Question 1

Which of the following is true?
A)​When increased government purchases or expansionary monetary policy does give the economy a boost, no one knows precisely how long it will take to do so.
B)​Given the difficulties of timing stabilization policy, an expansionary monetary policy intended to reduce the severity of a recession may instead add inflationary pressures to an economy that is already overheating.
C)​If velocity changes, but it moves in a fairly predictable pattern, the connection between money supply and GDP is still fairly predictable.
D)​All of the above are true.

Accepted Answer

All of the statements are true.

A) The effects of increased government purchases or expansionary monetary policy on the economy's boost are uncertain and cannot be predicted with accuracy.

B) Timing stabilization policies is challenging, and expansionary monetary policies intended to reduce the severity of a recession can add inflationary pressures if implemented incorrectly.

C) Despite changes in velocity and predictable patterns of movements, there is still a reliable link between money supply and GDP.

Question 2

Which of the following is false about a liquidity trap situation:
A)​Quantitative easing might be a more effective strategy to stimulate the economy than buying short term government securities.
B)​The Fed can lower both short term and long term interest rates by using quantitative easing.
C)​The Fed cannot easily reduce the fed funds interest rate.
D)​Quantitative easing may be able to affect long term interest rates even when the Fed is unable to appreciably lower short term interest rates.

Accepted Answer

The answer of Which of the following is false about...

Question 3

Which of the following would cause the U.S. money supply to expand?
A)​a commercial bank using excess reserves to extend a loan to a customer
B)​a commercial bank purchasing U.S.securities from the Fed as an investment
C)​an increase in reserve requirements
D)​an increase in the discount rate

Accepted Answer

When a commercial bank uses excess reserves to extend a loan to a customer, it increases the amount of money that is circulating in the economy, therefore expanding the money supply.

Answer: B
 When a commercial bank purchases U.S. securities from the Fed, it increases the amount of reserves it holds, which can then be used to create more loans, therefore expanding the money supply.

Answer: None of the above
 Choice C represents an increase in reserve requirements, which would decrease the amount of money that banks can lend out, therefore contracting the money supply. Choice D represents an increase in the discount rate, which would make it more expensive for banks to borrow from the Fed, and therefore may limit their ability to extend loans, contracting the money supply.

Question 4

Which of the following would tend to increase AD?
A)​a commercial bank using excess reserves to extend a loan to a customer
B)​a commercial bank purchasing U.S.securities from the Fed as an investment
C)​an increase in reserve requirements
D)​an increase in the discount rate

Accepted Answer

When a commercial bank uses excess reserves to extend a loan to a customer, it increases the money supply, which leads to an increase in AD. This is because it provides additional funds that consumers and businesses can spend and invest.

Answer: B
 When a commercial bank purchases U.S. securities from the Fed as an investment, it does not directly affect AD. However, it can indirectly influence AD if it increases the liquidity of banks, which can lead to more lending and investment.

Answer: None of the choices
 An increase in reserve requirements reduces the amount of money that banks can lend, thus decreasing the money supply and leading to a decrease in AD. An increase in the discount rate also makes it more expensive for banks to borrow money, which reduces their lending and investment, and therefore decreases AD.

Question 5

When the economy is on the steeper part of the short run aggregate supply curve, efforts to bring inflation down with monetary policy will be ____ successful and efforts to stimulate the economy will be ____ successful.
A)​More; more
B)​More; less
C)​Less; more
D)​Less; less

Accepted Answer

The answer of When the economy is on the steeper...

Question 6

Which of the following is true about a liquidity trap situation:​
A)​Quantitative easing might be a more effective strategy to stimulate the economy than buying short term government securities.
B)​Quantitative easing may be able to affect long term interest rates even when the Fed is unable to appreciably lower short term interest rates.
C)​The Fed cannot easily reduce the fed funds interest rate.
D)​All of the above are true.

Accepted Answer

A liquidity trap is a situation in which interest rates are very low and changes in the monetary policy have little or no effect on the economy. In this situation, quantitative easing (QE) might be a more effective strategy to stimulate the economy than buying short-term government securities. This is because QE involves the purchase of long-term government securities, which can help to reduce long-term interest rates and stimulate borrowing and investment. Moreover, quantitative easing may be able to affect long-term interest rates even when the Fed is unable to appreciably lower short-term interest rates. Additionally, in a liquidity trap situation, the Fed cannot easily reduce the fed funds interest rate because it is already close to zero. Therefore, all of the above statements are true.

Question 7

If multiplier effects are ____ than policy makers expect or the natural rate of real output is _____ than expected, monetary policy will tend to undershoot its intended effects.
A)​Greater; greater.
B)​Greater; less
C)​Less; greater
D)​Less; less

Accepted Answer

If the multiplier effects are less than expected or the natural rate of real output is greater than expected, monetary policy will tend to undershoot its intended effects. This is because the lesser multiplier effects imply that the policy action has a smaller impact on the economy, and a greater natural rate of real output implies that the economy is already operating at a higher level, leaving less room for the policy to stimulate growth.

Question 8

In a liquidity trap situation:​
A)​The Fed could not appreciably lower short term interest rates.
B)​If the Fed added reserves to the banking system, it would have little effect on investment.
C)​Traditional monetary policy would be relatively weak in its effects on aggregate demand.
D)​All of the above are true.

Accepted Answer

In a liquidity trap situation, short term interest rates are already close to zero and cannot be lowered further by traditional monetary policy. Adding reserves to the banking system would also have little effect on investment, as banks would have no incentive to lend out the excess funds. Therefore, traditional monetary policy would be relatively weak in its effects on aggregate demand. All three statements are true.

Question 9

Which of the following is not a limitation to monetary policy?​
A)​The fact that fiscal policy is sometimes at odds with monetary.
B)​The world has become global in all markets including financial markets, and the Fed does not have control over international banks or non-member banks.
C)​Because the Federal Reserve System is made up of twelve branches, it is essentially very difficult to get a decision enacted by the Board of Governors.
D)​Monetary policy has to be carried out through the commercial banking system.

Accepted Answer

The fact that fiscal policy is sometimes at odds with monetary (option A) and the world being global in financial markets (option B) are both limitations to monetary policy. Option D is also a limitation because it restricts the direct control the Federal Reserve has over the economy, as it needs to rely on commercial banks to carry out monetary policy. However, option C is incorrect because the fact that the Federal Reserve has twelve branches does not limit monetary policy directly. Instead, it is an organizational structure that can create delays or difficulties in implementing policy decisions but is not a fundamental limitation to the effectiveness of monetary policy.

Question 10

Which of the following is true?
A)​Sometimes the Fed moves to partly offset or even neutralize the intended effects of fiscal policy changes.
B)​If a consensus was reached between fiscal and monetary policy makers, you would not expect contractionary fiscal policy and expansionary monetary policy to be adopted at the same time.
C)​If policymakers' timing is off, expansionary monetary policy could cause an inflation problem rather than reducing a high unemployment problem.
D)​All of the above are true

Accepted Answer

All of the given statements are true. The Fed may at times offset or neutralize the desired outcomes of fiscal policy changes. Contractionary fiscal policy and expansionary monetary policy are typically not adopted at the same time, and improper timing of expansionary monetary policy could lead to inflationary pressures.

Question 11

Which of the following is false?​
A)​In a liquidity trap, expansionary monetary policy will tend to increase the excess reserves in the banking system.
B)​If there are currently excess reserves in the banking system, in a liquidity trap, expansionary monetary policy will lead those excess reserves to be lent out by the banking system
C)​If there are no changes in the level of excess reserves held in the banking system as a result, both expansionary and contractionary monetary policy can successfully shift the money supply curve
D)​None of the above; all of the above are true.

Accepted Answer

In a liquidity trap, even if there are excess reserves, banks may not lend out additional reserves due to a lack of borrower demand or due to pessimism about the future economic outlook. Expansionary monetary policy in such a scenario does not guarantee that banks will lend out their excess reserves.

Question 12

If commercial banks are increasing their borrowing from the Fed while the Fed is selling government securities, the borrowing of the commercial banks from the Fed will tend to:
A)​reinforce the contractionary open market operations policy.
B)​reinforce the expansionary open market operations policy.
C)​counteract the contractionary open market operations policy.
D)​counteract the expansionary open market operations policy.

Accepted Answer

When the Fed sells government securities, it is conducting a contractionary open market operation, which aims to decrease the money supply by taking money out of circulation. If commercial banks are increasing their borrowing from the Fed at the same time, they are obtaining additional reserves, which can counteract the effect of the contractionary policy by potentially increasing the money supply.

Question 13

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run, an unanticipated decrease in the money supply will:
A)​raise real interest rates, lower the price level, and reduce real GDP.
B)​raise real interest rates, lower the price level, and leave real GDP unchanged.
C)​raise nominal interest rates, lower the price level, and leave real GDP unchanged.
D)​lower real interest rates, raise the price level, and increase real GDP.

Accepted Answer

An unanticipated decrease in the money supply will lead to a contractionary shift in the AD curve. This leads to a decrease in real GDP and a decrease in the price level. The decrease in AD also leads to an increase in real interest rates as the demand for loanable funds decreases.

Question 14

Which of the following will tend to decrease the excess reserves of the commercial banking system?
A)​The central bank buys bonds from the public.
B)​The central bank sells bonds to a commercial bank.
C)​The central bank reduces its discount rate.
D)​The central bank decreases the required reserve ratio.

Accepted Answer

When the central bank sells bonds to a commercial bank, the commercial bank will have to give money to the central bank to purchase those bonds. This decreases the excess reserves of the commercial banking system. A, C, and D would all tend to increase the excess reserves of the commercial banking system.

Question 15

Which of the following is false about a liquidity trap situation:​
A)​The Fed could not appreciably raise short term interest rates.
B)​If the Fed added reserves to the banking system, it would have little effect on investment.
C)​Traditional monetary policy would be relatively weak in its effects on aggregate demand.
D)​Expansionary monetary policy would tend to increase excess reserves in the banking system.

Accepted Answer

In a liquidity trap, the Federal Reserve (or any central bank) can indeed lower short-term interest rates, often to near zero, in an attempt to stimulate economic activity. The statement that the Fed could not appreciably raise short-term interest rates is false because the characteristic of a liquidity trap is that interest rates are already very low and cannot be lowered significantly further, not that they cannot be raised.

Question 16

Which of the following is false?​
A)​Policy makers generally get the timing of countercyclical macroeconomic policy correct.
B)​To know the appropriate countercyclical policy to adopt, policy makers would need to know the natural rate of real output.
C)​If policy makers underestimate the multiplier, they may overshoot their goal for stimulus policies.
D)​All of the above are true

Accepted Answer

The answer of Which of the following is false?​
A)​Policy makers...

Question 17

If multiplier effects are ____ than policy makers expect or the natural rate of real output is _____ than expected, monetary policy will tend to overshoot its intended effects.
A)​Greater; greater.
B)​Greater; less
C)​Less; greater
D)​Less; less

Accepted Answer

If multiplier effects are greater than policy makers expect or the natural rate of real output is less than expected, monetary policy will tend to overshoot its intended effects.

Question 18

When the economy is on operating beyond the natural rate of real output, efforts to bring inflation down with monetary policy will be ____ successful and efforts to stimulate the economy will be ____ successful.
A)​More; less
B)​More; more
C)​Less; less
D)​Less; more

Accepted Answer

When the economy is operating beyond its natural rate, it is typically experiencing inflationary pressures. Monetary policy aimed at reducing inflation (such as raising interest rates) is more likely to be successful in this scenario. Conversely, efforts to stimulate the economy further (such as lowering interest rates) are less likely to be successful because the economy is already operating at or beyond full capacity.

Question 19

By changing its regulations, the Fed ___ force the banking system to reduce the money supply; by changing its regulations, the Fed ____ force the banking system to increase the money supply:
A)​Can; can
B)​Can; cannot
C)​Cannot; can
D)​Cannot; cannot.

Accepted Answer

The Fed can change its regulations to force the banking system to reduce the money supply, but it cannot force the banking system to increase the money supply. Increasing the money supply requires the banks to lend out more money, which is their own decision based on the demand for loans and their lending standards. Therefore, the correct answer is that the Fed can force the banking system to reduce the money supply by changing its regulations, but it cannot force the banking system to increase the money supply.

Question 20

By changing its regulations, the Fed ___ force the banking system to increase the money supply; by changing its regulations, the Fed ____ force the banking system to decrease the money supply:
A)​Can; can
B)​Can; cannot
C)​Cannot; can
D)​Cannot; cannot.

Accepted Answer

The Fed does not directly control the money supply, but rather uses various tools to influence it. By changing regulations, the Fed can encourage or discourage banks from lending, which may in turn increase or decrease the money supply. However, the Fed cannot directly force the banking system to increase or decrease the money supply through regulations alone.

Quiz 18: Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Which of the following is true?

Which of the following is false about a liquidity trap situation:

Which of the following would cause the U.S. money supply to expand?

Which of the following would tend to increase AD?

When the economy is on the steeper part of the short run aggregate supply curve, efforts to bring inflation down with monetary policy will be successful and efforts to stimulate the economy will be successful.

Which of the following is true about a liquidity trap situation:

If multiplier effects are than policy makers expect or the natural rate of real output is _ than expected, monetary policy will tend to undershoot its intended effects.

In a liquidity trap situation:

Which of the following is not a limitation to monetary policy?

Which of the following is true?

Which of the following is false?

If commercial banks are increasing their borrowing from the Fed while the Fed is selling government securities, the borrowing of the commercial banks from the Fed will tend to:

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run, an unanticipated decrease in the money supply will:

Which of the following will tend to decrease the excess reserves of the commercial banking system?

Which of the following is false about a liquidity trap situation:

Which of the following is false?

If multiplier effects are than policy makers expect or the natural rate of real output is _ than expected, monetary policy will tend to overshoot its intended effects.

When the economy is on operating beyond the natural rate of real output, efforts to bring inflation down with monetary policy will be successful and efforts to stimulate the economy will be successful.

By changing its regulations, the Fed _ force the banking system to reduce the money supply; by changing its regulations, the Fed __ force the banking system to increase the money supply:

By changing its regulations, the Fed _ force the banking system to increase the money supply; by changing its regulations, the Fed __ force the banking system to decrease the money supply:

Quiz 18: Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Which of the following is true?

Which of the following is false about a liquidity trap situation:

Which of the following would cause the U.S. money supply to expand?

Which of the following would tend to increase AD?

When the economy is on the steeper part of the short run aggregate supply curve, efforts to bring inflation down with monetary policy will be ____ successful and efforts to stimulate the economy will be ____ successful.

Which of the following is true about a liquidity trap situation:​

If multiplier effects are ____ than policy makers expect or the natural rate of real output is _____ than expected, monetary policy will tend to undershoot its intended effects.

In a liquidity trap situation:​

Which of the following is not a limitation to monetary policy?​

Which of the following is true?

Which of the following is false?​

If commercial banks are increasing their borrowing from the Fed while the Fed is selling government securities, the borrowing of the commercial banks from the Fed will tend to:

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run, an unanticipated decrease in the money supply will:

Which of the following will tend to decrease the excess reserves of the commercial banking system?

Which of the following is false about a liquidity trap situation:​

Which of the following is false?​

If multiplier effects are ____ than policy makers expect or the natural rate of real output is _____ than expected, monetary policy will tend to overshoot its intended effects.

When the economy is on operating beyond the natural rate of real output, efforts to bring inflation down with monetary policy will be ____ successful and efforts to stimulate the economy will be ____ successful.

By changing its regulations, the Fed ___ force the banking system to reduce the money supply; by changing its regulations, the Fed ____ force the banking system to increase the money supply:

By changing its regulations, the Fed ___ force the banking system to increase the money supply; by changing its regulations, the Fed ____ force the banking system to decrease the money supply:

When the economy is on the steeper part of the short run aggregate supply curve, efforts to bring inflation down with monetary policy will be successful and efforts to stimulate the economy will be successful.

Which of the following is true about a liquidity trap situation:

If multiplier effects are than policy makers expect or the natural rate of real output is _ than expected, monetary policy will tend to undershoot its intended effects.

In a liquidity trap situation:

Which of the following is not a limitation to monetary policy?

Which of the following is false?

Which of the following is false about a liquidity trap situation:

Which of the following is false?

If multiplier effects are than policy makers expect or the natural rate of real output is _ than expected, monetary policy will tend to overshoot its intended effects.

When the economy is on operating beyond the natural rate of real output, efforts to bring inflation down with monetary policy will be successful and efforts to stimulate the economy will be successful.

By changing its regulations, the Fed _ force the banking system to reduce the money supply; by changing its regulations, the Fed __ force the banking system to increase the money supply:

By changing its regulations, the Fed _ force the banking system to increase the money supply; by changing its regulations, the Fed __ force the banking system to decrease the money supply: