Deck 19: The Federal Reserve: Monetary Policy, Economic Activity, and Inflation

Question 1

Ordinarily the Fed lends money only to banks, but during the Great Recession of 2007-2009 the Fed extended its lender-of-last-resort role to other financial institutions. These institutions included

A) securities dealers.
B) investment banks.
C) high-quality corporations.
D) all of the above

Answer 1

all of the above

Question 2

If people accurately speculate that a run on one bank will result in a run on all banks, the financial system would experience what is known as a

A) financial death spiral.
B) clearinghouse collapse.
C) bank panic.
D) commodity crisis.

Answer 2

bank panic.

Question 3

The four distinct tools of policy used by the Fed to influence the money supply are

A) interest rates, government spending, tax rates, and government transfer payments.
B) open market operations, discount policy, reserve requirement policy, and adjusting interest on reserves.
C) open market operations, adjusting the exchange rate of the dollar, government purchases, and reserve requirement policy.
D) reserve requirement policy, discount policy, interest rates, and tax rates.

Answer 3

open market operations, discount policy, reserve requirement policy, and adjusting interest on reserves.

Question 4

If a bank receives a $5 million discount loan from the Fed, then the bank's reserves will

A) increase by $5 million.
B) increase by more than $5 million.
C) increase by less than $5 million.
D) not change.

Question 5

Suppose a bank has $10 million in deposits with no excess reserves, and the reserve requirement is 25%. If the Fed reduces the reserve requirement to 20%, the bank will now have excess reserves of

A) $0.
B) $0.5 million.
C) $1.5 million.
D) $2 million.

Question 6

Suppose a bank has $10 million in deposits with no excess reserves, and the reserve requirement is 20%. If the Fed reduces the reserve requirement to 5%, the bank can make a maximum loan of

A) $0.
B) $0.5 million.
C) $1.5 million.
D) $2 million.

Question 7

If the Fed conducts an open market purchase of Treasury bonds, this will

A) encourage banks to make more loans and will increase the money supply.
B) encourage banks to make more loans and will decrease the money supply.
C) cause banks to reduce their loans and will increase the money supply.
D) cause banks to reduce their loans and will decrease the money supply.

Question 8

To increase the money supply, the Federal Reserve could

A) increase the reserve requirement.
B) raise the discount rate.
C) make an open market sale.
D) lower the interest it pays on reserves.

Question 9

To decrease the money supply, the Federal Reserve could

A) decrease the reserve requirement.
B) lower the discount rate.
C) make an open market sale.
D) lower the interest it pays on reserves.

Question 10

Required reserves are the portion of deposits banks are required to hold and not lend to customers.

Question 11

An insolvent bank is one that owes more money to its depositors than it has in cash, loans, and other assets.

Question 12

A bank panic refers to a situation where banks are afraid they will not have enough customers to borrow all their excess reserves.

Question 13

The Federal reserve can increase the money supply by lowering the reserve requirement or raising the discount rate.

Question 14

When the Fed makes an open market purchase of government bonds, it does so with the intention of decreasing the money supply.

Question 15

A group of banks that agree to lend one another money in case of unexpectedly large withdrawals is a ________.

Question 16

What does it mean when the Federal Reserve is referred to as a lender of last resort?

Question 17

Describe the four distinct tools of policy that the Federal Reserve can use to influence the money supply. How would the Fed use each of these tools to either increase or decrease the money supply?

Question 18

The Fed can attempt to increase the federal funds rate by

A) selling government bonds, which increases the money supply.
B) selling government bonds, which decreases the money supply.
C) buying government bonds, which increases the money supply.
D) buying government bonds, which decreases the money supply.

Question 19

The Fed can attempt to decrease the federal funds rate by

A) lowering the reserve requirement, which increases the money supply.
B) lowering the reserve requirement, which decreases the money supply.
C) raising the reserve requirement, which increases the money supply.
D) raising the reserve requirement, which decreases the money supply.

Question 20

A decrease in interest rates

A) increases investment spending on machinery, equipment, and factories, but decreases consumer spending on durable goods.
B) decreases investment spending on machinery, equipment, and factories, but increases consumer spending on durable goods.
C) increases investment spending on machinery, equipment, and factories, and increases consumer spending on durable goods.
D) decreases investment spending on machinery, equipment, and factories, and decreases consumer spending on durable goods.

Question 21

Less money means ________ interest rates, which ________ spending.

A) lower; stimulates
B) lower; reduces
C) higher; stimulates
D) higher; reduces

Question 22

In response to already low short-term interest rates doing little to stimulate the economy during the Great Recession, the Fed began purchasing mortgage-backed securities and long-term government bonds to bring down long-term interest rates. This policy was called

A) closed market operations.
B) contractionary monetary policy.
C) inflation targeting.
D) quantitative easing.

Question 23

If the economy is not fully using its inputs, pumping money into the economy will put ________ pressure on interest rates and will tend to ________ output.

A) upward; increase
B) upward; decrease
C) downward; increase
D) downward; decrease

Question 24

If the economy's resources are fully employed, pumping money into the economy will put ________ pressure on interest rates and will ________ output.

A) upward; not change
B) upward; decrease
C) downward; decrease
D) downward; not change

Question 25

If the economy's resources are fully employed and prices are starting to rise, the Fed can ________ the money supply in an attempt to reduce inflationary pressure. If this action is well-calculated, output will ________.

A) increase; rise
B) increase; remain close to its potential level
C) decrease; remain close to its potential level
D) decrease; fall

Question 26

As the federal funds rate changes, other interest rates tend to move in the same direction.

Question 27

When the economy is producing the maximum amount that it can, increasing the money supply will cause prices and output to increase.

Question 28

Expansionary monetary policy is designed to stimulate the economy by increasing the money supply, but not create much inflationary pressure.

Question 29

If the economy is entering a recession, what should the Fed do as far as changing interest rates, and how should this affect consumer and business spending?

Question 30

Under what economic circumstances would the Fed tend to use an expansionary monetary policy and when would it use a contractionary monetary policy? What would happen to the money supply in each of these situations?

Question 31

The economy entered a recession in January of 2015, but GDP data alluding to the start of the recession was not published and analyzed by the Fed until July 2015. This exemplifies a(n)

A) recognition lag.
B) implementation lag.
C) impact lag.
D) liquidity lag.

Question 32

The time it takes to overcome the practical and procedural hurdles before the Fed can begin to fix the economy is called the

A) recognition lag.
B) implementation lag.
C) impact lag.
D) liquidity lag.

Question 33

GDP data alluding to the start of a recession in January 2015 was published and analyzed by the Fed in July 2015. The Fed then had to hold meetings to formulate a monetary policy to deal with the recession, and then enact the chosen policy. This exemplifies a(n)

A) recognition lag.
B) implementation lag.
C) impact lag.
D) liquidity lag.

Question 34

GDP data alluding to the start of a recession in January 2015 was published and analyzed by the Fed in July 2015. The Fed held meetings to formulate a monetary policy to deal with the recession, and then it enacted the chosen policy in September 2015. It was December 2015 before the policy actually began to affect the economy. The three-month period from September 2015 to December 2015 exemplifies a(n)

A) recognition lag.
B) implementation lag.
C) impact lag.
D) liquidity lag.

Question 35

Which of the following is a reason for long-run potential growth of real GDP?

A) yearly growth of the labor force
B) growth of the stock of physical capital over time
C) improvements in technology over time
D) all of the above

Question 36

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

A) Potential real GDP is projected to be above actual real GDP.
B) Potential real GDP is projected to be below actual real GDP.
C) Gross domestic product is growing too fast to keep the economy at full employment.
D) Consumer and business spending is growing so rapidly that there is a danger of a rapid increase in inflation.

Question 37

Suppose the economy is producing below potential GDP and the Federal Reserve implements the appropriate change in monetary policy, but not until after the economy has started to recover from the recession. In this situation there is a real danger that

A) the Fed's expansionary policy will result in too small of an increase in GDP.
B) the Fed's expansionary policy will result in too large of an increase in GDP.
C) the Fed's contractionary policy will result in too large of a decrease in GDP.
D) the Fed's contractionary policy will result in too small of a decrease in GDP.

Question 38

Suppose the economy is producing above potential GDP and the Federal Reserve implements the appropriate change in monetary policy, but not until after the economy has started to slow down on its own. In this situation there is a real danger that

A) the Fed's expansionary policy will result in too small of an increase in GDP.
B) the Fed's expansionary policy will result in too large of an increase in GDP.
C) the Fed's contractionary policy will result in too large of a decrease in GDP.
D) the Fed's contractionary policy will result in too small of a decrease in GDP.

Question 39

The economist who recognized that lags in policy can explain the difficulty in conducting monetary policy was

A) Adam Smith.
B) John Nash.
C) Milton Friedman.
D) Joseph Schumpeter.

Question 40

Monetary policy has the power to make recessions more severe and long-lasting if it is not timed well.

Question 41

Due to the regularity of business cycles, implementing the correct monetary policy at the correct time has become relatively straightforward.

Question 42

If the economy does not respond to the Fed's tools of policy, the Fed is very limited in what else it can do to correct economic imbalances.

Question 43

What is a liquidity trap? What are the implications of a liquidity trap on monetary policy?

Question 44

Explain the potential downfalls of the Fed implementing an expansionary monetary policy or contractionary monetary policy at the wrong time.

Question 45

Suppose that the basket of goods purchased by the typical consumer costs $188.80 this year and it cost $160 in the base year. The CPI this year would be

A) 28.8.
B) 85.11.
C) 118.0.
D) 348.8.

Question 46

Suppose that the basket of goods purchased by the typical consumer costs $188.80 this year and it cost $160 in the base year. The CPI in the base year would be

A) 85.11.
B) 100.0.
C) 118.0.
D) 348.8.

Question 47

If the basket of goods purchased by the typical consumer costs $188.80 this year and it cost $160 in the base year, prices have risen ________ since the base year.

A) 14.89%
B) 18%
C) 28.8%
D) 188.8%

Question 48

If the CPI this year is 240 and the CPI last year was 217, the inflation rate from last year to this year was

A) 1.11%.
B) 9.0%
C) 10.6%.
D) 23%.

Question 49

When the United States was under the gold standard, recessions were ________ and long-term inflation was ________.

A) more frequent; virtually nonexistent
B) less frequent; virtually nonexistent
C) more frequent; prevalent
D) less frequent; prevalent

Question 50

There tends to be ________ relationship between the growth rate of the money supply and the inflation rate.

A) an inverse
B) a direct
C) no significant
D) a negative

Question 51

A period of very high and accelerating inflation is known as

A) deflation.
B) disinflation.
C) hyperinflation.
D) nuclear inflation.

Question 52

When inflation increases at a ________ rate, the money someone holds will ________ every day.

A) high; buy more
B) high; buy less
C) low; buy less
D) low; buy more

Question 53

When inflation begins to rise, people can prevent their wealth from deteriorating by doing all of the following except

A) holding more cash.
B) converting their cash into foreign currencies.
C) spending their cash on goods and services.
D) investing in financial instruments such as stocks or precious metals.

Question 54

High inflation can do which of the following?

A) increase shoeleather costs
B) distort consumption choices
C) arbitrarily redistribute income
D) all of the above

Question 55

When inflation is high and unexpected,

A) borrowers of money lose and lenders win.
B) borrowers of money win and lenders lose.
C) both borrowers and lenders of money win.
D) both borrowers and lenders of money lose.

Question 56

Economies with sustained high inflation generally have

A) very low unemployment rates.
B) very low GDP growth rates.
C) high rates of business investment.
D) independent central banks.

Question 57

Over long time horizons, the more independent a country's central bank is,

A) the lower the inflation that country experiences.
B) the better chance that country has of experiencing hyperinflation.
C) the higher the country's unemployment rate tends to be.
D) the more politically unstable the country becomes.

Question 58

Deflation financially ________ borrowers of money and financially ________ lenders of money.

A) benefits; benefits
B) benefits; harms
C) harms; benefits
D) harms; harms

Question 59

In the United States, the most commonly cited measure of the price level is the consumer price index.

Question 60

In periods of inflation, wages generally increase to compensate for higher prices.

Question 61

High inflation helps people store wealth over time, which helps them to be able to smooth out their consumption over their lifetimes.

Question 62

One key to keeping inflation low is to have an independent central bank.

Question 63

Suppose that the basket of goods purchased by the typical consumer cost $222.50 in 2015, it cost $177.80 in 2014, and it cost $145.25 in the base year. Calculate the CPI for 2015 and for 2014, and calculate the inflation rate from 2014 to 2015.

Question 64

List five ways that the creators of the U.S. Federal Reserve System set up the system to be independent from the federal government.

Question 65

________ is a period of falling prices of goods and services in an economy.