Question 1

A shift to a more expansionary monetary policy will
A) increase the long-term growth rate of the economy.
B) reduce the future rate of inflation.
C) Stimulate output and employment almost immediately.
D) Stimulate output and employment, but only after a time lag that is generally long and variable.

Accepted Answer

Expansionary monetary policy can stimulate output and employment, but it typically takes time for the effects to be felt in the economy due to delays in how monetary policy impacts spending and investment decisions.

Question 2

A study of countries with high inflation rates indicates that the inflation is generally
A) caused by strong labor unions.
B) the result of restrictive macroeconomic policy, which pushes up interest rates.
C) caused by supply shocks.
D) the result of rapid growth in the money supply.

Accepted Answer

High inflation rates are often caused by a rapid increase in the money supply, which leads to an excess supply of money chasing a limited supply of goods and services, driving up prices. Supply shocks or strong labor unions may also contribute to inflation, but they are not typically the main underlying cause. Restrictive macroeconomic policy, which can raise interest rates, is actually a tool used to combat inflation, not a cause of it.

Question 3

Which of the following interest rates will be least affected by a shift in monetary policy that alters the money supply?
A) a three-month certificate of deposit
B) interest on checking accounts
C) a one-year bank loan
D) a thirty-year home mortgage

Accepted Answer

Long-term interest rates, like those on a thirty-year home mortgage, are generally less sensitive to short-term changes in monetary policy compared to short-term rates.

Question 4

Which of the following was true of the actions of the Federal Reserve in response to the recession of 2008?
A) The Fed shifted toward a highly restrictive monetary policy in 2008, which was a major cause of the recession.
B) The Fed continued to focus only on price stability and therefore it expanded the money supply at a slow and steady rate throughout the recession.
C) The Fed introduced several new procedures for the conduct of monetary policy and substantially increased bank reserves as the recession worsened.
D) The Fed continued to purchase and sell only U.S. Treasury bonds when conducting open market operations to control the money supply.

Accepted Answer

The Fed introduced several new procedures for the conduct of monetary policy, including substantially increasing bank reserves, in response to the recession of 2008. This was done to support the functioning of financial markets and stabilize the economy. The Fed did not shift toward a highly restrictive monetary policy, which would have worsened the recession. Additionally, the Fed's focus on price stability did not preclude it from expanding the money supply to support the economy. Lastly, the Fed did conduct open market operations to control the money supply, but it also introduced new measures such as quantitative easing to support the economy during the recession.

Question 5

Since 1980, changes in the nature of both the M1 and M2 money supply have
A) increased their reliability as indicators of monetary policy.
B) decreased their reliability as indicators of monetary policy.
C) had no effect on their reliability as indicators of monetary policy.
D) decreased their reliability as indicators of fiscal policy.

Accepted Answer

Since 1980, changes in the nature of both the M1 and M2 money supply, such as the introduction of new financial products, have caused fluctuations in their relationship with monetary policy. Therefore, their reliability as indicators of monetary policy has decreased.

Question 6

In 2008, nominal GDP was equal to $14,265 billion while the M1 money supply was $1,423 billion. What was the velocity of the M1 money stock?
A) 1.0
B) 10.0
C) 1.8
D) 0.1

Accepted Answer

The velocity of money is calculated as nominal GDP divided by the money supply. So, $14,265 billion / $1,423 billion = 10.0.

Question 7

Which of the following contributed to the strong auto sales and soaring housing prices during 2002-2004?
A) The Fed's high-interest rate policy during the period.
B) The tightening of loan standards by commercial lenders.
C) The increasing popularity of fixed-rate, long-term loans to lock in low interest rates.
D) The Fed's low-interest rate policy during the period.

Accepted Answer

The Fed's low-interest rate policy during the period contributed to the strong auto sales and soaring housing prices by making borrowing cheaper and more accessible. This allowed consumers to purchase homes and cars at lower interest rates, resulting in increased demand and higher prices.

Question 8

The coefficient that represents the average number of times a dollar is used to buy goods and services is called
A) the demand for money.
B) the quantity theory of money.
C) the price level.
D) the velocity of money.

Accepted Answer

The coefficient that represents the average number of times a dollar is used to buy goods and services is called the velocity of money.

Question 9

Since the mid-1980s, the primary indicator of monetary policy has been
A) movement of short-term interest rates.
B) the growth rate of real government expenditures.
C) the growth of the M1 money supply.
D) changes in the nominal (dollar) size of budget deficits or surpluses.

Accepted Answer

Since the mid-1980s, the primary indicator of monetary policy has been the movement of short-term interest rates. The Federal Reserve adjusts the federal funds rate, which is the interest rate that banks charge each other for overnight loans, to influence borrowing and spending in the economy. When the Fed raises interest rates, it makes borrowing more expensive, which can slow down economic growth and inflation. Conversely, when the Fed lowers interest rates, it makes borrowing cheaper, which can stimulate economic activity. Therefore, tracking the movement of short-term interest rates is a key way to understand the stance of monetary policy.

Question 10

When the Fed conducts expansionary monetary policy, lower short-term interest rates will tend to stimulate the economy. How will the change in the velocity of money affect this result?
A) Velocity will decline, enhancing the stimulus effect.
B) Velocity will increase, somewhat dampening the stimulus effect.
C) Velocity will increase, enhancing the stimulus effect.
D) Velocity will decline, somewhat dampening the stimulus effect.

Accepted Answer

The answer of When the Fed conducts expansionary monetary policy,...

Question 11

When the Fed purchases additional securities and shifts to a more expansionary monetary policy,
A) the inflation rate will rise almost immediately.
B) the growth of output and employment will increase quickly.
C) several months will typically pass before the shift in policy exerts much impact on output and employment.
D) this policy will eventually lead to a decline in the general level  of prices if it is continued for a prolonged period of time.

Accepted Answer

Several months will typically pass before the shift in policy exerts much impact on output and employment. While the expansionary policy can lead to an increase in the money supply and lower interest rates, it takes time for businesses and consumers to respond to these changes and increase their spending and investment. Therefore, the impact on output and employment is not immediate. Option A is incorrect because an increase in the inflation rate is not an immediate consequence of an expansionary policy. Option B is incorrect because, as previously mentioned, it takes time for the impact on output and employment to become apparent. Option D is incorrect because an expansionary policy is more likely to lead to an increase in prices, not a decline in prices.

Question 12

If changes in monetary policy are going to help stabilize the economy, they must
A) be expansionary.
B) be restrictive.
C) reduce the real rate of interest.
D) be properly timed.
E) stimulate aggregate demand.

Accepted Answer

In order to be effective, changes in monetary policy must be properly timed to coincide with economic conditions and avoid exacerbating economic instability. Expansive or restrictive policies and reductions in the real rate of interest or stimulation of aggregate demand may or may not be necessary depending on the economic situation, but proper timing is crucial for their effectiveness.

Question 13

Which of the following contributed to the dramatic rise in housing prices between 2002 and mid-year 2006?
A) Government policy made credit for housing abundant and easily available.
B) The Fed's restrictive monetary policy, which led to high interest rates.
C) The tightening of loan standards by commercial lenders.
D) The large amounts of reserves and equity capital being held by financial institutions in order to back new mortgages.

Accepted Answer

Government policy, particularly through Fannie Mae and Freddie Mac, made credit for housing abundant and easily available during this time period, leading to increased demand and subsequently driving up housing prices.

Question 14

Which of the following contributed to the financial crisis of 2008?
A) The housing price boom (2002-2005), followed by a housing price bust (2007-2008).
B) A sharp reduction in stock prices in 2008.
C) A sharp increase in the price of crude oil from January 2007 to mid-year 2008.
D) All of the above.

Accepted Answer

All of the factors listed contributed to the financial crisis of 2008. The housing price boom and subsequent bust led to a collapse of the subprime mortgage market and housing-related securities, which had a ripple effect on the entire financial system. The sharp reduction in stock prices in 2008 also led to a further loss of confidence in the financial system and contributed to the overall economic downturn. Additionally, the sharp increase in the price of crude oil in 2007-2008 exacerbated the economic situation by increasing inflationary pressures and reducing consumer spending.

Question 15

Cross-country figures indicate that
A) countries with high rates of monetary growth also experience high inflation.
B) countries with high rates of monetary growth experience low inflation.
C) monetary growth rates and inflation are unrelated.
D) inflation is primarily the result of restrictive monetary policy.

Accepted Answer

Cross-country figures show that there is a strong positive correlation between high rates of monetary growth and high inflation rates. Countries with high rates of monetary growth often see an increase in the money supply, which leads to an increase in demand for goods and services, putting pressure on prices. This can result in inflation.

Question 16

Shifts in monetary policy will
A) stimulate output and employment almost immediately, and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.
B) stimulate output and employment almost immediately, and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.
C) stimulate output and employment with time lags that are long and variable and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.
D) stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.

Accepted Answer

Shifts in monetary policy typically have time lags that are long and variable, meaning that it takes time for the effects on output and employment to be realized. This can make it more difficult for policy-makers to determine the appropriate timing and magnitude of changes to monetary policy in order to promote macroeconomic stability.

Question 17

A shift to a more  expansionary  monetary policy will generally  _________ in the short run, but if the rapid monetary expansion persists, the  long-run result will be  ______.(fill in the blanks.)
A) expand output and employment; inflation
B) increase the general level of prices; expand  output and employment
C) increase the rate of unemployment; reduce the rate of inflation
D) reduce the rate of inflation;  increase the rate of unemployment

Accepted Answer

A shift to a more expansionary monetary policy will initially expand output and employment in the short run due to an increase in money supply and lowering of interest rates, which stimulates spending and investment. However, if the rapid monetary expansion persists, it can lead to higher inflation in the long run as more money chases the same amount of goods and services, creating an overheated economy.

Question 18

If the Fed wanted to shift to a more restrictive monetary policy, it would
A) expand the reserves available to the banking system, which would drive down short term interest rates.
B) reduce the reserves available to the banking system, which would drive down short term interest rates.
C) expand the reserves available to the banking system, which would drive up short term interest rates.
D) reduce the reserves available to the banking system, which would drive up short term interest rates.

Accepted Answer

If the Fed wanted to shift to a more restrictive monetary policy, it would need to reduce the reserves available to the banking system. By doing so, the Fed can drive up short term interest rates, making it more expensive for banks to borrow money and thus reducing the amount of money in circulation. This is known as a contractionary monetary policy.

Question 19

Which of the following is true of home mortgage loans since the late 1990s?
A) Government regulations required homebuyers to make larger down payments in order to obtain a mortgage.
B) Traditional fixed-rate, long-term mortgages grew in popularity.
C) There was a substantial increase in the volume of mortgage loans extended with little or no down payment.
D) High interest rates made it less attractive to lock in to a fixed-rate, long-term loan.

Accepted Answer

Since the late 1990s, there was a substantial increase in the volume of mortgage loans extended with little or no down payment, particularly during the housing boom leading up to the 2008 financial crisis. This was part of a broader trend of relaxed lending standards.

Question 20

Continuous rapid growth of the money supply relative to the growth of real output will most likely lead to
A) persistent inflation.
B) low nominal interest rates.
C) high rates of real economic growth.
D) low unemployment.

Accepted Answer

When the growth of the money supply outpaces real output, the demand for goods and services increases relative to their supply, leading to inflation. This is due to an increase in the amount of money chasing a limited amount of goods and services, leading to a decrease in the purchasing power of money.

Quiz 14: Modern Macroeconomics and Monetary Policy

A shift to a more expansionary monetary policy will

A study of countries with high inflation rates indicates that the inflation is generally

Which of the following interest rates will be least affected by a shift in monetary policy that alters the money supply?

Which of the following was true of the actions of the Federal Reserve in response to the recession of 2008?

Since 1980, changes in the nature of both the M1 and M2 money supply have

In 2008, nominal GDP was equal to $14,265 billion while the M1 money supply was $1,423 billion. What was the velocity of the M1 money stock?

Which of the following contributed to the strong auto sales and soaring housing prices during 2002-2004?

The coefficient that represents the average number of times a dollar is used to buy goods and services is called

Since the mid-1980s, the primary indicator of monetary policy has been

When the Fed conducts expansionary monetary policy, lower short-term interest rates will tend to stimulate the economy. How will the change in the velocity of money affect this result?

When the Fed purchases additional securities and shifts to a more expansionary monetary policy,

If changes in monetary policy are going to help stabilize the economy, they must

Which of the following contributed to the dramatic rise in housing prices between 2002 and mid-year 2006?

Which of the following contributed to the financial crisis of 2008?

Cross-country figures indicate that

Shifts in monetary policy will

A shift to a more expansionary monetary policy will generally ___ in the short run, but if the rapid monetary expansion persists, the long-run result will be .(fill in the blanks.)

If the Fed wanted to shift to a more restrictive monetary policy, it would

Which of the following is true of home mortgage loans since the late 1990s?

Continuous rapid growth of the money supply relative to the growth of real output will most likely lead to