Question 1

Monetary authorities in a country face the following situation. Consumers are not spending, investment is low, and unemployment is relatively high. Explain how monetary policy could work to improve this situation.

Accepted Answer

The answer of Monetary authorities in a country face the...

Question 2

Explain why the Federal Reserve did not reduce the growth rate of the money supply in response to rising oil prices in 2007 and 2008.

Accepted Answer

The answer of Explain why the Federal Reserve did not...

Question 3

Bubbles in asset markets are usually easy to identify.

Accepted Answer

Bubbles in asset markets are not always easy to identify as market trends and fluctuations can be influenced by various factors including supply and demand, government policies, investor sentiment, and unforeseen events. Furthermore, bubbles can often go unnoticed until they burst, causing significant damage to investors and the wider economy.

Question 4

Explain carefully why monetary policy deals more successfully with aggregate demand shocks than real shocks.

Accepted Answer

The answer of Explain carefully why monetary policy deals more...

Question 5

Using monetary policy to deal with aggregate demand shocks is much easier in theory than in practice. Describe three major difficulties that a central bank might face.

Accepted Answer

The answer of Using monetary policy to deal with aggregate...

Question 6

The housing boom of the 2000s is an example of a negative real shock.

Accepted Answer

The housing boom of the 2000s is more accurately described as a positive demand shock in the housing market, driven by factors like low interest rates and easy credit, rather than a negative real shock which would imply a reduction in the economy's ability to produce goods and services.

Question 7

Many economists now believe that rising U.S. housing prices in the early 2000s were a bubble. Explain why the Federal Reserve did not pop the bubble.

Accepted Answer

The answer of Many economists now believe that rising U.S....

Question 8

During the late 1970s and first part of the 1980s, the Fed seemed to react in a counter-intuitive manner to the 1970s oil shocks. Explain the reasoning behind the Fed's policy decisions and the effect that they had on the economy.

Accepted Answer

The answer of During the late 1970s and first part...

Question 9

Briefly explain why monetary policy cannot beat both inflation and unemployment at the same time.

Accepted Answer

The answer of Briefly explain why monetary policy cannot beat...

Question 10

Briefly explain why the Fed is not very effective when a negative real shock occurs.

Accepted Answer

The answer of Briefly explain why the Fed is not...

Question 11

Monetary authorities in a country say that there have been no recent negative supply shocks. The economy in this country is currently experiencing high inflation and its productive capacity cannot be increased much. Explain how monetary policy could work to fix this business fluctuation in the best case scenario.

Accepted Answer

The answer of Monetary authorities in a country say that...

Question 12

Monetary policy is much less effective at combating a real shock than an aggregate demand shock.

Accepted Answer

Monetary policy can influence aggregate demand by manipulating interest rates and the money supply, but it cannot directly address real shocks such as natural disasters, supply chain disruptions, or changes in technology. Real shocks can have a significant impact on the economy, but their effects cannot be fully offset by monetary policy alone. Other policies such as fiscal policy may be more effective in responding to real shocks.

Question 13

Suppose the spending habits of consumers suddenly change so that consumption growth increases. What should the central bank do to restore the economy back to the old equilibrium point? Explain your answer with the aid of a dynamic AS-AD diagram.

Accepted Answer

The answer of Suppose the spending habits of consumers suddenly...

Quiz 33: Transmission and Amplification Mechanisms