Question 1

The statutory goal of monetary policy in the United States is&#10;A) Maximum employment&#10;B) Moderate long-term interest rates&#10;C) Stable prices&#10;D) All of the above

Accepted Answer

The statutory goal of monetary policy in the United States, as set by the Federal Reserve Act, includes maximum employment, stable prices, and moderate long-term interest rates.

Question 2

Outside the United States, the goal of monetary policy in industrial economies&#10;A) Stable prices (or low inflation)&#10;B) A stable exchange rate&#10;C) Maximum employment&#10;D) Low interest rates

Accepted Answer

The primary goal of monetary policy in most industrial economies outside the United States is to maintain stable prices or low inflation, as this is crucial for economic stability and growth.

Question 3

If actual output were to grow at nearly a 2.5 percent rate over the next three years, according to Okun's Law&#10;A) Unemployment would be rising&#10;B) Unemployment would be falling&#10;C) Unemployment would be stable&#10;D) More information is needed

Accepted Answer

Unemployment would be stable&#10;

Question 4

The Fed (and many other central banks) prefers to gauge inflation by looking at the core measure of inflation because&#10;A) This measure is biased downward&#10;B) It is required to by statute&#10;C) By removing volatile food and energy prices, the core measure better reflects underlying inflation&#10;D) None of the above

Accepted Answer

The core measure of inflation excludes volatile food and energy prices, providing a clearer view of the underlying inflation trend, which is why it is preferred by the Fed and many other central banks.

Question 5

If disinflation is taking place&#10;A) The level of actual output likely is below the level of potential output&#10;B) The growth of actual output must be below the growth of potential output&#10;C) The minimum wage has probably fallen&#10;D) The unemployment rate is below the NAIRU

Accepted Answer

Disinflation refers to a slowdown in the rate of inflation. It often occurs when the actual output is below potential output, leading to less pressure on prices.

Question 6

To stimulate aggregate demand, the Fed could&#10;A) Lower its policy interest rate&#10;B) Use forward guidance to alter the path of the expected policy rate&#10;C) Purchase long-term benchmark securities to compress the term premium&#10;D) All of the above

Accepted Answer

All of the options listed are tools the Federal Reserve can use to stimulate aggregate demand. Lowering the policy interest rate makes borrowing cheaper, encouraging spending and investment. Forward guidance can shape expectations about future monetary policy, influencing economic decisions today. Purchasing long-term securities aims to lower long-term interest rates, further encouraging borrowing and investment.

Question 7

Inflation would rise if&#10;A) Actual output exceeded potential output&#10;B) Inflation expectations increased&#10;C) Unemployment were below the NAIRU&#10;D) All of the above

Accepted Answer

All of the options provided are factors that can lead to an increase in inflation. A) When actual output exceeds potential output, it indicates an overheating economy which can lead to inflation. B) If inflation expectations increase, it can become a self-fulfilling prophecy as workers demand higher wages and businesses raise prices in anticipation of higher costs, leading to actual inflation. C) Unemployment below the NAIRU (Non-Accelerating Inflation Rate of Unemployment) suggests that the labor market is tight, which can put upward pressure on wages and, consequently, prices, leading to inflation.

Question 8

If actual output equals and grows with potential output&#10;A) Inflation will be stable&#10;B) The unemployment rate will equal the NAIRU&#10;C) Output will be growing at nearly a 2.5 percent rate&#10;D) All of the above

Accepted Answer

When actual output equals and grows with potential output, it indicates a balanced economy where inflation is stable because demand and supply are in equilibrium. The unemployment rate will be at the Non-Accelerating Inflation Rate of Unemployment (NAIRU), meaning it's at a level that doesn't put upward or downward pressure on inflation. The statement about output growing at nearly a 2.5 percent rate is more specific and might not always be true, but it's often used as a rough estimate for potential growth in many developed economies. Therefore, all of the statements can be considered correct in this context.

Question 9

If growth in the labor force is 1 percent, growth in labor productivity is 2 percent, and growth in prices is 2 percent, growth in potential (real) output will be&#10;A) 3 percent&#10;B) 5 percent&#10;C) 1 percent&#10;D) Cannot tell from the information provided

Accepted Answer

Growth in potential (real) output is determined by the sum of the growth in the labor force and the growth in labor productivity. Here, 1% (labor force growth) + 2% (labor productivity growth) = 3%. Growth in prices (inflation) does not affect the calculation of real output growth.

Question 10

Setting the stage for the Great Moderation was&#10;A) Restrictive fiscal policy&#10;B) Low and fairly steady inflation and inflation expectations&#10;C) Coordinated international policies&#10;D) Strong stock prices

Accepted Answer

Low and fairly steady inflation and inflation expectations were key factors in setting the stage for the Great Moderation, a period of reduced macroeconomic volatility experienced by many countries starting in the mid-1980s.

Question 11

Inflation will increase when&#10;A) Growth in aggregate demand exceeds growth in potential output and the level of output is above the level of potential output&#10;B) Growth in aggregate demand falls short of growth in potential output and the level of output is above the level of potential output&#10;C) Growth in aggregate demand exceeds the growth in potential output and the level of output is below the level of potential output&#10;D) Both a and b

Accepted Answer

The answer of Inflation will increase when&#10;A) Growth in aggregate...

Deck 13: Monetary Policy: The Basics