Question 58

-Refer to Figure 16-1.Suppose a demand shock causes output to rise above full employment and increases money demand from $\mathrm { M } _ { 1 } ^ { \mathrm { D } }$ to $\mathrm { M } _ { 2 } ^ { \mathrm { D } }$ .If the Fed wants to maintain the interest rate at r?,it will

A) use a constant monetary supply policy
B) increase the money supply,which will increase aggregate demand and increase output further in the short run
C) increase the money supply,which will increase the price level,decrease aggregate demand,and lower output back to full employment
D) decrease money demand,decrease the interest rate,and decrease aggregate demand until output returns to full employment
E) be unable to meet its interest rate target without causing a recession.

Question 59

If the Fed has a goal of stable real GDP and government spending increased,which of the following would occur?

A) The money demand would not change,real GDP would not change,the interest rate would decrease,and there would be partial crowding out.
B) Money demand would not change,real GDP would not change,the interest rate would increase,and there would be complete crowding out.
C) Money demand would increase,real GDP would not change,the interest rate would increase,and there would be partial crowding out.
D) Money demand would not change,real GDP would increase,the interest rate would decrease,and there would be complete crowding out.
E) Money demand would increase,real GDP would not change,the interest rate would decrease,and there would be complete crowding out.

Question 60

If there is a leftward shift of the money demand curve,which of the following should the Fed do if it wants to keep output stable?

A) Lower its interest rate target
B) Sell bonds in the open market
C) Wait,since output usually does not change when the money demand curve shifts
D) Raise its interest rate target
E) Buy bonds in the open market.

Question 61

What is the major cost of slowing down an ongoing inflation?

A) Output must rise above potential.
B) The Fed must sell bonds at lower prices than those at which the bonds were purchased.
C) Output must fall below potential.
D) The Fed must purchase bonds from the public.
E) The Fed must lend additional money to member banks at below-market interest rates.

Question 62

Those who prefer that the Fed react to negative supply shocks by tolerating higher rates of inflation as a means of moderating a recession are called

A) inflation doves
B) inflation hawks
C) monetarists
D) Keynesians
E) hard headed and soft hearted

Question 63

What is a good historical example of when the Fed created a recession to reduce inflation expectations?

A) In the early 1980s
B) In the early 1960s
C) During the Great Depression
D) In the late 1920s
E) During World War II.

Question 64

If people come to expect ongoing inflation,what will happen over time independent of the Fed's response?

A) The long-run aggregate supply curve will shift to the right.
B) The aggregate supply curve will continue to shift upward.
C) The aggregate demand curve will continue to shift to the right.
D) The aggregate supply curve will continue to shift downward.
E) The aggregate demand curve will continue to shift to the left.

Question 65

If the Fed increases the money supply in response to positive demand shocks,it

A) lowers the interest rate
B) reduces each type of unemployment
C) adds its own positive demand shock
D) creates financial stability
E) crowds out private investment

Question 66

The Fed has been able to achieve a zero rate of inflation throughout most of the 1990s.

Question 67

How can the Fed reduce a continuing inflation?

A) By slowing the continuing downward shift of the aggregate supply curve
B) By increasing the money supply
C) By slowing the continuing leftward shift of the aggregate demand curve
D) By decreasing the required reserve ratio
E) By slowing the continuing rightward shift of the aggregate demand curve.

Question 68

Since World War II,the U.S.economy has been characterized by

A) extremely high rates of inflation
B) decreases in the price level
C) ongoing inflation
D) zero inflation
E) a continually falling rate of inflation

Question 69

If the economy is at potential output,the price level can continue to increase.

Question 70

Ongoing inflation has its own momentum because

A) prices rise whenever firms see other prices rising
B) the public learns to expect inflation and adjusts its decisions in response
C) public officials are unwilling to stop prosperity
D) more and more people now have jobs
E) we are always playing catch up,trying to get what we lost when others raise prices

Question 71

If there is an increase in the price of oil and the Fed wishes to maintain price stability,what should it do?

A) Do nothing,because the self-correcting mechanism will adjust the economy
B) Sell bonds in the open market
C) Wait,because the price level seldom changes when there is an increase in the price of oil
D) Encourage firms to not adjust the wages they pay
E) Buy bonds in the open market.

Question 72

Refer to Figure 16-2.Suppose a supply shock shifts the aggregate supply curve from AS₁ to AS₂,and decreases output below full employment.If the Fed then decreases the money supply,it will

A) stabilize the price level,but cause a further decline in output
B) return output to its full-employment level,but at the expense of an increase in the price level
C) increase both output and the price level
D) stabilize the price level and return output to its full-employment level
E) decrease the price level and shift the aggregate demand curve to the right until output returns to its full-employment level

Question 73

The Fed can surely reduce the rightward shift of the AD curve,but

A) stock and bond prices may fall dramatically
B) inflation may rise sharply
C) inflation would change in an unpredictable fashion
D) recession may result
E) unemployment may fall to below the natural rate

Question 74

Which of the following would lead the Fed to increase the money supply under an interest rate rule?

A) an unexplained decrease of money demand
B) an increase in taxes
C) a decrease in spending that caused the money demand curve to decrease
D) an increase in spending that caused the money demand curve to increase
E) a decrease in government spending.

Question 75

If there is a large increase in the price of oil and the Fed wishes to maintain stable output,which of the following should it do?

A) Do nothing,because the self-correcting mechanism will adjust the economy
B) Sell bonds in the open market
C) Wait,because output seldom changes when there is an increase in the price of oil
D) Encourage firms to not adjust the wages they pay
E) Buy bonds in the open market.

Question 76

Ongoing inflation means the Fed must respond to

A) an upward-shifting AS curve
B) a downward-shifting AS curve
C) changing interest rate targets
D) a depression
E) a lower real interest rate

Question 77

To eliminate built-in inflation from the economy,the Fed must

A) announce its intention to have a single policy objective
B) create a recession
C) maintain a constant rate of inflation
D) resist the temptation to change its interest rate targets
E) work closely with Congress and the President

Question 78

Refer to Figure 16-2.Suppose a supply shock shifts aggregate supply from AS₁ to AS₂ and decreases output below full employment.Which of the following statements is most accurate?

A) By increasing the money supply,the Fed can stabilize the interest rate and price level and return output to its full-employment level.
B) By decreasing the money supply,the Fed can stabilize the interest rate and price level and return output to its full-employment level.
C) By increasing the money supply,the Fed can stabilize the price level but output will remain below the full-employment level.
D) By increasing the money supply,the Fed can return output to its full-employment level but at the expense of a further increase in the price level.
E) By increasing the money supply,the Fed can stabilize the price level and return output to its full-employment level but must sacrifice its interest rate target.

Question 79

The choice between hawk and dove positions depends on

A) the extent of cyclical unemployment at the time of the decision
B) relative importance of short-run and long-run monetary considerations
C) cooperation between Congress and the monetary authorities
D) the frequency of negative supply shocks
E) the Fed's relative concern for price and employment stability

Question 80

When the economy reaches its potential output,the price level cannot rise any further.