Question 1

If the Fed wants to cool off the economy,how will it adjust its monetary policy?

Accepted Answer

Interest rates will increase i...

Question 2

The "Goldilocks economy" is one in which

Accepted Answer

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.

Question 3

If money demand is very volatile,the preferred policy is to target the interest rate instead of the money supply.

Accepted Answer

A) True 
 B)False

Question 4

The interest rate effectively hit zero in the U.S.in December 2008.

Accepted Answer

A) True 
 B)False

Question 5

Suppose real and potential GDP are initially equal.If the Fed increases the target inflation rate,then in the long run we would expect

Accepted Answer

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.

Question 6

Explain why there is no tradeoff between inflation and unemployment in the short run or the long run.

Accepted Answer

In the short run,inflation doe...

Question 7

When the rate of interest increases,

Accepted Answer

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.

Question 8

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.

Accepted Answer

The Federal Reserve was interested in ma...

Question 9

Exhibit 27-1 
-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

Accepted Answer

A)  10 percent.
B)  2 percent.
C)  11 percent.
D)  8 percent.
E)  9 percent.

Question 10

If prices and wages are perfectly flexible,there is never any tradeoff between inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 11

If the interest rate on bank CDs increases,the opportunity cost of holding money increases.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

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.

Question 13

Explain why interest rates cannot go negative.

Accepted Answer

Because a negative interest rate would m...

Question 14

What is a liquidity trap?

Accepted Answer

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.

Question 15

Describe the "gain then pain" scenario whereby the Fed raises the target inflation rate.Identify the short-run,medium-run,and long-run effects.

Accepted Answer

If the Fed raises the target inflation r...

Question 16

Exhibit 27-1 
-According to the data in Exhibit 27-1,

Accepted Answer

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.

Question 17

A line depicting the relationship between the quantity of money demanded and the interest rate is

Accepted Answer

A)  negatively sloped.
B)  positively sloped.
C)  horizontal.
D)  vertical.
E)  horizontal at high interest rates and vertical at low interest rates.

Question 18

Explain how the facts justify the conclusion implied by the AD-IA analysis: There is no long-run tradeoff between inflation and unemployment.

Accepted Answer

The facts justify this conclusion.In the...

Question 19

Explain the controversy surrounding the effectiveness of quantitative easing.

Accepted Answer

In quantitative easing the emphasis is o...

Question 20

In setting interest rates,the Fed reacts directly to

Accepted Answer

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.

Exam 27: Monetary Policy

Explain how the facts justify the conclusion implied by the AD-IA analysis: There is no long-run tradeoff between inflation and unemployment.

Correct Answer
verified
The facts justify this conclusion.In the...
View Answer

In setting interest rates,the Fed reacts directly to

Correct Answer
verified

If prices and wages are perfectly flexible,there is never any tradeoff between inflation and unemployment.

Correct Answer
verified

Exhibit 27-1 -According to the data in Exhibit 27-1,

Correct Answer
verified

Exhibit 27-1 -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

Correct Answer
verified

Explain why interest rates cannot go negative.

Correct Answer
verified
Because a negative interest rate would m...
View Answer

Explain the controversy surrounding the effectiveness of quantitative easing.

Correct Answer
verified
In quantitative easing the emphasis is o...
View Answer

Explain why there is no tradeoff between inflation and unemployment in the short run or the long run.

Correct Answer
verified
In the short run,inflation doe...
View Answer

If money demand is very volatile,the preferred policy is to target the interest rate instead of the money supply.

Correct Answer
verified

Correct Answer
verified
The Federal Reserve was interested in ma...
View Answer

When the rate of interest increases,

Correct Answer
verified

If the interest rate on bank CDs increases,the opportunity cost of holding money increases.

Correct Answer
verified

The interest rate effectively hit zero in the U.S.in December 2008.

Correct Answer
verified

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

Correct Answer
verified

A line depicting the relationship between the quantity of money demanded and the interest rate is

Correct Answer
verified

Describe the "gain then pain" scenario whereby the Fed raises the target inflation rate.Identify the short-run,medium-run,and long-run effects.

Correct Answer
verified
If the Fed raises the target inflation r...
View Answer

The "Goldilocks economy" is one in which

Correct Answer
verified

What is a liquidity trap?

Correct Answer
verified

Suppose real and potential GDP are initially equal.If the Fed increases the target inflation rate,then in the long run we would expect

Correct Answer
verified

If the Fed wants to cool off the economy,how will it adjust its monetary policy?

Correct Answer
verified
Interest rates will increase i...
View Answer

Exam 27: Monetary Policy

Explain how the facts justify the conclusion implied by the AD-IA analysis: There is no long-run tradeoff between inflation and unemployment.

Correct AnswerverifiedThe facts justify this conclusion.In the...View AnswerShow Answer

In setting interest rates,the Fed reacts directly to

Correct AnswerverifiedShow Answer

If prices and wages are perfectly flexible,there is never any tradeoff between inflation and unemployment.

Correct AnswerverifiedShow Answer

Exhibit 27-1 -According to the data in Exhibit 27-1,

Correct AnswerverifiedShow Answer

Exhibit 27-1 -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

Correct AnswerverifiedShow Answer

Explain why interest rates cannot go negative.

Correct AnswerverifiedBecause a negative interest rate would m...View AnswerShow Answer

Explain the controversy surrounding the effectiveness of quantitative easing.

Correct AnswerverifiedIn quantitative easing the emphasis is o...View AnswerShow Answer

Explain why there is no tradeoff between inflation and unemployment in the short run or the long run.

Correct AnswerverifiedIn the short run,inflation doe...View AnswerShow Answer

If money demand is very volatile,the preferred policy is to target the interest rate instead of the money supply.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe Federal Reserve was interested in ma...View AnswerShow Answer

When the rate of interest increases,

Correct AnswerverifiedShow Answer

If the interest rate on bank CDs increases,the opportunity cost of holding money increases.

Correct AnswerverifiedShow Answer

The interest rate effectively hit zero in the U.S.in December 2008.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A line depicting the relationship between the quantity of money demanded and the interest rate is

Correct AnswerverifiedShow Answer

Describe the "gain then pain" scenario whereby the Fed raises the target inflation rate.Identify the short-run,medium-run,and long-run effects.

Correct AnswerverifiedIf the Fed raises the target inflation r...View AnswerShow Answer

The "Goldilocks economy" is one in which

Correct AnswerverifiedShow Answer

What is a liquidity trap?

Correct AnswerverifiedShow Answer

Suppose real and potential GDP are initially equal.If the Fed increases the target inflation rate,then in the long run we would expect

Correct AnswerverifiedShow Answer

If the Fed wants to cool off the economy,how will it adjust its monetary policy?

Correct AnswerverifiedInterest rates will increase i...View AnswerShow Answer

Correct Answer
verified
The facts justify this conclusion.In the...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Because a negative interest rate would m...
View Answer

Correct Answer
verified
In quantitative easing the emphasis is o...
View Answer

Correct Answer
verified
In the short run,inflation doe...
View Answer

Correct Answer
verified

Correct Answer
verified
The Federal Reserve was interested in ma...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
If the Fed raises the target inflation r...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Interest rates will increase i...
View Answer