Question 1

The leader of the monetarist school and major proponent of a monetary growth rule was

Accepted Answer

Milton Friedman was the leader of the monetarist school and is known for advocating for a monetary growth rule, which suggests that the money supply should grow at a steady, predictable rate to promote long-term economic stability.

Question 2

Table 26-2

-Refer to Table 26-2.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy.If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015,which of the following will be lower than if the Fed had taken no action?

Accepted Answer

If the Fed takes no action, real GDP will be above potential GDP in 2015, which will lead to an increase in the inflation rate. However, if the Fed successfully uses monetary policy to keep real GDP at its potential level in 2015, then real GDP will be lower than it would have been without the monetary policy intervention. However, the inflation rate will be lower than it would have been without the Fed's actions because of the lower real GDP. Therefore, the correct answer is B, real GDP and the inflation rate.

Question 3

The Fed is able to use monetary policy to keep real GDP exactly at its potential level.

Accepted Answer

The Fed is able to influence real GDP through monetary policy, but it cannot perfectly control it to be exactly at its potential level. There are other factors that influence real GDP as well, such as fiscal policy, international trade, technological advancements, and changes in consumer behavior.

Question 4

According to the Taylor rule,the Fed should set the target for the federal funds rate equal to the sum of the equilibrium real federal funds rate,the current inflation rate,one-half times the ________,and one-half times the ________.

Accepted Answer

The answer of According to the Taylor rule,the Fed should...

Question 5

In recent years,a monetary growth rule has fallen out of favor because

Accepted Answer

The close relationship between movements in M1 (a measure of the money supply that includes cash and checking deposits) and movements in real GDP has weakened over time, making a monetary growth rule less effective as a policy tool. This is because the predictability of the impact of changes in the money supply on the economy has diminished, complicating the use of a fixed rule for monetary policy.

Question 6

The Taylor rule accurately predicted the changes in the federal funds target during the period

Accepted Answer

The Taylor rule is a guideline for setting the federal funds rate based on inflation and output. Alan Greenspan was particularly interested in the Taylor rule and his decisions closely followed it. Therefore, the Taylor rule accurately predicted the changes in the federal funds target during the period when Alan Greenspan was the chairman of the Federal Reserve Board.

Question 7

Table 26-5
 
-Refer to Table 26-5.Suppose the table above illustrates the values of real and potential GDP and the price level,if the Fed does not vote to change their current policy to be more contractionary or expansionary.Suppose that the Fed uses an appropriate policy and is successful in keeping real GDP at potential in 2015.State whether each of the following will be higher or lower than if the Fed had taken no action:
a.Real GDP
b.Potential real GDP
c.The price level
d.The unemployment rate

Accepted Answer

The answer of Table 26-5
 
-Refer to Table 26-5.Suppose the...

Question 8

The Taylor rule helps explain the relationship between the Fed's ________ and ________.

Accepted Answer

The Taylor rule is a guideline for central banks to set interest rates based on economic conditions, primarily inflation and output. It suggests that the federal funds target rate should be adjusted in response to changes in inflation and output levels, which are both indicators of economic conditions. Therefore, the Taylor rule helps explain the relationship between the Fed's federal funds target and economic conditions.

Question 9

Using the Taylor rule,if the current inflation rate equals the target inflation rate and real GDP is greater than potential GDP,then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.

Accepted Answer

According to the Taylor rule, if inflation equals the target rate and real GDP is greater than potential GDP, the federal funds target rate is higher than the sum of the current inflation rate and the real equilibrium federal funds rate. This is because the economy is operating above its potential, which creates upward pressure on prices. The central bank will need to raise interest rates to counteract inflationary pressures, which will increase the federal funds rate above the equilibrium rate.

Question 10

The Taylor rule predicted a federal funds rate which was ________ that set when Paul Volcker was chairman of the Fed,and a rate which was ________ that set when Arthur Burns chaired the Fed.

Accepted Answer

The Taylor rule suggests that the federal funds rate should be adjusted based on inflation and output gaps. During Paul Volcker's tenure as chairman of the Fed, he implemented tight monetary policy to combat high inflation, leading to a high federal funds rate. The Taylor rule, which considers the inflation rate to be high during this period, would predict a lower federal funds rate. Therefore, the predicted rate is less than the rate set by Volcker. On the other hand, during Arthur Burns' tenure as chairman of the Fed, inflation was high, but the output gap was also negative. The Taylor rule, in this case, would suggest a higher federal funds rate to combat inflation. Therefore, the predicted rate would be greater than the rate set by Burns. Thus, the correct choice is D, less than the rate set when Paul Volcker was chairman of the Fed and greater than the rate set when Arthur Burns chaired the Fed.

Question 11

Suppose the equilibrium real federal funds rate is 5 percent,the target rate of inflation is 3 percent,the current inflation rate is 5 percent,and real GDP is 4 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2,then according to the Taylor rule the federal funds target rate equals

Accepted Answer

The answer of Suppose the equilibrium real federal funds rate...

Question 12

Why doesn't the Fed have both a money supply target and an interest rate target?

Accepted Answer

The answer of Why doesn't the Fed have both a...

Question 13

Table 26-3
 
-Refer to Table 26-3.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy.If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015,which of the following will be higher than if the Fed had taken no action?

Accepted Answer

If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, then real GDP will be higher than if no action was taken. However, if no action is taken, there will be downward pressure on prices due to the economy operating below its potential level. This can lead to deflation. Therefore, if the Fed takes action to keep real GDP at its potential level, it will prevent deflation and lead to a higher inflation rate than if no action was taken. Thus, real GDP and the inflation rate will be higher than if the Fed had taken no action.

Question 14

The argument advanced by Milton Friedman for adopting a monetary growth rule is that

Accepted Answer

The answer of The argument advanced by Milton Friedman for...

Question 15

Table 26-4
 
-Refer to Table 26-4.Suppose the following table illustrates the values of real and potential GDP and the price level,if the Fed does not vote to change their current policy to be more contractionary or expansionary.If the Fed wants to keep real GDP at its potential level in 2015,should the Fed use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal?

Accepted Answer

The answer of Table 26-4
 
-Refer to Table 26-4.Suppose the...

Question 16

Table 26-6
 
-Refer to Table 26-6.Suppose the table above illustrates the values of real and potential GDP and the price level,if the Fed does not vote to change their current policy to be more contractionary or expansionary.If the Fed wants to keep real GDP at its potential level in 2015,should the Fed use a contractionary or expansionary policy? Should it raise or lower its interest rate target? How should it conduct open market operations to achieve its goal?

Accepted Answer

The answer of Table 26-6
 
-Refer to Table 26-6.Suppose the...

Question 17

Table 26-7
 
-Refer to Table 26-7.Suppose the table above illustrates the values of real and potential GDP and the price level,if the Fed does not vote to change their current policy to be more contractionary or expansionary.Suppose that the Fed uses an appropriate policy and is successful in keeping real GDP at potential in 2013.Draw an aggregate demand and supply curve to illustrate your answer.

Accepted Answer

The answer of Table 26-7
 
-Refer to Table 26-7.Suppose the...

Question 18

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.

Accepted Answer

When the Fed uses expansionary monetary policy, it increases the money supply and lowers interest rates, which can encourage borrowing and spending by businesses and consumers, leading to an increase in aggregate demand.

Question 19

The Fed can use contractionary monetary policy in an attempt to keep inflation from increasing.

Accepted Answer

Contractionary monetary policy involves reducing the money supply and increasing interest rates, which can help to slow down the economy and prevent inflation from increasing.

Question 20

A monetary growth rule means that

Accepted Answer

A monetary growth rule states that the money supply should grow at a constant rate. Therefore, option C is the correct answer. Option A is incorrect because lowering interest rates during a recession is a short-term policy response but a monetary growth rule is a long-term policy framework. Option B is incorrect because raising interest rates in response to fast economic growth is a short-term policy response, whereas a monetary growth rule focuses on the long-term steady growth rate of the money supply. Option D is incorrect because a monetary growth rule fixes the rate of money growth, rather than adjusting it in response to economic conditions.

Quiz 15: Monetary Policy