Question 1

If the current unemployment rate is 5%,under which of the following circumstances would you expect the Fed to use contractionary monetary policy?

Accepted Answer

The answer of If the current unemployment rate is 5%,under...

Question 2

In August 1979,President Jimmy Carter appointed ________ as chairman of the Board of Governors of the Federal Reserve System.

Accepted Answer

Paul Volcker was appointed as chairman of the Board of Governors of the Federal Reserve System by President Jimmy Carter in August 1979.

Question 3

If the Federal Reserve chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation,which of the following would you expect to see?

Accepted Answer

An upward shift of the short-run Phillips curve can occur when firms and consumers expect inflation to increase due to expansionary monetary policy. This expectation can lead to higher wage demands and prices, moving the economy along the Phillips curve to a point with higher inflation and potentially lower unemployment in the short run.

Question 4

A study conducted by Alberto Alesina and Lawrence Summers concluded that countries with highly independent central banks had ________ than countries whose central banks had little independence.

Accepted Answer

The study concluded that countries with highly independent central banks had lower inflation rates than countries whose central banks had little independence.

Question 5

Expansionary monetary policy will result in

Accepted Answer

Expansionary monetary policy involves increasing the money supply, which leads to lower interest rates. Lower interest rates encourage borrowing and spending, which in turn increase aggregate demand and can lead to higher inflation. Therefore, option B is incorrect, and option C is incorrect because expansionary monetary policy is designed to increase aggregate demand, not decrease it.

Question 6

Which of the following is an appropriate policy for a central bank to follow if the economy is plagued with deflation?

Accepted Answer

Consistently pursuing policy to promote the credibility of the central bank is an appropriate policy for a central bank to follow if the economy is plagued with deflation. This can help build trust in the central bank and its policies, which can facilitate the transmission of monetary policy and help restore inflation expectations. Increasing the interest rate (A) or using contractionary monetary policy (B) would only exacerbate the deflationary pressures, while gradually raising the required reserve rate (D) is unlikely to be effective in addressing deflation.

Question 7

It has been argued that the experience of Paul Volcker's fight against inflation during the late 1970s and early 1980s indicates that firms and workers

Accepted Answer

During that time, firms and workers were observed to have adaptive expectations. This means that they changed their expectations of future inflation only after the current inflation rate had fallen. This suggests that they did not have rational expectations and did not fully trust Fed announcements. Option B is incorrect because it assumes that firms and workers had rational expectations and trusted Fed's announcements. Option C is also incorrect because high unemployment would cause economic hardship for workers and firms, and thus, they would prefer low unemployment and low inflation simultaneously. Therefore, option A is the correct answer.

Question 8

A provision of the Dodd-Frank Act of 2010 revised the Federal Reserve Act to

Accepted Answer

The answer of A provision of the Dodd-Frank Act of...

Question 9

Deflation refers to

Accepted Answer

Deflation refers to a falling price level, which is the opposite of inflation, where the price level increases. Option A is incorrect because a decrease in the rate of inflation still means there is inflation, not deflation. Option C is partly correct, but only B is a necessary condition for deflation. Option D is incorrect because deflation is a real phenomenon that can occur in an economy.

Question 10

Disinflation refers to

Accepted Answer

Disinflation is a reduction in the rate of inflation, not necessarily a decrease in the overall price level. It means that the rate at which prices are increasing is slowing down, but prices are still generally going up. Option A is incorrect because it refers to deflation, which is a sustained decrease in the overall price level. Option B is incorrect because it refers to hyperinflation, which is a very rapid increase in the price level. Option D is also incorrect, as it refers to accelerating inflation, which is the opposite of disinflation.

Question 11

Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008.Which of the following was one of those actions?

Accepted Answer

Keeping the federal funds rate at 1 percent from June 2003 to June 2004 encouraged risky lending and contributed to the housing bubble that eventually burst and led to the financial crisis in 2008. Decreasing the money supply to fight disinflation would have the opposite effect of encouraging lending, and working with the European Central Bank to stabilize exchange rates is not directly linked to the financial crisis. Financing the first Gulf War through money printing occurred before Greenspan's term as chairman.

Question 12

One criticism of the Fed's policy of forward guidance during the recession of 2007-2009 is that it contributed to a prolonged period of abnormally low interest rates,leading to speculative bubbles in stocks or other financial assets as investors

Accepted Answer

The criticism is that the Fed's forward guidance led to prolonged low-interest rates, which encouraged investors to borrow at these low rates to invest in financial assets, leading to speculative bubbles. This is consistent with choice B, where investors borrowed at the low rates to buy assets. The other choices are not consistent with the criticism.

Question 13

Forward guidance refers to central banks

Accepted Answer

Forward guidance is a tool used by central banks to communicate their future monetary policy intentions to the public. It can help shape expectations about future interest rates and inflation, and influence market behavior. Setting long-term interest rates (A) is not typically the role of central banks, as they typically focus on short-term interest rates. Simultaneously reducing unemployment and inflation (C) is a goal of many central banks, but it is not specific to the concept of forward guidance. Engaging in monetary policy to offset the negative side-effects of government fiscal policies (D) is also a broader concept and not specific to forward guidance.

Question 14

If the Fed chose to change its policy actions implemented during the heart of the recession faster than the timing suggested by the White House,this would be an indication of the Fed's

Accepted Answer

The Fed's independence is highlighted when it makes policy decisions that may not align with the White House's suggested timing. This independence is a key feature of the Fed's role in promoting healthy economic growth and stability, as it ensures that policy decisions are made based on economic data and analysis rather than political pressure.

Question 15

The policy which holds that the federal government should not allow large financial firms to fail,for fear of damaging the financial system,is known as the ________ policy.

Accepted Answer

The policy which holds that the federal government should not allow large financial firms to fail, for fear of damaging the financial system, is known as the "too-big-to-fail" policy. Dodd-Frank is a financial reform legislation passed in response to the 2008 financial crisis. Mandatory bailout and rational expectations are not applicable to this context.

Question 16

If the economy experiences a(n)________,inflation will rise and real GDP will fall.

Accepted Answer

A negative supply shock, such as an increase in the price of oil or a natural disaster disrupting production, causes a decrease in the availability or cost of inputs for businesses. This, in turn, leads to a decrease in short-run aggregate supply, causing prices to rise (inflation) and real GDP to fall. Both choices B and C suggest an increase in aggregate supply, which would have the opposite effect on both inflation and real GDP. Choice D would only lead to a decrease in real GDP but not necessarily an increase in inflation.

Question 17

All of the following have enhanced the Fed's credibility in conducting monetary policy except

Accepted Answer

Discontinuing the policy of announcing whether it considered the economy to be at greater risk of inflation or recession following each FOMC meeting would not have enhanced the Fed's credibility in conducting monetary policy. This policy was actually discontinued because it was perceived as creating confusion and uncertainty among financial market participants. The other options listed (A, B, and C) have contributed to the Fed's credibility by increasing transparency and accountability in its monetary policy decisions.

Question 18

Which of the following could decrease unemployment and inflation simultaneously?

Accepted Answer

A decrease in oil prices would decrease the cost of production for firms, which would lower prices for consumers and decrease inflation. At the same time, firms may hire more workers to increase production, which would decrease unemployment. Expansionary monetary policy may also decrease unemployment, but it could increase inflation. Contradictory monetary policy would decrease inflation, but it could also increase unemployment. An increase in the real wage would likely only decrease unemployment, but it may also increase inflation.

Question 19

If the Federal Reserve announces that its target for the federal funds rate is falling from 3 percent to 2.25 percent,how do you expect workers and firms to react?

Accepted Answer

When the Federal Reserve announces a decrease in the federal funds rate target, it is indicating that it wants to stimulate the economy by lowering borrowing costs. This can encourage workers and firms to increase their consumption and investment spending, leading to an increase in aggregate demand and inflation. If the Fed's announcement is credible, people will expect these effects and act accordingly, supporting economic growth.

Question 20

If the Fed decided to reverse its policy actions implemented during the heart of the recession,the Fed would be acting to try to prevent

Accepted Answer

Reversing policy actions implemented during the heart of the recession would stimulate economic growth and potentially lead to an increase in inflation, as increased aggregate demand could lead to higher prices. Therefore, the Fed would be acting to try to prevent an increase in inflation.

Quiz 17: Inflation, Unemployment, and Federal Reserve Policy