Question 1

If you believe that velocity is constant and that the aggregate supply curve is vertical, then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of

Accepted Answer

The quantity theory of money, when assuming a constant velocity of money and a vertical aggregate supply curve (indicating no change in real output), predicts that doubling the money supply would double nominal output (prices) but leave real output unchanged. This is because the increase in money supply would lead to proportional inflation without affecting the actual production or real economy.

Question 2

In utilizing unconventional monetary policy in 2009, the Federal Reserve purchased

Accepted Answer

In 2009, the Federal Reserve utilized quantitative easing as an unconventional monetary policy to stimulate the economy. As a part of this policy, the Fed bought over $1 trillion in mortgage-backed securities to breathe some life into the struggling housing market. This purchase increased the money supply and reduced interest rates, which made it easier for consumers to borrow, invest, and buy homes. Buying mortgage-backed securities is one form of quantitative easing.

Question 3

Treasury securities have ____ risk of default and mortgage-backed securities have ____ risk of default.

Accepted Answer

Treasury securities are issued by the U.S. government and are considered to have no risk of default due to the government's ability to raise taxes or print money to meet its obligations. Mortgage-backed securities, however, are backed by mortgage payments from homeowners and carry some risk of default if borrowers fail to make their payments.

Question 4

By purchasing large amounts of mortgage-backed securities (MBS) in 2009, the Federal Reserve's goal was to

Accepted Answer

By purchasing large amounts of mortgage-backed securities (MBS), the Federal Reserve aimed to increase demand for these securities, which would raise their price and lower their yield (interest rate). This was intended to stimulate borrowing and lending, ultimately spurring economic growth. Lower interest rates on MBS also led to lower interest rates on other types of loans, such as mortgages, which further encouraged spending and investment.

Question 5

According to the quantity theory of money currently used by monetarists, assuming velocity is constant (at a value of 5), a 10 percent increase in the money supply will raise

Accepted Answer

According to the quantity theory of money, an increase in the money supply leads to a proportional increase in nominal GDP. As velocity is assumed to be constant at a value of 5, a 10 percent increase in the money supply will lead to a 10 percent increase in nominal GDP. Real GDP, on the other hand, is not directly affected by changes in the money supply as it is adjusted for inflation. Therefore, option C is the correct answer.

Question 6

In utilizing unconventional monetary policy in 2010, the Federal Reserve purchased

Accepted Answer

The answer of In utilizing unconventional monetary policy in 2010,...

Question 7

Critics of the unconventional monetary policies in 2009 and 2010 argued that by deciding which financial institutions would fail and which would not, the Fed was assuming authority that rightfully belonged to

Accepted Answer

The power to decide which financial institutions should fail and which should not belongs to Congress, which has the authority to pass laws and make policy decisions regarding financial regulation and supervision. The Federal Reserve, as an independent agency, has some discretion in implementing monetary policy, but its actions must be consistent with the overall policy goals and objectives set by Congress. The FDIC and the U.S. Treasury also play important roles in the regulation and supervision of financial institutions, but they do not have the same authority as Congress to make policy decisions that affect the entire financial system.

Question 8

Which of the following was the result of the Federal Reserve's purchase of mortgage-backed securities in 2009?

Accepted Answer

The Federal Reserve's purchase of mortgage-backed securities (MBS) in 2009 was aimed at lowering interest rates on mortgages and stimulating the housing market. By buying these securities, the Fed increased demand for MBS, which led to a decline in their yields (or interest rates). This, in turn, led to lower home mortgage rates, making borrowing cheaper for homebuyers. Additionally, the Fed was able to sell these securities at a later date for a profit, as their value increased when the economy and housing market recovered.

Question 9

Which of the following was not a reason that the Federal Reserve took on additional risks associated with unconventional policy during the recession of 2007-2009?

Accepted Answer

The inflated price of Treasury bills did not make them too expensive to purchase in open market operations. In fact, one of the main tools that the Fed used during this time period was the purchase of Treasury bills through open market operations. The other three choices are all reasons that the Fed took on additional risks associated with unconventional policy during the recession.

Question 10

During the financial crisis of 2007-2009, the interest rate on mortgage-backed securities had

Accepted Answer

During the financial crisis of 2007-2009, the interest rate on mortgage-backed securities had increased as the risk of default on mortgages increased. The Treasury interest rate had fallen as investors sought the safety of government bonds. Therefore, choice B is the correct answer.

Question 11

For both Keynesians and monetarists to predict accurately the effects of a change in the money supply on the price level, they need to add ____ to their analysis.

Accepted Answer

Both Keynesians and monetarists need to add aggregate supply to their analysis to accurately predict the effects of a change in the money supply on the price level. This is because changes in the money supply can affect both aggregate demand and aggregate supply, and it is important to consider the interplay between the two in order to assess the overall impact on the price level.

Question 12

Since the 1970s, the velocity of money has

Accepted Answer

Since the 1970s, the velocity of money has been very erratic and unpredictable, making it difficult to forecast or plan for. This unpredictability makes it challenging to gauge the overall health and direction of the economy.

Question 13

Which of the following is an example of the Fed's use of unconventional monetary policy?

Accepted Answer

Unconventional monetary policy refers to actions taken by the Fed that deviate from traditional methods of controlling the money supply and interest rates. Buying assets other than Treasury bills, participating in rescue operations for troubled financial institutions, and lending massive amounts to banks and other financial institutions are all examples of unconventional monetary policy. Therefore, all of these responses are correct.

Question 14

During the financial crisis of 2007-2009, the interest rate spread on mortgage-backed securities over Treasury bills

Accepted Answer

The financial crisis of 2007-2009 was characterized by a significant increase in default rates on subprime mortgages, causing a loss of confidence in mortgage-backed securities. As a result, investors demanded a higher risk premium to hold mortgage-backed securities, leading to a tremendous increase in the interest rate spread over Treasury bills.

Question 15

Which of the following is an example of unconventional monetary policy?

Accepted Answer

Unconventional monetary policy refers to non-traditional tactics used by central banks to stimulate economic growth and combat inflation. Purchasing mortgage-backed securities is an example of unconventional monetary policy, as it involves buying assets other than traditional government bonds in order to increase the money supply and encourage lending. Choosing A or B would not be unconventional policy, as they are more traditional and commonly used methods.

Question 16

Economists who focus their analyses on the effects of a change in the money supply and velocity are called

Accepted Answer

Monetarists focus on the role of money supply and velocity in determining the level of economic activity and inflation. They believe that changes in the money supply are the primary driver of changes in aggregate demand, and that stability in the money supply is essential for long-term economic growth.

Question 17

Monetarists use the equation of exchange to predict the effects of changes in M on

Accepted Answer

Monetarists use the equation of exchange (MV = PQ) to predict that changes in the money supply (M) will primarily affect nominal GDP (PQ), assuming velocity (V) is stable.

Question 18

During the financial crisis of 2007-2009, why did the Federal Reserve begin to utilize various types of unconventional monetary policy?

Accepted Answer

The Federal Reserve began to utilize various types of unconventional monetary policy because the federal funds rate had already been reduced to zero, which limited their ability to use traditional monetary policy tools to stimulate the economy.

Question 19

Which of the following was a reason that the Federal Reserve took on additional risks associated with unconventional policy during the recession of 2007-2009?

Accepted Answer

The Federal Reserve adopted unconventional policy measures during the 2007-2009 recession because it could act more quickly than Congress to address the financial crisis, providing immediate support to the economy when traditional monetary policy tools were insufficient or too slow to implement.

Question 20

If you believe that velocity is constant and that the aggregate supply curve is horizontal, then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of the

Accepted Answer

The answer of If you believe that velocity is constant...

Quiz 31: The Debate Over Monetary and Fiscal Policy