Question 1

Monetary policy is much less effective at combating a real shock than a demand shock.

Accepted Answer

A) True 
 B)False

Question 2

During the 1970s,the Fed often reacted to negative oil shocks by decreasing the money supply and focusing on:

Accepted Answer

A)   increasing long-run growth in the economy.
B)   reducing inflation.
C)   reducing unemployment.
D)   raising employment.

Question 3

The BEST type of negative shock for the Federal Reserve to respond to is a negative shock to:

Accepted Answer

A)   AD.
B)   SRAS.
C)   LRAS.
D)   inflation.

Question 4

The Fed has been unable to offset the effects of negative real shocks with monetary policy.

Accepted Answer

A) True 
 B)False

Question 5

Nobel Prize-winner Milton Friedman advocated which of the following as an adequate monetary policy?

Accepted Answer

A)   a discretionary rule in which the money supply should be adjusted to control the level of inflation rate
B)   a discretionary rule in which the money supply should be adjusted to counteract aggregate demand shocks
C)   a strict rule in which the money supply should grow 2% higher than the long-run economic growth rate
D)   a strict rule in which the money supply should grow at the rate of the long-run economic growth rate

Question 6

Which would be an example of running monetary policy by rules?

Accepted Answer

A)   A 5% increase in money supply automatically leads to a 2% increase in real GDP.
B)   An increase in money supply growth automatically leads to an increase in inflation.
C)   The Fed will increase money growth to different levels,depending on the severity of the recession.
D)   A 1% drop in real GDP growth will automatically elicit a 2% increase in money growth.

Question 7

If the Fed increases  M⃗\vec{ M }M  to fight slower real growth after a negative real shock,which of the following should occur?

Accepted Answer

A)   no change in real growth
B)   lower real growth
C)   lower inflation
D)   higher inflation

Question 8

Deflation is:

Accepted Answer

A)   a decrease in prices;that is,a negative inflation rate.
B)   a reduction in the rate of inflation.
C)   an increase in prices.
D)   an increase in the rate of inflation.

Question 9

In the short run,a negative real shock will cause the inflation rate to:

Accepted Answer

A)   increase.
B)   decrease.
C)   remain unchanged.
D)   become more difficult to predict.

Question 10

In the short run,a negative real shock will cause output growth to:

Accepted Answer

A)   increase.
B)   decrease.
C)   remain unchanged.
D)   become more difficult to predict.

Question 11

A decrease in money supply growth will cause the:

Accepted Answer

A)   AD curve to shift to the left.
B)   SRAS curve to shift to the left.
C)   LRAS curve to shift to the left.
D)   price level to fall.

Question 12

Some economists argue that the Fed should commit to keeping  M⃗\vec{ M }M   +  v⃗\vec { v }v  fixed at a particular value,say 5%.How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock?

Accepted Answer

A)   increase   M⃗\vec{ M }M3.333 2.667 6.667 9 10 19 6.667 24.667 20.333 43.667 41 57 7.333 4.667 1110.667 11 18 0 6-1 10-3 12s-6.667 5-14 9c-28.667 14.667-53.667 35.667-75 63-1.333 1.333-3.167 3.5-5.5 6.5s-4 4.833-5 5.5c-1 .667-2.5 1.333-4.5 2s-4.333 1-7 1c-4.667 0-9.167-1.833-13.5-5.5S337 184 337 178c0-12.667 15.667-32.333 47-59H213l-171-1c-8.667-6-13-12.333-13-19 0-4.667 4.333-11.333 13-20h359c-16-25.333-24-45-24-59z'/>  ;do nothing
B)   increase M⃗\vec { M }M3.333 2.667 6.667 9 10 19 6.667 24.667 20.333 43.667 41 57 7.333 4.667 1110.667 11 18 0 6-1 10-3 12s-6.667 5-14 9c-28.667 14.667-53.667 35.667-75 63-1.333 1.333-3.167 3.5-5.5 6.5s-4 4.833-5 5.5c-1 .667-2.5 1.333-4.5 2s-4.333 1-7 1c-4.667 0-9.167-1.833-13.5-5.5S337 184 337 178c0-12.667 15.667-32.333 47-59H213l-171-1c-8.667-6-13-12.333-13-19 0-4.667 4.333-11.333 13-20h359c-16-25.333-24-45-24-59z'/>  ;increase M⃗\vec{ M }M3.333 2.667 6.667 9 10 19 6.667 24.667 20.333 43.667 41 57 7.333 4.667 1110.667 11 18 0 6-1 10-3 12s-6.667 5-14 9c-28.667 14.667-53.667 35.667-75 63-1.333 1.333-3.167 3.5-5.5 6.5s-4 4.833-5 5.5c-1 .667-2.5 1.333-4.5 2s-4.333 1-7 1c-4.667 0-9.167-1.833-13.5-5.5S337 184 337 178c0-12.667 15.667-32.333 47-59H213l-171-1c-8.667-6-13-12.333-13-19 0-4.667 4.333-11.333 13-20h359c-16-25.333-24-45-24-59z'/> 
C)   increase M⃗\vec{ M }M3.333 2.667 6.667 9 10 19 6.667 24.667 20.333 43.667 41 57 7.333 4.667 1110.667 11 18 0 6-1 10-3 12s-6.667 5-14 9c-28.667 14.667-53.667 35.667-75 63-1.333 1.333-3.167 3.5-5.5 6.5s-4 4.833-5 5.5c-1 .667-2.5 1.333-4.5 2s-4.333 1-7 1c-4.667 0-9.167-1.833-13.5-5.5S337 184 337 178c0-12.667 15.667-32.333 47-59H213l-171-1c-8.667-6-13-12.333-13-19 0-4.667 4.333-11.333 13-20h359c-16-25.333-24-45-24-59z'/>  ;decrease M⃗\vec{ M }M3.333 2.667 6.667 9 10 19 6.667 24.667 20.333 43.667 41 57 7.333 4.667 1110.667 11 18 0 6-1 10-3 12s-6.667 5-14 9c-28.667 14.667-53.667 35.667-75 63-1.333 1.333-3.167 3.5-5.5 6.5s-4 4.833-5 5.5c-1 .667-2.5 1.333-4.5 2s-4.333 1-7 1c-4.667 0-9.167-1.833-13.5-5.5S337 184 337 178c0-12.667 15.667-32.333 47-59H213l-171-1c-8.667-6-13-12.333-13-19 0-4.667 4.333-11.333 13-20h359c-16-25.333-24-45-24-59z'/> 
D)   decrease M⃗\vec{ M }M3.333 2.667 6.667 9 10 19 6.667 24.667 20.333 43.667 41 57 7.333 4.667 1110.667 11 18 0 6-1 10-3 12s-6.667 5-14 9c-28.667 14.667-53.667 35.667-75 63-1.333 1.333-3.167 3.5-5.5 6.5s-4 4.833-5 5.5c-1 .667-2.5 1.333-4.5 2s-4.333 1-7 1c-4.667 0-9.167-1.833-13.5-5.5S337 184 337 178c0-12.667 15.667-32.333 47-59H213l-171-1c-8.667-6-13-12.333-13-19 0-4.667 4.333-11.333 13-20h359c-16-25.333-24-45-24-59z'/>  ;increase M⃗\vec{ M }M3.333 2.667 6.667 9 10 19 6.667 24.667 20.333 43.667 41 57 7.333 4.667 1110.667 11 18 0 6-1 10-3 12s-6.667 5-14 9c-28.667 14.667-53.667 35.667-75 63-1.333 1.333-3.167 3.5-5.5 6.5s-4 4.833-5 5.5c-1 .667-2.5 1.333-4.5 2s-4.333 1-7 1c-4.667 0-9.167-1.833-13.5-5.5S337 184 337 178c0-12.667 15.667-32.333 47-59H213l-171-1c-8.667-6-13-12.333-13-19 0-4.667 4.333-11.333 13-20h359c-16-25.333-24-45-24-59z'/>

Question 13

At the time the Federal Reserve must make a decision,the actual state of the economy may be unknown.

Accepted Answer

A) True 
 B)False

Question 14

Use the following to answer questions 
Figure: Monetary Policy 
-(Figure: Monetary Policy) Refer to the figure.Assume that the economy is initially at point Y in the graph.In the best case scenario,the Fed will:

Accepted Answer

A)   increase money supply to take the economy to point X.
B)   decrease money supply to take the economy to point W.
C)   increase money supply to take the economy to point W.
D)   decrease money supply to take the economy to point X.

Question 15

The most appropriate monetary policy response to an asset price bubble for a central bank is to:

Accepted Answer

A)   react to asset price bubbles because they can easily be identified.
B)   not react to asset price bubbles because its actions will lead to a recession.
C)   react to asset price bubbles aggressively because they cannot be popped any other way.
D)   not react to asset price bubbles because monetary policy can only affect aggregate demand,not demand in a specific market.

Question 16

In response to a negative spending shock,a condition of lower market confidence makes monetary policy easing:

Accepted Answer

A)   more effective in raising real GDP growth.
B)   less effective in raising real GDP growth.
C)   just as effective in raising real GDP growth as higher market confidence.
D)   lead to increases in both real GDP growth and inflation.

Question 17

To reduce inflation in response to a negative real shock,the Federal Reserve would:

Accepted Answer

A)   decrease the money growth rate,which would lower both the inflation rate and economic growth rate.
B)   decrease the money growth rate,which would increase both the inflation rate and economic growth rate.
C)   increase the money growth rate,which would lower both the inflation rate and economic growth rate.
D)   increase the money growth rate,which would increase both the inflation rate and economic growth rate.

Question 18

When hit with a negative real shock,the Fed must pick a policy that chooses between:

Accepted Answer

A)   a growth rate that's too low and an unemployment rate that's too high.
B)   a growth rate that's too low and an inflation rate that's too high.
C)   a growth rate that's too high and wages that are too low.
D)   a growth rate that's too high and a savings rate that's too low.

Question 19

The advocates of discretion for the Fed's role think that the Fed's adjustments on average push the economy in the:

Accepted Answer

A)   wrong direction and lower GDP volatility.
B)   right direction and lower GDP volatility.
C)   wrong direction and increase GDP volatility.
D)   right direction and increase GDP volatility.

Question 20

Shortly after September 11,2011,the Federal Reserve:

Accepted Answer

A)   decreased its lending to banks.
B)   increased its lending to banks.
C)   decreased its lending to individuals.
D)   increased its lending to individuals.

Exam 16: Monetary Policy

In the short run,a negative real shock will cause the inflation rate to:

Correct AnswerverifiedShow Answer

Some economists argue that the Fed should commit to keeping M⃗\vec{ M }M + v⃗\vec { v }v fixed at a particular value,say 5%.How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock?

Correct AnswerverifiedShow Answer

The advocates of discretion for the Fed's role think that the Fed's adjustments on average push the economy in the:

Correct AnswerverifiedShow Answer

The most appropriate monetary policy response to an asset price bubble for a central bank is to:

Correct AnswerverifiedShow Answer

In the short run,a negative real shock will cause output growth to:

Correct AnswerverifiedShow Answer

Which would be an example of running monetary policy by rules?

Correct AnswerverifiedShow Answer

A decrease in money supply growth will cause the:

Correct AnswerverifiedShow Answer

To reduce inflation in response to a negative real shock,the Federal Reserve would:

Correct AnswerverifiedShow Answer

Shortly after September 11,2011,the Federal Reserve:

Correct AnswerverifiedShow Answer

Use the following to answer questions Figure: Monetary Policy -(Figure: Monetary Policy) Refer to the figure.Assume that the economy is initially at point Y in the graph.In the best case scenario,the Fed will:

Correct AnswerverifiedShow Answer

The BEST type of negative shock for the Federal Reserve to respond to is a negative shock to:

Correct AnswerverifiedShow Answer

If the Fed increases M⃗\vec{ M }M to fight slower real growth after a negative real shock,which of the following should occur?

Correct AnswerverifiedShow Answer

In response to a negative spending shock,a condition of lower market confidence makes monetary policy easing:

Correct AnswerverifiedShow Answer

Monetary policy is much less effective at combating a real shock than a demand shock.

Correct AnswerverifiedShow Answer

During the 1970s,the Fed often reacted to negative oil shocks by decreasing the money supply and focusing on:

Correct AnswerverifiedShow Answer

When hit with a negative real shock,the Fed must pick a policy that chooses between:

Correct AnswerverifiedShow Answer

At the time the Federal Reserve must make a decision,the actual state of the economy may be unknown.

Correct AnswerverifiedShow Answer

Nobel Prize-winner Milton Friedman advocated which of the following as an adequate monetary policy?

Correct AnswerverifiedShow Answer

The Fed has been unable to offset the effects of negative real shocks with monetary policy.

Correct AnswerverifiedShow Answer

Deflation is:

Correct AnswerverifiedShow Answer

Correct Answer
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Some economists argue that the Fed should commit to keeping $\vec{ M }$ + $\vec { v }$ fixed at a particular value,say 5%.How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock?

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If the Fed increases $\vec{ M }$ to fight slower real growth after a negative real shock,which of the following should occur?

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