Question 1

Suppose inflationary pressures are building up in an economy. Is this economy likely to
Jexperience a recessionary gap or an inflationary gap? Explain how the Fed could use monetary policy to combat inflation. A complete answer must include an explanation of the policy tools that can be used and their effects on the money supply, interest rates, and aggregate demand. Use a diagram of LRAS, SRAS, and AD to illustrate your answer.

Accepted Answer

When inflationary pressures are building...

Question 2

When the Fed raises the target for federal funds, it

Accepted Answer

A)   sells government bonds.
B)   increases the discount rate.
C)   buys government bonds.
D)   increases the required reserve ratio.

Question 3

Following the U.S. financial crisis in 2008, some observers assert that the policies of Fed Chairman Greenspan contributed to the crisis. Which of the following is a criticism of Greenspan's policies? 
I. The very low interest rates used to fight the 2001 recession were maintained for too long, leading to the real estate bubble.
II. The Fed provided real estate developers with liquidity to encourage property development and offered tax breaks to first-time home buyers, which in turn fueled the real estate bubble.
III. The Fed did not promote appropriate regulations to deal with the new financial instruments that were created in the early 2000s.

Accepted Answer

A)   I and II only.
B)   I and III only.
C)   II and III only.
D)   I, II, and III.

Question 4

Suppose velocity = 5, money supply = $200, and price = 2. What is the value of real GDP?

Accepted Answer

A)   $10
B)   $40
C)   $400
D)   $500

Question 5

When the Fed sells bonds in the open market, we can expect

Accepted Answer

A)   bond prices and interest rates to fall.
B)   bond prices to rise and interest rates to fall.
C)   bond prices to fall and interest rates to rise.
D)   bond prices and interest rates to rise.

Question 6

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by

Accepted Answer

A)   M *V = nominal GDP.
B)   M * Y = P * V.
C)   M* P = V * Y.
D)   M * V = (1/V) P * Y.

Question 7

Figure 11-5 
-Refer to Figure 11-5. Short-run but not long-run equilibrium positions occur at points

Accepted Answer

A)   a and b.
B)   b and c.
C)   c and d.
D)   a and c.

Question 8

Suppose money supply (M)  = $3,960 billion, price level (P)  = 1.1, and real GDP (Y)  = $7,200 billion. Calculate the value of velocity using the equation of exchange.

Accepted Answer

A)   1.6
B)   1.8
C)   2.0
D)   2.2

Question 9

The Fed changes the federal funds rate using open-market operations.

Accepted Answer

A) True 
 B)False

Question 10

The time it takes to collect and process data is the biggest source of which lag?

Accepted Answer

A)   implementation lag
B)   recognition lag
C)   government lag
D)   impact lag

Question 11

The Fed increases the money supply by selling bonds.

Accepted Answer

A) True 
 B)False

Question 12

If velocity is constant in the long run, which of the following results flow from the quantity theory of money?

Accepted Answer

A)   A change in the money supply changes real GDP by an equal percentage.
B)   A change in the money supply changes nominal GDP by an equal percentage.
C)   A change in the money supply changes real interest rates by an equal percentage.
D)   A change in the money supply changes consumer lending by an equal percentage.

Question 13

Which of the following predictions can be made using the growth rates associated with the quantity equation, assuming velocity is stable?

Accepted Answer

A)   If the money supply grows at a faster rate than real GDP, there will be inflation.
B)   If the money supply grows at a slower rate than real GDP, there will be inflation.
C)   If the money supply grows at the same rate as real GDP, the price level will be fall and there will be deflation.
D)   If the money supply grows at the same rate as real GDP, the price level will also increase at the same rate as real GDP.

Question 14

The monetary policy tool that involves the buying and selling of government bonds is

Accepted Answer

A)   moral suasion.
B)   reserve requirements.
C)   the discount rate.
D)   open-market operations.

Question 15

Mary Chestnut reported in her diary that, during the Civil War, she became much less willing to hold "'Confederates," currency issued by the Confederate State of America. Assuming that this change in preferences was widespread in the South, it suggests

Accepted Answer

A)   a reduction in the demand for money and a reduction in velocity.
B)   a reduction in the demand for money and an increase in velocity.
C)   an increase in the demand for money and a reduction in velocity.
D)   an increase in the demand for money and an increase in velocity.

Question 16

An effort by the Fed to reduce aggregate demand may be thwarted because

Accepted Answer

A)   investment could remain the same or increase because of optimistic expectations by businesses about the future of the economy.
B)   investment and interest rates are positively related.
C)   investment could fall because of pessimistic expectations.
D)   taxes may have been increased.

Question 17

The rational expectations hypothesis suggests that

Accepted Answer

A)   people are creatures of habit and tend not to change their economic behavior in the short run.
B)   people are rational if they make forecasts about economic activity.
C)   people use all available information to make forecasts about future economic activity and adjust their behavior to these forecasts.
D)   people use all available information to make forecasts about future economic activity but often fail to adjust their behavior to these forecasts.

Question 18

Figure 11-4 1 to AD2 in Panel (a) ? A)  selling government bonds in the open market B)  buying government bonds in the open market C)  increasing the discount rate D)  increasing the federal funds rate" class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 11-4. Which of the following actions by the Fed could have caused the movement from AD1 to AD2 in Panel (a) ?

Accepted Answer

A)   selling government bonds in the open market
B)   buying government bonds in the open market
C)   increasing the discount rate
D)   increasing the federal funds rate

Question 19

Figure 11-5 
-Refer to Figure 11-5. If the economy is at point c,

Accepted Answer

A)   it is in a recessionary gap.
B)   it is at natural level of employment.
C)   the level of employment is greater than the natural level of employment.
D)   the unemployment rate is negative.

Question 20

Figure 11-5 1 to AS2. B)  a shift of the short-run aggregate supply curve from AS2 to AS1. C)  a shift of the aggregate demand curve from AD1 to AD2. D)  a shift of the aggregate demand curve from AD2 to AD1." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 11-5. If the economy is at point c, an open market purchase would cause

Accepted Answer

A)   a shift of the short-run aggregate supply curve from AS1 to AS2.
B)   a shift of the short-run aggregate supply curve from AS2 to AS1.
C)   a shift of the aggregate demand curve from AD1 to AD2.
D)   a shift of the aggregate demand curve from AD2 to AD1.

Exam 11: Monetary Policy and the Fed

The time it takes to collect and process data is the biggest source of which lag?

Correct Answer
verified

Suppose money supply (M) = $3,960 billion, price level (P) = 1.1, and real GDP (Y) = $7,200 billion. Calculate the value of velocity using the equation of exchange.

Correct Answer
verified

Suppose velocity = 5, money supply = $200, and price = 2. What is the value of real GDP?

Correct Answer
verified

Which of the following predictions can be made using the growth rates associated with the quantity equation, assuming velocity is stable?

Correct Answer
verified

The monetary policy tool that involves the buying and selling of government bonds is

Correct Answer
verified

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by

Correct Answer
verified

Mary Chestnut reported in her diary that, during the Civil War, she became much less willing to hold "'Confederates," currency issued by the Confederate State of America. Assuming that this change in preferences was widespread in the South, it suggests

Correct Answer
verified

Figure 11-5 -Refer to Figure 11-5. If the economy is at point c, an open market purchase would cause

Correct Answer
verified

An effort by the Fed to reduce aggregate demand may be thwarted because

Correct Answer
verified

The Fed changes the federal funds rate using open-market operations.

Correct Answer
verified

If velocity is constant in the long run, which of the following results flow from the quantity theory of money?

Correct Answer
verified

The rational expectations hypothesis suggests that

Correct Answer
verified

When the Fed sells bonds in the open market, we can expect

Correct Answer
verified

Figure 11-5 -Refer to Figure 11-5. Short-run but not long-run equilibrium positions occur at points

Correct Answer
verified

Figure 11-4 -Refer to Figure 11-4. Which of the following actions by the Fed could have caused the movement from AD₁ to AD₂ in Panel (a) ?

Correct Answer
verified

Figure 11-5 -Refer to Figure 11-5. If the economy is at point c,

Correct Answer
verified

Correct Answer
Answered by ExamLex AI
When inflationary pressures are building...
View Answer

Correct Answer
verified

When the Fed raises the target for federal funds, it

Correct Answer
verified

The Fed increases the money supply by selling bonds.

Correct Answer
verified

Exam 11: Monetary Policy and the Fed

The time it takes to collect and process data is the biggest source of which lag?

Correct AnswerverifiedShow Answer

Suppose money supply (M) = $3,960 billion, price level (P) = 1.1, and real GDP (Y) = $7,200 billion. Calculate the value of velocity using the equation of exchange.

Correct AnswerverifiedShow Answer

Suppose velocity = 5, money supply = $200, and price = 2. What is the value of real GDP?

Correct AnswerverifiedShow Answer

Which of the following predictions can be made using the growth rates associated with the quantity equation, assuming velocity is stable?

Correct AnswerverifiedShow Answer

The monetary policy tool that involves the buying and selling of government bonds is

Correct AnswerverifiedShow Answer

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by

Correct AnswerverifiedShow Answer

Mary Chestnut reported in her diary that, during the Civil War, she became much less willing to hold "'Confederates," currency issued by the Confederate State of America. Assuming that this change in preferences was widespread in the South, it suggests

Correct AnswerverifiedShow Answer

Figure 11-5 -Refer to Figure 11-5. If the economy is at point c, an open market purchase would cause

Correct AnswerverifiedShow Answer

An effort by the Fed to reduce aggregate demand may be thwarted because

Correct AnswerverifiedShow Answer

The Fed changes the federal funds rate using open-market operations.

Correct AnswerverifiedShow Answer

If velocity is constant in the long run, which of the following results flow from the quantity theory of money?

Correct AnswerverifiedShow Answer

The rational expectations hypothesis suggests that

Correct AnswerverifiedShow Answer

When the Fed sells bonds in the open market, we can expect

Correct AnswerverifiedShow Answer

Figure 11-5 -Refer to Figure 11-5. Short-run but not long-run equilibrium positions occur at points

Correct AnswerverifiedShow Answer

Figure 11-4 -Refer to Figure 11-4. Which of the following actions by the Fed could have caused the movement from AD1 to AD2 in Panel (a) ?

Correct AnswerverifiedShow Answer

Figure 11-5 -Refer to Figure 11-5. If the economy is at point c,

Correct AnswerverifiedShow Answer

Correct AnswerAnswered by ExamLex AIWhen inflationary pressures are building...View AnswerShow Answer

Correct AnswerverifiedShow Answer

When the Fed raises the target for federal funds, it

Correct AnswerverifiedShow Answer

The Fed increases the money supply by selling bonds.

Correct AnswerverifiedShow Answer

Correct Answer
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Figure 11-4 -Refer to Figure 11-4. Which of the following actions by the Fed could have caused the movement from AD₁ to AD₂ in Panel (a) ?

Correct Answer
verified

Correct Answer
verified

Correct Answer
Answered by ExamLex AI
When inflationary pressures are building...
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