Test Bank Chapter.15 Monetary Policy v8.0 - Principles of Macroeconomics -Complete Test Bank by Taylor. DOCX document preview.
Chapter 15
Monetary Policy
Multiple Choice
1. Which of the following policies that the Fed followed between 2007 and 2014?
a. | To unwind expansionary policy measures and try to return to a normal stance of policy. |
b. | To get the economy out of a recession. |
c. | To stimulate the U.S. financial and banking systems. |
d. | To raise interest rates in an attempt to keep inflation low. |
e. | None of these. |
OBJ: factual
SEC: 0. Monetary Policy
TOP: Fed
MSC: Bloom's: Knowledge
2. Which of the following policies that the Fed followed after 2014?
a. | To unwind expansionary policy measures and try to return to a normal stance of policy. |
b. | To get the economy out of a recession. |
c. | To stimulate the U.S. financial and banking systems. |
d. | To lower interest rate in an attempt to stimulate economic growth. |
e. | None of these. |
OBJ: factual
SEC: 0. Monetary Policy
TOP: Fed
MSC: Bloom's: Knowledge
/
3. During the financial crisis of 2007 and 2008, the Fed raised interest rates in an attempt to stabilize the financial system.
Basic
OBJ: factual
SEC: 0. Monetary Policy
TOP: Fed
MSC: Bloom's: Knowledge
4. In an attempt to avert the worst consequences of the financial crisis of 2007 and 2008, the Fed cut the interest rate all the way to zero during the crisis, requiring that it find other ways to stimulate the economy.
Moderate
OBJ: factual
SEC: 0. Monetary Policy
TOP: Fed
MSC: Bloom's: Analysis | AACSB: Analytic
5. The Fed’s monetary policy was one of the possible factors leading to the Great Inflation in the 1970s and the housing price boom in the mid-2000s.
Basic
OBJ: factual
SEC: 0. Monetary Policy
TOP: Fed
MSC: Bloom's: Knowledge
Multiple Choice
6. Which of the following is not considered one of the main assets on the balance sheet of the Fed?
a. | Government securities. |
b. | Private securities. |
c. | Loans to banks. |
d. | Currency. |
e. | Loans to other financial institutions. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge | AACSB: Analytic
7. One of the main liabilities on the Fed's balance sheet is reserves. Which of the following is the best definition of that item?
a. | Reserves represent foreign currencies held at the Fed. |
b. | Reserves are deposits that banks hold at the Fed. |
c. | Reserves represent gold and other precious metals held at the Fed. |
d. | Reserves represent loans that the Fed has made to other countries. |
e. | None of these is an appropriate definition. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge | AACSB: Analytic
8. What happens to the Fed's balance sheet when it buys $10 billion in government securities?
a. | The left-hand side of the Fed's balance sheet increases by $10 billion. |
b. | The left-hand side of the Fed's balance sheet decreases by $10 billion. |
c. | The right-hand side of the Fed's balance sheet decreases by $10 billion. |
d. | Both the right-hand and left-hand sides of the Fed's balance sheet decrease by $10 billion. |
e. | None of these. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge
9. One type of private security held by the Fed is commercial paper. Which of the following is the most appropriate definition of this type of private asset?
a. | A public bond with very short maturity. |
b. | A public bond with long term maturity. |
c. | A private bond with very short maturity. |
d. | A private bond backed by the federal government. |
e. | None of these. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge
10. The interest rate on loans banks pay when they borrow from the Fed is called
a. | the discount rate. |
b. | the three-month CD rate. |
c. | the prime rate. |
d. | the Treasury bill rate. |
e. | the federal funds rate. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Discount Rate
MSC: Bloom's: Knowledge
11. The discount window enables the Fed to
a. | better regulate the banking system. |
b. | take action to change interest rates. |
c. | be a lender of last resort. |
d. | ensure the banking system's profitability. |
e. | control the money supply. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Discount Rate
MSC: Bloom's: Knowledge
12. As a result of the financial crisis, the Fed has begun buying securities in troubled markets, as it has been trying to provide more credit to the markets and thereby mitigate the crisis. This is known as
a. | Quantitative easing. |
b. | FOMC. |
c. | Credit crunching. |
d. | Market deepening. |
e. | Market thinning. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: New Fed's Tools
MSC: Bloom's: Knowledge
/
13. Currencythe amount of coins and bills in circulationis the main liability of the Fed.
Basic
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge
14. Currencythe amount of coins and bills in circulationis part of the money supply.
Basic
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Money Supply
MSC: Bloom's: Knowledge
15. The buying and selling government securities is the traditional role of central banks as they go about doing open market operations.
Basic
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge
16. One of the basic changes that the Fed has established as a result of the financial crisis is that it no longer carries private securities.
Basic
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge
17. One of the basic changes that the Fed has established as a result of the financial crisis is that it now lends to other financial institutions that are not banks, such as the insurance giant AIG.
Basic
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge
Short Answer
18. Explain the changes made by the Fed as a result of the 2007-08 financial crisis and the corresponding new types of assets it now holds.
OBJ: conceptual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: New Fed's Tools
MSC: Bloom's: Knowledge | AACSB: Analytic
19. Describe the new tools of monetary policy of the Fed and explain the basic reasoning of the Fed to create these new ways to deal with the recent financial crisis.
OBJ: conceptual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
20. What do economists mean when they refer to the "size" of the Fed's balance sheet?
a. | the size of the money supply it controls. |
b. | its ability to set fiscal policy. |
c. | its operating budget. |
d. | the sum of all the assets on its balance sheet. |
e. | its net worth. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge
21. Economists refer to the sum of all currency plus reserves on the Fed's balance sheet liabilities as
a. | aggregate demand. |
b. | implicit power. |
c. | the Fed's operating budget. |
d. | the monetary base. |
e. | the Fed's net worth. |
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge
/
22. As a result of the financial crisis, from 2007 to 2009, the size of the Fed's balance sheet more than doubled.
Moderate
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Knowledge | AACSB: Analytic
23. Increases or decreases in the monetary base eventually become corresponding increases or decreases in the money supply.
Moderate
OBJ: factual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
24. Explain why increases or decreases in the monetary base will eventually lead to increases or decreases in the money supply.
OBJ: conceptual
SEC: 1. The Federal Reserve’s Balance Sheet
TOP: Fed's Balance Sheet
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
25. The demand for money is
a. | negatively related to real GDP. |
b. | positively related to the interest rate. |
c. | negatively related to the volume of transactions. |
d. | independent of the interest rate. |
e. | negatively related to the interest rate and positively related to the volume of transactions. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Demand for Money
MSC: Bloom's: Knowledge
26. A line depicting the relationship between the quantity of money demanded and the interest rate is
a. | negatively sloped. |
b. | positively sloped. |
c. | horizontal. |
d. | vertical. |
e. | horizontal at high interest rates and vertical at low interest rates. |
TOP: Demand for Money
MSC: Bloom's: Knowledge
27. When the rate of interest increases,
a. | the opportunity cost of money increases, and the quantity of money demanded increases. |
b. | the opportunity cost of money decreases, and the quantity of money demanded declines. |
c. | the demand for money is unaffected. |
d. | the opportunity cost of money decreases, and the quantity of money demanded increases. |
e. | the opportunity cost of money increases, and the quantity of money demanded declines. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Demand for Money
MSC: Bloom's: Analysis | AACSB: Analytic
28. When the rate of interest falls,
a. | the opportunity cost of money increases, and the quantity of money demanded declines. |
b. | the opportunity cost of money increases, and the quantity of money demanded increases. |
c. | the demand for money is unaffected. |
d. | the opportunity cost of money decreases, and the quantity of money demanded declines. |
e. | the opportunity cost of money decreases, and the quantity of money demanded increases. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Demand for Money
MSC: Bloom's: Analysis | AACSB: Analytic
29. If banks start paying higher interest rates on checking accounts, we would expect, assuming everything else held equal,
a. | the demand for money to become more sensitive to changes in the interest rate. |
b. | the demand for money to become horizontal. |
c. | the relationship between interest rates and the demand for money to be unaffected. |
d. | the demand for money to become less sensitive to changes in the interest rate. |
e. | a decrease in the supply of money. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Demand for Money
MSC: Bloom's: Analysis | AACSB: Analytic
30. All else held equal, an increase in the amount of transactions (goods and services purchased) in the economy results in
a. | a decrease in the demand for money. |
b. | a steeper demand-for-money curve. |
c. | an increase in the demand for money. |
d. | an increase in the quantity demanded of money. |
e. | no change in the demand for money. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Demand for Money
MSC: Bloom's: Analysis | AACSB: Analytic
31. When the Fed increases the federal funds rate,
a. | all other interest rates are unaffected. |
b. | money demand is unaffected. |
c. | all other interest rates increase. |
d. | all other interest rates decrease. |
e. | money demand increases. |
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Interest Rate
MSC: Bloom's: Knowledge
32. When the Fed increases the interest rate,
a. | money supply is unaffected. |
b. | money demand is unaffected. |
c. | money demand shifts left, and money supply shifts right. |
d. | money demand shifts left, and money supply is unaffected. |
e. | money demand and money supply shift left. |
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Money Demand and Supply
MSC: Bloom's: Analysis | AACSB: Analytic
33. According to current U.S. monetary policy, the Fed
a. | adjusts the interest rate so it intersects money supply and the chosen money demand. |
b. | adjusts the money supply so it intersects money demand at the chosen interest rate. |
c. | adjusts the money demand so it intersects the chosen money supply and interest rate. |
d. | adjusts money demand, money supply, and the interest rate to be in line with the chosen target inflation rate. |
e. | adjusts the interest rate so it intersects money demand and the chosen money supply. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Monetary Policy
MSC: Bloom's: Knowledge
34. If the Fed determines the amount of money in circulation, the interest rate is determined by the
a. | required reserve ratio. |
b. | currency to deposit ratio. |
c. | money multiplier. |
d. | monetary base. |
e. | demand for money. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Equilibrium Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
35. Assume the Fed has complete control over the money supply. If the demand for money were greater than the supply of money, we would expect
a. | a decrease in the quantity of money demanded and a decrease in the rate of interest. |
b. | a decrease in the quantity of money demanded and an increase in the rate of interest. |
c. | an increase in the quantity of money supplied, a decrease in the quantity of money demanded, and an increase in the rate of interest. |
d. | an increase in the quantity of money demanded and a decline in the rate of interest. |
e. | a decrease in the quantity of money supplied, a decrease in the quantity of money demanded, and an increase in the rate of interest. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Changes in the Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
36. Assume the Fed has complete control over the money supply. If the demand for money were less than the supply of money, we would expect
a. | an increase in the quantity of money demanded and a decline in the rate of interest. |
b. | a decrease in the quantity of money demanded and an increase in the rate of interest. |
c. | a decrease in the quantity of money supplied, a decrease in the quantity of money demanded, and an increase in the rate of interest. |
d. | a decrease in the quantity of money demanded and a decrease in the rate of interest. |
e. | an increase in the quantity of money supplied, a decrease in the quantity of money demanded, and an increase in the rate of interest. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Changes in the Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
37. If the Fed has fixed the interest rate,
a. | it must conduct open market sales when money demand increases. |
b. | the money demand will not change. |
c. | money supply and money demand will not change. |
d. | it must conduct open market sales when money demand decreases. |
e. | the money supply will not change. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
38. Open market sales will
a. | increase money supply. |
b. | increase money demand. |
c. | decrease money supply. |
d. | decrease money demand. |
e. | decrease money supply and the quantity of money demanded. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
39. The Fed prefers to focus on the interest rate rather than growth in the money supply because
a. | it does not like to conduct open market operations. |
b. | the money supply is too unpredictable. |
c. | it makes inflation more predictable. |
d. | money demand is too volatile. |
e. | it is easier to fix the interest rate than maintain growth in the money supply. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
40. Throughout history, higher money growth has been associated with
a. | disinflation. |
b. | stable economic growth. |
c. | deflation. |
d. | higher inflation. |
e. | longer economic expansions. |
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Money and Inflation
MSC: Bloom's: Knowledge | AACSB: Analytic
41. The policy by which the central bank keeps the growth of the money supply constant is referred to as
a. | constant money growth rule. |
b. | constant interest rate rule. |
c. | constant money demand rule. |
d. | Taylor rule. |
e. | Fisher rule. |
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Constant Money Growth Rule
MSC: Bloom's: Knowledge
42. A constant money growth rule
a. | leads to higher inflation. |
b. | keeps interest rates stable. |
c. | prevents the demand for money from shifting. |
d. | does not work well because the demand for money is too volatile. |
e. | works better than an interest rate rule because the demand for money is too volatile. |
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Constant Money Growth Rule
MSC: Bloom's: Analysis | AACSB: Analytic
/
43. The interest rate is the opportunity cost of holding money.
Moderate
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Central Bank Independence
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
44. The Fed changes the federal funds rate by
a. | directing banks to charge each other a new rate. |
b. | asking banks to charge each other a new rate. |
c. | asking Congress to make the change. |
d. | increasing or decreasing the supply of reserves in the overnight market. |
e. | directing banks to charge consumers a new rate. |
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Federal Funds Rate
MSC: Bloom's: Knowledge
45. The main instrument of monetary policy at central banks around the world is the
a. | money supply. |
b. | overnight interest rate. |
c. | discount rate. |
d. | prime rate. |
e. | reserve requirement. |
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Federal Funds Rate
MSC: Bloom's: Knowledge
/
46. If money demand increases, wealth must have increased.
Basic
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Money
MSC: Bloom's: Knowledge
47. If the interest rate on bank CDs increases, the opportunity cost of holding money increases.
Basic
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Demand for Money
MSC: Bloom's: Knowledge
48. There is a positive relationship between interest rates and the money supply.
Basic
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Interest Rates and Money Supply
MSC: Bloom's: Knowledge
49. The money demand curve does not tend to move around much.
Basic
OBJ: factual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Money Demand Curve
MSC: Bloom's: Knowledge
50. If money demand is very volatile, the preferred policy is to target the interest rate instead of the money supply.
Moderate
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
51. Explain why the interest rate is the opportunity cost of holding money.
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Demand for Money
MSC: Bloom's: Knowledge
52. If the Fed wants to fix the interest rate, how does it guarantee that money demand will equal money supply?
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
53. The Fed can fix the interest rate or the money supply, but not both at the same time. Please explain.
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
54. Given that the money demand function is not stable, why does the Fed think it is best to fix interest rates instead of growth in the money supply?
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
55. Use a supply and demand for money diagram to show why, if the Fed is interested in lowering the federal funds rate by a certain amount, the interest sensitivity of the demand for money function will determine the extent of the open market operation, that is, by how much the money supply will have to increase.
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Changes in the Federal Funds Rate
MSC: Bloom's: Analysis | AACSB: Analytic
56. Assuming everything else held constant, suppose there is an increase in the demand for money.
(A) | Use a supply and demand diagram to show what will happen to the equilibrium interest rate if the supply of money is fixed. |
(B) | If there was an increase in money demand and the interest rate was fixed, what would happen to the money supply? Explain how the change in money supply would come about. |
(A) | As shown in the figure below, the increase in the demand for money from Md1 to Md2 causes the equilibrium interest rate to increase from R1 to R2. Since the supply of money is vertical, there is no change in the equilibrium money supply. |
| |
(B) | The money supply would have to increase. See the figure below. The Fed would need to conduct open market purchases. |
|
OBJ: conceptual
SEC: 2. Money Demand and Zero Interest Rate
TOP: Changes in the Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
57. A situation in which further increases in the money supply (liquidity) do not lower interest rates is known as
a. | a liquidity trap. |
b. | an asymptotic limit. |
c. | credit crunch. |
d. | a Fed's failure. |
e. | None of these. |
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Knowledge
58. What is a liquidity trap?
a. | A situation in which banks stop lending to one another. |
b. | A situation in which further increases in the money supply result in smaller reductions in the interest rate until the interest rate approaches zero. |
c. | A situation in which the Fed no longer has the capacity to provide liquidity to the system. |
d. | A situation in which the interest rate gets so high that consumers and companies no longer can afford to obtain credit. |
e. | None of these. |
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Knowledge
59. A situation in which a zero interest rate has been reached, and yet the Fed continues to increase the money supply by increasing reserves, is known as
a. | a liquidity trap. |
b. | an asymptotic limit. |
c. | quantitative easing. |
d. | a liquidity expansion. |
e. | None of these. |
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Knowledge
60. Because it emphasizes the fact that the process involves the purchase of certain types of private securities, the Fed uses the following related term to refer to quantitative easing.
a. | A liquidity trap. |
b. | Credit easing. |
c. | Zero interest measures. |
d. | Liquidity easing. |
e. | None of these. |
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Quantitative Easing
MSC: Bloom's: Knowledge
61. Quantitative easing refers to the change in
a. | interest rates. |
b. | the amount of money supply. |
c. | stock prices. |
d. | the number of loans instead of their sizes. |
e. | None of these. |
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Quantitative Easing
MSC: Bloom's: Knowledge
62. Quantitative easing increases all the following except
a. | interest rates. |
b. | reserves. |
c. | the monetary base. |
d. | the money supply. |
e. | the size of the Fed’s balance sheet. |
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Quantitative Easing
MSC: Bloom's: Knowledge | AACSB: Analytic
63. In 2009, QE1 involved
a. | cutting some interest rates to below zero. |
b. | the bailing out of major banks. |
c. | the federal government’s increased spending and tax cuts. |
d. | the Fed’s purchase of mortgage backed and long-term government securities. |
e. | no action. |
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Quantitative Easing
MSC: Bloom's: Knowledge | AACSB: Analytic
64. Quantitative easing in 2009 and 2010 was criticized for its likely effect on
a. | bringing down GDP growth. |
b. | raising the unemployment rate further. |
c. | causing high inflation. |
d. | raising the value of the U.S. dollar against other currencies. |
e. | lowering interest rates further. |
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Quantitative Easing
MSC: Bloom's: Knowledge | AACSB: Analytic
/
65. A situation in which the interest rate gets so high that consumers and companies no longer can afford to obtain credit is known as a liquidity trap.
Basic
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Knowledge
66. The nominal interest rate in the economy cannot go below zero, so at some point increases in reserves will stop lowering the interest rate.
Moderate
OBJ: factual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
67. A liquidity trap is a situation in which further increases in the money supply result in smaller reductions in the interest rate until the interest rate approaches zero.
Basic
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Knowledge
68. Nominal interest rates sometimes go negative.
Basic
OBJ: conceptual | factual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Knowledge
69. The interest rate effectively hit zero in the U.S. in December 2008.
Moderate
OBJ: factual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
70. Once a zero interest rate has been reached, even though continuing to increase the money supply will not lower the interest rate, the process can stimulate the economy.
Basic
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Knowledge
71. Quantitative easing is one way to stimulate the economy when the interest rate hits zero.
Basic
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Quantitative Easing
MSC: Bloom's: Knowledge
72. QE2 occurred in 2007 to bail out major U.S. banks.
Basic
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Quantitative Easing
MSC: Bloom's: Knowledge
73. The policy of quantitative easing aims at reducing the interest rate.
Basic
OBJ: conceptual
SEC: 3. When the Interest Rate Hits Zero
TOP: Quantitative Easing
MSC: Bloom's: Knowledge
Short Answer
74. Explain why interest rates cannot go negative.
OBJ: conceptual | factual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
75. Explain the controversy surrounding the effectiveness of quantitative easing.
OBJ: conceptual | factual
SEC: 3. When the Interest Rate Hits Zero
TOP: Zero Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
76. Which of the following statements best describes what it means for the Fed to manage aggregate demand?
a. | If real and potential GDP were equal, the Fed would change interest rates even if the rate of inflation equaled the target rate of inflation. |
b. | The Fed changes interest rates only if the rate of inflation is deviating from the target rate of inflation. |
c. | If real and potential GDP were not equal, the Fed would change interest rates in order to prevent a deviation between the rate of inflation and the target rate of inflation. |
d. | The Fed changes interest rates only if the rate of inflation is higher than the target rate of inflation. |
e. | If real and potential GDP were not equal, the Fed would change interest rates only in those cases that would prevent the rate of inflation from rising above the target rate of inflation. |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Managing Aggregate Demand
MSC: Bloom's: Analysis | AACSB: Analytic
77. If the inflation rate is equal to the target inflation rate, then the Fed
a. | does not have to change monetary policy as long as the rate of inflation remains constant. |
b. | will only change monetary policy if it wants to change the target inflation rate. |
c. | will change monetary policy if it feels that aggregate demand is too high or low. |
d. | does not have to worry about changing monetary policy. |
e. | will change monetary policy only if it believes that potential GDP is changing. |
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy
MSC: Bloom's: Knowledge
78. The "Goldilocks economy" is one in which
a. | real GDP is below potential GDP. |
b. | real GDP is equal to potential GDP. |
c. | real GDP is equal to potential GDP, and inflation is equal to the target rate. |
d. | inflation is equal to the target rate. |
e. | inflation is lower than the target rate. |
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Goldilocks Economy
MSC: Bloom's: Knowledge
79. Which of the following would cause the Fed to raise interest rates?
a. | An increase in imports |
b. | An increase in consumer confidence |
c. | An increase in saving |
d. | An increase in taxes |
e. | A decrease in exports |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Aggregate Demand Too High
MSC: Bloom's: Knowledge | AACSB: Analytic
80. Which of the following would cause the Fed to raise interest rates even though the rate of inflation is equal to the target rate?
a. | An increase in household wealth |
b. | An increase in potential GDP |
c. | An increase in imports |
d. | A reduction in government purchases |
e. | A reduction in business confidence |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Aggregate Demand Too High
MSC: Bloom's: Analysis | AACSB: Analytic
81. When financial market analysts say that the Fed is "trying to cool off the economy," they are referring to the case in which the Fed
a. | raises the target rate of inflation. |
b. | lowers the target rate of inflation. |
c. | raises the federal funds rate because aggregate demand is greater than potential GDP at the target rate of inflation. |
d. | raises the federal funds rate because aggregate demand is less than potential GDP at the target rate of inflation. |
e. | lowers the federal funds rate because aggregate demand is less than potential at the target rate of inflation. |
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Cooling off the Economy
MSC: Bloom's: Analysis | AACSB: Analytic
82. If the Fed believes that real GDP is above potential GDP, it will
a. | raise interest rates to shift the AD curve to the left and the IA line downward. |
b. | raise interest rates to shift the IA line downward. |
c. | raise interest rates to shift the AD curve to the left. |
d. | lower interest rates to shift the IA line downward. |
e. | lower interest rates to shift the AD curve to the left. |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Aggregate Demand Too High
MSC: Bloom's: Analysis | AACSB: Analytic
83. If the Fed believes that real GDP is below potential GDP, it will
a. | lower interest rates to shift the AD curve to the right and the IA line upward. |
b. | do nothing and wait for the IA line to shift and return real GDP to potential GDP at a lower inflation rate. |
c. | lower interest rates to shift the AD curve to the right. |
d. | lower interest rates to shift the IA line downward. |
e. | lower interest rates to shift the AD curve to the right and the IA line downward. |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Aggregate Demand Too Low
MSC: Bloom's: Analysis | AACSB: Analytic
84. Which of the following would cause the Fed to lower interest rates?
a. | A decrease in taxes |
b. | A decrease in imports |
c. | A decrease in investment |
d. | An increase in wealth |
e. | A decrease in saving |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Aggregate Demand Too Low
MSC: Bloom's: Analysis | AACSB: Analytic
/
85. The Fed conducts monetary policy so as to counteract any positive or negative demand shocks.
Basic
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy
MSC: Bloom's: Knowledge
86. When the actual and target rate of inflation are equal, the Fed will change interest rates only if it wants to change the target rate of inflation.
Moderate
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Managing Aggregate Demand
MSC: Bloom's: Analysis | AACSB: Analytic
87. To "cool off the economy," the Fed will raise interest rates.
Moderate
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Aggregate Demand Too High
MSC: Bloom's: Analysis | AACSB: Analytic
88. If we have a "Goldilocks economy," the Fed will not change monetary policy.
Moderate
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Goldilocks Economy
MSC: Bloom's: Analysis | AACSB: Analytic
89. If the rest of the world falls into a deep recession, the Fed is likely to raise interest rates.
Moderate
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Aggregate Demand Too Low
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
90. If the Fed believes there has been a positive wealth effect, it will want to
a. | raise interest rates to reduce inflationary pressure. |
b. | raise interest rates to reduce prices. |
c. | lower interest rates to increase potential GDP. |
d. | lower interest rates to offset the increase in wealth. |
e. | raise interest rates to encourage saving and investment. |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Wealth Effect
MSC: Bloom's: Analysis | AACSB: Analytic
91. If the Fed is worried about increasing inflation and decides to raise the interest rate, real GDP will
a. | remain above potential GDP if consumption is more responsive to changes in interest rates than the Fed expected. |
b. | come in below potential if potential GDP is higher than the Fed expected. |
c. | come in above potential GDP if some other factor acts to shift the AD curve to the left. |
d. | come in below potential if investment is less responsive to changes in interest rates than the Fed expected. |
e. | quickly return to potential GDP as the AD curve shifts to the left. |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Uncertain Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
92. Which of the following is ?
a. | The Fed can accurately measure real GDP. |
b. | The Fed can accurately measure potential GDP. |
c. | Monetary policy is subject to fewer uncertainties than fiscal policy. |
d. | The Fed can reliably predict the interest responsiveness of consumption and investment. |
e. | The AD-IA model illustrates the various issues the Fed needs to consider when it conducts monetary policy. |
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Uncertain Monetary Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
/
93. In most cases, the Fed can determine whether real and potential GDP are equal.
Moderate
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Uncertain Monetary Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
94. It is easy for the Fed to keep real GDP near potential GDP by varying the interest rate.
Moderate
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Uncertain Monetary Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
95. Monetary policy is subject to fewer "mistakes" than fiscal policy.
Moderate
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Uncertain Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
96. In setting interest rates, the Fed reacts directly to
a. | the output gap. |
b. | the price level. |
c. | the level of potential GDP. |
d. | the level of real GDP. |
e. | the level of investment. |
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy
MSC: Bloom's: Knowledge
97. The Fed's interest rate decisions depend on the level of
a. | investment and the level of inflation. |
b. | investment and the level of potential GDP. |
c. | real GDP and the level of potential GDP. |
d. | potential GDP and the level of inflation. |
e. | inflation and the output gap. |
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy
MSC: Bloom's: Knowledge
Exhibit 27-1
98. According to the data in Exhibit 27-1,
a. | real interest rates are negatively related to inflation. |
b. | real interest rates are negatively related to the gap between real and potential GDP. |
c. | real interest rates and real GDP are positively correlated. |
d. | the Fed does not follow a monetary policy rule. |
e. | the nominal interest rate will rise less than inflation. |
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy Rule
MSC: Bloom's: Application | AACSB: Analytic
99. Exhibit 27-1 is an example of
a. | how real GDP reacts to changes in the interest rate. |
b. | an aggregate demand curve. |
c. | how potential GDP reacts to changes in inflation. |
d. | the Fed's monetary policy rule. |
e. | how real GDP reacts to changes in inflation. |
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
100. According to the data in Exhibit 27-1, if the gap between real GDP and potential GDP is 1 percent and inflation is 5 percent, the Fed will set the real interest rate at
a. | 10 percent. |
b. | 2 percent. |
c. | 11 percent. |
d. | 8 percent. |
e. | 9 percent. |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge
101. Suppose the Fed decides to increase the real interest rate. According to the data in Exhibit 27-1,
a. | the gap between real and potential GDP must be increasing. |
b. | inflation must be increasing. |
c. | inflation must be constant, and the gap between real and potential GDP must be increasing. |
d. | inflation must be increasing or the gap between real and potential GDP must be increasing. |
e. | inflation must be increasing, and the gap between real and potential GDP must be increasing. |
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
/
102. The Fed's monetary policy rule is more than just a simple relationship between inflation and interest rates.
Basic
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge
103. The Fed's monetary policy responds mainly to changes in inflation.
Moderate
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
104. An increase in the output gap will shift the monetary policy rule line to the right.
Moderate
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
105. Describe the Goldilocks economy. If we are experiencing a Goldilocks economy, what is happening to interest rates?
OBJ: factual
SEC: 4. The Economic Fluctuations Model
TOP: Goldilocks Economy
MSC: Bloom's: Analysis | AACSB: Analytic
106. If the Fed wants to cool off the economy, how will it adjust its monetary policy?
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Cooling off the Economy
MSC: Bloom's: Analysis | AACSB: Analytic
107. Describe the relationship between demand shocks and monetary policy.
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Demand Shocks and Monetary Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
108. Explain why the Fed adjusts monetary policy in response to both inflation and the output gap.
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
109. If the Fed thinks there has been a positive wealth effect, what sort of change in monetary policy would it be likely to make? What happens if it does not make the change? Illustrate both cases graphically.
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Wealth Effect
MSC: Bloom's: Analysis | AACSB: Analytic
110. In the past, the Fed has been criticized for increasing interest rates even though the rate of inflation was not rising at the time of the rate increase. Were the Fed's critics correct?
OBJ: conceptual
SEC: 4. The Economic Fluctuations Model
TOP: Reaction to the GDP Gap
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
111. The most important feature of a central bank is
a. | the size of the money supply it controls. |
b. | its ability to set fiscal policy. |
c. | its operating budget. |
d. | its independence from government. |
e. | its net worth. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Knowledge
112. The main rationale for central bank independence is that
a. | otherwise it would be hard to attract competent people to work for the central bank. |
b. | if the central bank were not independent, the government would be too bureaucratic. |
c. | in counties like the United States, this independence helps reduce the conflict between state and federal government. |
d. | this independence prevents the government from engaging in policies that, though beneficial in the short run, are harmful in the long run. |
e. | politicians find monetary policy too boring. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Knowledge
113. Which of the following statements is ?
a. | The Federal Reserve is less independent than the Bank of England or the Bank of Japan. |
b. | Each president has the right to appoint all the Federal Reserve officials. |
c. | The Federal Reserve seldom conducts policy concerned with long-run stability. |
d. | The Treasury supervises Federal Reserve activities. |
e. | The Federal Reserve can prevent the government from using monetary policy for short-run political gain. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Knowledge
114. Who was the chairperson of the Federal Reserve Board from 1987 to 2006?
a. | Arthur Burns |
b. | G. William Miller |
c. | Paul Volcker |
d. | Alan Greenspan |
e. | Ben Bernanke |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Fed
MSC: Bloom's: Knowledge
115. Who is the current chairperson of the Federal Reserve Board?
a. | Tim Geithner |
b. | Paul Volcker |
c. | Alan Greenspan |
d. | George Soros |
e. | Janet Yellen |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Fed
MSC: Bloom's: Knowledge
/
116. Fed officials are appointed to long terms that may span several different presidents.
Moderate
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Central Bank Independence
MSC: Bloom's: Knowledge | AACSB: Analytic
117. The Federal Reserve must have Congress approve its monetary policy decisions.
Moderate
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Central Bank Independence
MSC: Bloom's: Knowledge | AACSB: Analytic
118. The Federal Reserve System is part of the Department of the Treasury.
Basic
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Central Bank Independence
MSC: Bloom's: Knowledge
119. The current chairperson of the Federal Reserve Board (Fed) is Alan Greenspan.
Basic
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Fed
MSC: Bloom's: Knowledge
120. Some economists have argued that the recent financial crisis has forced the world's central banks to surrender some of their independence.
Basic
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Knowledge
Multiple Choice
121. Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the long run we would expect
a. | a higher real rate of interest. |
b. | lower real interest rates. |
c. | no change in the real rate of interest. |
d. | a decline in unemployment. |
e. | a decline in potential GDP. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Increase in the Growth Rate of the Money Supply
MSC: Bloom's: Analysis | AACSB: Analytic
122. Suppose real and potential GDP are initially equal. If the Fed increases the target inflation rate, then in the short run we would expect
a. | a decrease in the rate of inflation. |
b. | an increase in the rate of inflation. |
c. | a higher real rate of interest. |
d. | lower unemployment. |
e. | a higher nominal interest rate. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Increase in the Growth Rate of the Money Supply
MSC: Bloom's: Knowledge
123. The Phillips curve reflects
a. | positive correlation between the inflation rate and the unemployment rate. |
b. | negative correlation between the inflation rate and the unemployment rate. |
c. | positive correlation between the inflation rate and the exchange rate. |
d. | negative correlation between the inflation rate and government spending. |
e. | positive correlation between interest rates and the unemployment rate. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Knowledge
124. If Congress controlled central bank decisions, it would have
a. | a short-run incentive to lower the target rate of inflation. |
b. | no political incentive to adjust the target rate of inflation in the short run. |
c. | a long-run incentive to lower the target rate of inflation. |
d. | a long-run incentive to raise the target rate of inflation. |
e. | a short-run incentive to raise the target rate of inflation. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Analysis | AACSB: Analytic
125. A central bank increases its inflation target when real and potential GDP are equal if it
a. | wants to avoid a political business cycle. |
b. | succumbs to political pressure to stimulate the economy. |
c. | wants to raise the rate of inflation in the long run. |
d. | is more concerned with long-run stability than short-run gain. |
e. | wants to lower the rate of inflation in the long run. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Analysis | AACSB: Analytic
126. If prices and wages were perfectly flexible and Congress had control over central bank decisions, Congress would have
a. | no political incentive to adjust the target rate of inflation. |
b. | a long-run incentive to lower the target rate of inflation. |
c. | a short-run incentive to raise the target rate of inflation. |
d. | a short-run incentive to lower the target rate of inflation. |
e. | a long-run incentive to raise the target rate of inflation. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Analysis | AACSB: Analytic
127. The negative correlation between inflation and unemployment is called the
a. | fiscal policy curve. |
b. | monetary policy curve. |
c. | Phillips curve. |
d. | Greenspan curve. |
e. | economic fluctuations curve. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Knowledge
128. The negative correlation between inflation and unemployment is observed because
a. | a rightward shift of the AD curve will raise unemployment in the long run and decrease inflation in the short run. |
b. | a rightward shift of the AD curve will raise unemployment in the short run and decrease inflation in the long run. |
c. | a rightward shift of the AD curve will reduce unemployment in the long run and increase inflation in the short run. |
d. | a rightward shift of the AD curve will reduce unemployment in the short run and increase inflation in the long run. |
e. | a leftward shift the AD curve will increase potential GDP and reduce inflation in the short run. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
129. Which of the following statements about the Phillips curve is not ?
a. | It bears its name because of A.W. Phillips, a British economist who first showed that such a correlation existed. |
b. | It was originally shown to exist in British data from 1861 to 1957. |
c. | The Phillips curve was used in the 1960s and 1970s to justify a monetary policy that included higher inflation. |
d. | It reflects a negative correlation between the unemployment rate and the inflation rate. |
e. | All of these are true. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
130. The AD-AI analysis in conjunction with the Phillips curve relationship shows that
a. | it is impossible to trade higher inflation for lower unemployment in the short run. |
b. | there is no long-run gain from expansionary monetary policy. |
c. | inflation and unemployment are positively correlated in the long run. |
d. | it is possible to trade lower inflation for higher unemployment in the long run. |
e. | there is no short-run gain from expansionary monetary policy. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
131. There is no long-run tradeoff between inflation and unemployment because
a. | the aggregate demand curve always shifts back to its baseline position. |
b. | inflation always returns to the baseline level. |
c. | unemployment always returns to the natural rate. |
d. | the Federal Reserve does not allow such a tradeoff. |
e. | potential GDP declines as the rate of inflation increases. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
132. The fact that the average unemployment rate during the 1950s and early 1960s was roughly the same as the average unemployment rate during the late 1960s and 1970s, which was roughly the same as the average unemployment rate during the 1980s and 1990s, shows that
a. | there is not even a short-run tradeoff between unemployment and inflation. |
b. | it is also possible for there to be a long-run tradeoff between inflation and unemployment. |
c. | there are many issues that the AD-IA analysis cannot address. |
d. | it is possible to have high inflation monetary policy without long-run pain. |
e. | there is no long-run tradeoff between inflation and unemployment. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
133. The hypothesis of political business cycles asserts that
a. | politicians can produce a favorable short-run tradeoff between inflation and unemployment to improve their chances of reelection. |
b. | economic expansions and contractions are functions of congressional support for the president's economic policy. |
c. | political popularity is not a function of the business cycle. |
d. | an economic recession takes place before every national election. |
e. | political manipulation of the business cycle is an effective way to increase permanent economic growth. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Political Business Cycle
MSC: Bloom's: Knowledge
134. An increase in real GDP shortly before a presidential election could signal the start of
a. | a political business cycle. |
b. | an economy-wide supply shock. |
c. | a real business cycle. |
d. | a permanent reduction in the inflation rate. |
e. | long-term economic growth. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Political Business Cycle
MSC: Bloom's: Knowledge
135. Which of the following statements is ?
a. | The 1992 presidential election is an example of a political business cycle. |
b. | The 1980 presidential election is a classic example of a political business cycle. |
c. | The political business cycle has occurred regularly over the past 20 years. |
d. | Based on presidential elections in 1980 and 1992, there is no longer strong evidence supporting the existence of a political business cycle. |
e. | Since 1950, there has not been any evidence of a political business cycle. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Political Business Cycle
MSC: Bloom's: Knowledge | AACSB: Analytic
136. The situation in which policymakers have the incentive to announce one economic policy but then change that policy after citizens have acted on the initial state policy is known as
a. | presidential politics. |
b. | liar's syndrome. |
c. | foregone credibility. |
d. | time inconsistency. |
e. | finesse reporting. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Time Inconsistency
MSC: Bloom's: Knowledge
137. Time inconsistency arises when the government
a. | does not explicitly state its long-term goals. |
b. | does not know how to achieve its long-term goals. |
c. | is willing to deviate from its long-term goals for the sake of short-run gain. |
d. | often changes its long-term goals. |
e. | adheres to its long-term goals. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Time Inconsistency
MSC: Bloom's: Knowledge
138. Which of the following gives the Fed a credibility problem?
a. | Ricardian equivalence |
b. | Sticky prices |
c. | Rational expectations |
d. | Disinflation |
e. | Time inconsistency |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Time Inconsistency
MSC: Bloom's: Knowledge
139. If the public believes the government's claim that it will pursue low inflation policies, and the government then turns around and adopts an expansionary policy, then
a. | the IA line will shift up before the AD curve shifts right. |
b. | the IA line will shift up after the AD curve shifts right. |
c. | the IA line will shift down before the AD curve shifts right. |
d. | the IA line will shift down after the AD curve shifts right. |
e. | real GDP will not increase. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Time Inconsistency
MSC: Bloom's: Analysis | AACSB: Analytic
140. If the public does not believe the government's claim that it will pursue low inflation policies, and the government then goes ahead and adopts an expansionary policy as the public expected, then
a. | the IA line will shift up after the AD curve shifts right. |
b. | the IA line will shift down after the AD curve shifts right. |
c. | real GDP will increase. |
d. | the IA line will shift up before the AD curve shifts right. |
e. | the IA line will shift down before the AD curve shifts right. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Time Inconsistency
MSC: Bloom's: Analysis | AACSB: Analytic
/
141. There is a tradeoff between inflation and unemployment in the medium run only.
Moderate
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
142. Data from the U.S. economy in the 1960s and 1970s support a long-run tradeoff between inflation and unemployment, whereas data from the 1980s and 1990s do not support such a tradeoff.
Moderate
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
143. The low unemployment rate in the late 1990s resulted in high rates of inflation.
Basic
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Knowledge
144. The Phillips curve reflects a positive relationship between inflation and unemployment.
Basic
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Knowledge
145. If prices and wages are perfectly flexible, there is never any tradeoff between inflation and unemployment.
Challenging
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
146. The Phillips curve reflects a positive correlation between inflation and unemployment.
Basic
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Knowledge
147. The original Phillips curve argued that there was a long-run tradeoff between inflation and unemployment.
Challenging
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
148. Because of its devastating effects, the temptation to use monetary policy for short-run gain is easy to resist for governments around the world.
Basic
OBJ: conceptual | factual
SEC: 5. Central Bank Independence
TOP: Time Inconsistency
MSC: Bloom's: Knowledge
Multiple Choice
149. Which of the following statements is ?
a. | Central bank independence guarantees that central banks won't make more mistakes than they would if they were not independent. |
b. | Central bank independence guarantees that the central bank will always pursue price stability. |
c. | Independent central banks do not need to be held accountable for their actions. |
d. | Central bank independence can be taken too far. |
e. | Central banks should pursue the goal of price stability at all costs. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Disadvantages of Central Bank Independence
MSC: Bloom's: Knowledge
150. Which of the following best explains why independent central banks need to be held accountable?
a. | Central banks are used to serving politicians. |
b. | They would not otherwise be able to pursue the goal of price stability. |
c. | Central bank independence can be taken too far. |
d. | Central banks are prone to causing political business cycles. |
e. | Central banks do not understand political issues. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Disadvantages of Central Bank Independence
MSC: Bloom's: Knowledge
151. On the issue of central bank independence, evidence shows that
a. | there is no correlation between average rates of inflation and central bank independence. |
b. | countries with lower average rates of inflation have more frequent recessions. |
c. | countries with lower average rates of inflation have less independent central banks. |
d. | countries with lower rates of inflation have more effective fiscal policy. |
e. | countries with lower average rates of inflation have more independent central banks. |
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Knowledge
/
152. Central bank independence guarantees that there will be no monetary policy mistakes.
Basic
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Knowledge
153. The Central Bank of New Zealand has lost its independence in the last three decades.
Moderate
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Central Bank Independence
MSC: Bloom's: Knowledge | AACSB: Analytic
154. When central banks are independent of government, they are no longer accountable for their actions.
Basic
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Independence
MSC: Bloom's: Knowledge
Short Answer
155. How does the institutional setup of the Federal Reserve contribute to its independence?
OBJ: factual
SEC: 5. Central Bank Independence
TOP: Fed Independence
MSC: Bloom's: Knowledge | AACSB: Analytic
156. What is the economic justification for an independent central bank?
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Central Bank Independence
MSC: Bloom's: Knowledge
157. Explain why there is a tradeoff between inflation and unemployment in the medium run.
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
158. Explain why there is no tradeoff between inflation and unemployment in the short run or the long run.
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Analysis | AACSB: Analytic
159. What does the Phillips curve measure?
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Phillips Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
160. Describe the "gain then pain" scenario whereby the Fed raises the target inflation rate. Identify the short-run, medium-run, and long-run effects.
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Gain then Pain
MSC: Bloom's: Analysis | AACSB: Analytic
161. Explain how the facts justify the conclusion implied by the AD-IA analysis: There is no long-run tradeoff between inflation and unemployment.
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Gain then Pain
MSC: Bloom's: Knowledge | AACSB: Analytic
162. The table below shows the percentage difference between real and potential GDP and the rate of inflation for the years 1999 through 2003. If there were a presidential election in the year 2000, would these data support the view that there was a political business cycle during this period?
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Political Business Cycle
MSC: Bloom's: Analysis | AACSB: Analytic
163. The table shows the percentage difference between real and potential GDP and the rate of inflation for the years 2006 through 2015. If there was a presidential election in the year 2007, would these data support the view that there was a political business cycle during this period?
Year | Percentage Difference Between Real and Potential GDP | Inflation Rate |
2006 | 0.3% | 3.2% |
2007 | 0.2% | 2.9% |
2008 | -1.8% | 3.8% |
2009 | -6.2% | -0.3% |
2010 | -4.6% | 1.6% |
2011 | -4.0% | 3.1% |
2012 | -3.0% | 2.1% |
2013 | -2.9% | 1.5% |
2014 | -2.1% | 1.6% |
2015 | -1.2% | 0.1% |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Political Business Cycle
MSC: Bloom's: Analysis | AACSB: Analytic
164. Explain why independent central banks need to be held accountable.
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Holding Central Banks Accountable
MSC: Bloom's: Analysis | AACSB: Analytic
165. Suppose Congress had the power to set monetary policy instead of the Federal Reserve. Do you think we might more frequently observe the "short-run gain, long-run pain" scenario? Please explain.
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Central Bank Independence
MSC: Bloom's: Analysis | AACSB: Analytic
166. Between 1942 and 1951, the Federal Reserve, in order to help the United States Treasury cheaply finance World War II, maintained the interest rate on long-term government bonds at 2.5 percent. Between 1950 and 1951, the consumer price index rose by 8 percent because of the Korean War. Explain why this event resulted in a conflict between the Federal Reserve and the United States Treasury.
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Central Bank Independence
MSC: Bloom's: Analysis | AACSB: Analytic
167. Describe in detail how the Fed takes action to lower the federal funds rate. If money demand is fixed, what happens to money supply?
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Open Market Operation
MSC: Bloom's: Analysis | AACSB: Analytic
168. Is the interest rate on the federal funds market, the federal funds rate, regulated by the Federal Reserve? Is the discount rate? Explain.
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Discount Rate
MSC: Bloom's: Analysis | AACSB: Analytic
169. Answer the questions below:
(A) | Explain how each of the following would affect the money demand function: | |
1. | An increase in the cost of living | |
2. | Financial innovations that make it possible to write checks against saving and money market accounts | |
3. | Financial innovations that make it possible to electronically pay bills out of saving and money market accounts | |
4. | The December holiday season | |
(B) | If the Fed maintains constant growth of the money supply, what happens to interest rates as the money demand function moves around? | |
(C) | Given that the money demand function tends to move around, is it better policy to maintain constant growth of the money supply or a constant level of interest rates? | |
(A) | Money demand will shift right, shift left, shift left, and shift right. |
(B) | The interest rate moves up when money demand shifts right and moves down when money demand shifts left. |
(C) | A constant level of interest rates. All of the up-and-down movements in interest rates can add to the level of uncertainty in the economy and can make economic fluctuations greater and more frequent. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Money Demand
MSC: Bloom's: Analysis | AACSB: Analytic
170. Answer the questions below:
(A) | What are the advantages of the Fed increasing interest rates when the GDP gap is positive? |
(B) | What are the disadvantages of the Fed increasing interest rates when it believes the GDP gap is positive? |
(A) | Raising interest rates enables the Fed to shift the AD curve back so that real and potential GDP are equal. This will reduce the length of economic fluctuations and prevent increases in inflation associated with rightward shifts of the AD curve. |
(B) | The disadvantage of the Fed actively adjusting interest rates based on its belief about the GDP gap is that it may be wrong. If it increases interest rates in response to what it believes is a positive GDP gap, and there really is not a positive GDP gap, it could cause a recession. The success of the Fed's policy also depends on an accurate prediction of the interest responsiveness of investment, consumption, and net exports, which may be difficult to predict. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge | AACSB: Analytic
171. Suppose a country is experiencing a deflation while real GDP is below potential GDP.
(A) | If the country's central bank decides it wants to reinflate the economy, what type of policy should it pursue? |
(B) | Suppose this policy is enacted. What will happen to the real interest rate and investment when the economy returns to potential? |
(C) | Suppose the central bank decides not to reinflate the economy, and the economy eventually returns to potential GDP. How will the long-run equilibrium values for the real interest rate and investment differ from your answer in (B)? |
(A) | The central bank should engage in expansionary monetary policy. This means there will be a lower interest rate for any given rate of inflation (or deflation). |
(B) | Compared to where the economy was before the policy change, both the nominal and real interest rates will fall and investment spending will be higher when the economy returns to potential. |
(C) | There will be no difference. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
172. Answer the questions below:
(A) | What should the Fed do if inflation is at the target rate and the GDP gap is positive? Explain using an aggregate demand inflation diagram. |
(B) | What should the Fed do if inflation is below the target rate and the GDP gap is positive? Explain using an aggregate demand inflation model. |
(A) | The Fed should increase the interest rate and shift the AD curve to the left. In theory, this will return real GDP to potential with no change in inflation. |
(B) | Nothing. Real GDP will eventually return to potential, and inflation will be higher as the IA line shifts up. This assumes that the LR prediction for inflation is about equal to the target rate. |
OBJ: conceptual
SEC: 5. Central Bank Independence
TOP: GDP Gap
MSC: Bloom's: Analysis | AACSB: Analytic
173. Suppose the economy is in a boom in which real GDP is greater than potential GDP. The rate of inflation, however, remains at the target level set by the Fed. Suppose that financial markets are convinced that higher inflation is imminent and, in agreement, the Fed decides to increase interest rates.
(A) | Illustrate the change in Fed policy with a monetary policy rule diagram. |
(B) | Show, using the aggregate demand curve and an inflation adjustment line, the short-run, medium-run, and long-run effect of the Fed's policy. |
(A) | The preemptive move is shown by the monetary policy rule line shifting up in the diagram below. |
| |
(B) | The preemptive move means that the Fed, in effect, switches to a lower inflation target. As shown in the diagram below, the AD curve in turn shifts left. If the Fed is able to engineer the interest rate increase by the correct amount, the only effect will be the short-run effect, the leftward shift of the AD curve. |
|
a. | allocate different currencies to European member nations. |
b. | adopt a common currency for its member nations. |
c. | implement a flexible exchange rate policy for member nations. |
d. | implement restrictive trade policy for non-member nations. |
e. | implement a fixed exchange rate with the United States. |
OBJ: factual
SEC: 6. The Exchange Rate
TOP: EMU
MSC: Bloom's: Knowledge
175. If a small country, such as Argentina, attempts to fix its currency exchange rate with the United States,
a. | its inflation rate must be higher than the U.S. inflation rate. |
b. | its interest rates will move together with the U.S. interest rates. |
c. | its currency value relative to the U.S. dollar will fluctuate over time. |
d. | its central bank will have full flexibility in monetary policy actions. |
e. | it must restrict the flow of funds with the United States. |
OBJ: conceptual
SEC: 6. The Exchange Rate
TOP: Exchange Rate Policy
MSC: Bloom's: Analysis | AACSB: Analytic
176. Exchange market interventions involve
a. | fixing the exchange rate through purchases and sales of currency. |
b. | fixing the prices of goods in the domestic markets. |
c. | fixing the prices of goods imported from foreign countries. |
d. | imposing a tariff on all foreign imports. |
e. | allowing the currency exchange rate to be determined by the foreign exchange markets. |
OBJ: factual
SEC: 6. The Exchange Rate
TOP: Exchange Rate Policy
MSC: Bloom's: Knowledge
177. If the British government intends to raise the value of the British pound, it should
a. | sell pounds in the foreign exchange markets. |
b. | buy pounds in the foreign exchange markets. |
c. | buy pounds in one foreign exchange market and then sell those pounds in another foreign exchange market. |
d. | buy foreign currencies, such as the euro, in the foreign exchange markets. |
e. | lower the British interest rates. |
OBJ: conceptual
SEC: 6. The Exchange Rate
TOP: Exchange Rate Policy
MSC: Bloom's: Analysis | AACSB: Analytic
/
178. The Bretton Woods system from the end of World War II until the early 1970s was an example of a fixed exchange rate system.
Basic
OBJ: factual
SEC: 6. The Exchange Rate
TOP: Exchange Rate Policy
MSC: Bloom's: Knowledge
179. The Eurozone is a flexible exchange rate system.
Basic
OBJ: factual
SEC: 6. The Exchange Rate
TOP: Eurozone
MSC: Bloom's: Knowledge
180. Countries with fixed exchange rates will have their interest rates moving in the same direction.
Basic
OBJ: factual
SEC: 6. The Exchange Rate
TOP: Exchange Rate Policy
MSC: Bloom's: Knowledge