Question 1

Usually there is an inverse relationship between the federal funds rate and the output gap.

Accepted Answer

A) True 
 B)False

Question 2

Contractionary monetary policy entails _____ the money supply, _____ interest rates, and _____ aggregate demand.

Accepted Answer

A)   increasing; increasing; increasing
B)   increasing; decreasing; decreasing
C)   decreasing; decreasing; decreasing
D)   decreasing; increasing; decreasing

Question 3

Use the following to answer questions 
Figure: Monetary Policy and the AD-SRAS Model 
-(Figure: Monetary Policy and the AD-SRAS Model)  Look at the figure Monetary Policy and the AD-SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of:

Accepted Answer

A)   a decrease in government spending.
B)   an increase in the discount rate.
C)   a decrease in the money supply.
D)   purchases of government securities in the open market.

Question 4

To decrease interest rates, the Fed should increase the money supply.

Accepted Answer

A) True 
 B)False

Question 5

To close an inflationary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.

Accepted Answer

A)   increase; increase; left
B)   decrease; decrease; left
C)   increase; increase; right
D)   decrease; decrease; right

Question 6

The liquidity preference model uses the demand for and supply of money to determine:

Accepted Answer

A)   GDP.
B)   the price level.
C)   the interest rate.
D)   nominal output.

Question 7

If the Federal Reserve conducts an open market purchase, holding everything else constant, in the long run there will be:

Accepted Answer

A)   an increase in the aggregate price level.
B)   an increase in the aggregate output level.
C)   a decrease in unemployment.
D)   no effects on output, unemployment, or the price level.

Question 8

When long-term rates are lower than short-term rates, the market is signaling that it expects short-term rates to fall.

Accepted Answer

A) True 
 B)False

Question 9

The Federal Open Market Committee does NOT directly control the _____ with monetary policy.

Accepted Answer

A)   discount rate
B)   reserve ratio
C)   prime rate
D)   federal funds rate

Question 10

Use the following to answer questions 
Figure: Money Market I 
-(Figure: Money Market I)  Look at the figure Money Market I. If the money market is initially in equilibrium at point E and the central bank sells Treasury bills, then the interest rate will:

Accepted Answer

A)   move toward point H.
B)   move toward point L.
C)   remain at point E.
D)   shift rightward.

Question 11

In the long-run changes in the money supply will change prices but not real GDP or interest rates.

Accepted Answer

A) True 
 B)False

Question 12

Short-term interest rates:

Accepted Answer

A)   fluctuate widely depending on their terms.
B)   tend to move together.
C)   move in the same direction as long-term interest rates.
D)   are always less than long-term interest rates.

Question 13

Monetary policy affects GDP and the price level by:

Accepted Answer

A)   changing aggregate supply.
B)   changing aggregate demand.
C)   changing the aggregate amount of labor supplied.
D)   changing exports.

Question 14

Monetary policy that lowers the interest rate is called _____ because it _____.

Accepted Answer

A)   contractionary; aims to head off inflation
B)   expansionary; increases short-run aggregate supply
C)   contractionary; reduces saving and increases consumption
D)   expansionary; increases aggregate demand

Question 15

Suppose a new regulation lowers the interest rates banks can offer on checking account funds. This will result in a shift _____ of the money _____ curve.

Accepted Answer

A)   leftward; demand
B)   rightward; demand
C)   rightward; supply
D)   leftward; supply

Question 16

Short-term interest rates apply to financial assets due within:

Accepted Answer

A)   24 hours.
B)   three months.
C)   six months.
D)   one year.

Question 17

To decrease interest rates, the Fed should make an open-market sale of Treasury bills.

Accepted Answer

A) True 
 B)False

Question 18

An individual who decides to hold money instead of other assets:

Accepted Answer

A)   is giving up the interest that other assets could have earned.
B)   is likely to be subject to money illusion.
C)   is not affected by unanticipated inflation.
D)   can maintain a higher standard of living.

Question 19

Since the short-run increase in the aggregate price level that follows a monetary expansion is smaller than the ensuing long-run increase, it follows that:

Accepted Answer

A)   money is neutral in the short run.
B)   in the short run, the interest rate remains constant.
C)   in the long run, the real money supply increases.
D)   in the short run, the real money supply increases.

Question 20

Inflation targeting is different from the Taylor rule because the Taylor rule is based on a forecast of inflation, but inflation targeting adjusts monetary policy to past inflation.

Accepted Answer

A) True 
 B)False

Exam 27: Monetary Policy

Short-term interest rates apply to financial assets due within:

Correct AnswerverifiedShow Answer

The liquidity preference model uses the demand for and supply of money to determine:

Correct AnswerverifiedShow Answer

An individual who decides to hold money instead of other assets:

Correct AnswerverifiedShow Answer

Inflation targeting is different from the Taylor rule because the Taylor rule is based on a forecast of inflation, but inflation targeting adjusts monetary policy to past inflation.

Correct AnswerverifiedShow Answer

To close an inflationary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.

Correct AnswerverifiedShow Answer

Suppose a new regulation lowers the interest rates banks can offer on checking account funds. This will result in a shift _____ of the money _____ curve.

Correct AnswerverifiedShow Answer

Monetary policy affects GDP and the price level by:

Correct AnswerverifiedShow Answer

Use the following to answer questions Figure: Money Market I -(Figure: Money Market I) Look at the figure Money Market I. If the money market is initially in equilibrium at point E and the central bank sells Treasury bills, then the interest rate will:

Correct AnswerverifiedShow Answer

Short-term interest rates:

Correct AnswerverifiedShow Answer

Monetary policy that lowers the interest rate is called _____ because it _____.

Correct AnswerverifiedShow Answer

When long-term rates are lower than short-term rates, the market is signaling that it expects short-term rates to fall.

Correct AnswerverifiedShow Answer

In the long-run changes in the money supply will change prices but not real GDP or interest rates.

Correct AnswerverifiedShow Answer

If the Federal Reserve conducts an open market purchase, holding everything else constant, in the long run there will be:

Correct AnswerverifiedShow Answer

To decrease interest rates, the Fed should make an open-market sale of Treasury bills.

Correct AnswerverifiedShow Answer

To decrease interest rates, the Fed should increase the money supply.

Correct AnswerverifiedShow Answer

Usually there is an inverse relationship between the federal funds rate and the output gap.

Correct AnswerverifiedShow Answer

Contractionary monetary policy entails _____ the money supply, _____ interest rates, and _____ aggregate demand.

Correct AnswerverifiedShow Answer

The Federal Open Market Committee does NOT directly control the _____ with monetary policy.

Correct AnswerverifiedShow Answer

Use the following to answer questions Figure: Monetary Policy and the AD-SRAS Model -(Figure: Monetary Policy and the AD-SRAS Model) Look at the figure Monetary Policy and the AD-SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of:

Correct AnswerverifiedShow Answer

Since the short-run increase in the aggregate price level that follows a monetary expansion is smaller than the ensuing long-run increase, it follows that:

Correct AnswerverifiedShow Answer

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To close an inflationary gap using monetary policy, the Federal Reserve should ___ the money supply to _ investment and consumer spending and shift the aggregate demand curve to the ___.

Correct Answer
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Suppose a new regulation lowers the interest rates banks can offer on checking account funds. This will result in a shift _ of the money _ curve.

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Monetary policy that lowers the interest rate is called _ because it _.

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Contractionary monetary policy entails ___ the money supply, _ interest rates, and ___ aggregate demand.

Correct Answer
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