Question 1

If nominal income increases by 4 percent and the price level increases by 3 percent, real income must:

Accepted Answer

A)  increase by 7 percent.
B)  increase by 1 percent.
C)  decrease by 1 percent.
D)  decrease by 7 percent.

Question 2

Assume that the federal funds rate is at its target, 2 percent, output is about 1 percent beneath potential, and inflation is roughly 1.5 percent.If the Taylor rule is accurate, the Fed's desired rate of inflation at this time would be:

Accepted Answer

A)  1 percent.
B)  2.5 percent.
C)  3.5 percent.
D)  5 percent.

Question 3

A contractionary monetary policy decreases the money supply and the interest rate, which decreases investment and output.

Accepted Answer

A) True 
 B)False

Question 4

The federal funds rate is the rate banks charge one another for overnight loans.

Accepted Answer

A) True 
 B)False

Question 5

Monetary policy that seeks to minimize the business cycle in the AS/AD model involves:

Accepted Answer

A)  contractionary monetary policy throughout the business cycle.
B)  expansionary monetary policy throughout the business cycle.
C)  contractionary monetary policy when the economy is above trend growth and expansionary policy when the economy is below trend growth.
D)  expansionary monetary policy when the economy is above trend growth and contractionary policy when the economy is below trend growth.

Question 6

The Fed can conduct monetary policy in all the following ways except:

Accepted Answer

A)  changing the reserve requirement.
B)  changing the discount rate.
C)  executing open market operations.
D)  running deficits.

Question 7

If saving exceeds investment, the appropriate countercyclical monetary policy would be:

Accepted Answer

A)  an increase in the reserve requirement.
B)  a cut in the discount rate.
C)  an open market sale of government bonds.
D)  an increase in the federal funds rate.

Question 8

A monetary policy that reduces both real and nominal income:

Accepted Answer

A)  must be expansionary.
B)  must be contractionary.
C)  cannot be expansionary or contractionary.
D)  could be expansionary or contractionary. B

Question 9

The Federal Reserve kept interest rates low from 2002 through 2016 because:

Accepted Answer

A)  they wanted to reduce the value of the dollar and help domestic exporters.
B)  they were worried about inflation creeping into the economy.
C)  they wanted to avoid deflation and the resulting recession.
D)  they wanted to follow the Taylor Rule.

Question 10

Which of the following Fed actions increases the money supply?

Accepted Answer

A)  Decreasing the amount of loans made to commercial banks
B)  Buying government securities in the open market
C)  Selling government securities in the open market
D)  Increasing reserve requirements

Question 11

In the AS/AD model, an expansionary monetary policy has the greatest effect on the price level when it:

Accepted Answer

A)  increases both nominal and real income.
B)  increases real income but not nominal income.
C)  increases nominal income but not real income.
D)  doesn't increase real or nominal income.

Question 12

Suppose the federal funds rate rises by 0.5 percent.If the Taylor rule is correct, this might be because output is:

Accepted Answer

A)  1 percentage point below potential output.
B)  0.5 percentage points below potential output.
C)  0.5 percentage points above potential output.
D)  1 percentage point above potential output.

Question 13

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

Accepted Answer

A)  6.5.
B)  4.5.
C)  3.5.
D)  3.0. C

Question 14

An increase in the federal funds rate could be caused by:

Accepted Answer

A)  higher than expected bank deposits.
B)  higher than expected bank reserves.
C)  lower than expected loan demand.
D)  higher than expected withdrawals.

Question 15

If real income increases by 4 percent and the price level increases by 3 percent, nominal income must:

Accepted Answer

A)  increase by 7 percent.
B)  increase by 1 percent.
C)  decrease by 1 percent.
D)  decrease by 7 percent.

Question 16

In the short run if the Fed undertakes contractionary monetary policy, the effect will be to shift the:

Accepted Answer

A)  AD curve out to the right.
B)  AD curve in to the left.
C)  SAS curve up.
D)  SAS curve down. B

Question 17

The federal funds rate is the interest rate the:

Accepted Answer

A)  government charges banks for Fed funds.
B)  Fed charges banks for Fed funds.
C)  banks charge individual investors for Fed funds.
D)  banks charge each other in the Fed funds market.

Question 18

If banks are short of reserves, the Fed funds rate will:

Accepted Answer

A)  increase.
B)  decrease.
C)  stay the same.
D)  rise or fall; it cannot be determined with the information given.

Question 19

Unlike the practice in many other countries, in the United States:

Accepted Answer

A)  only monetary policy is used to influence the economy, and fiscal policy is not allowed.
B)  only fiscal policy is used to influence the economy, and monetary policy is not allowed.
C)  the agency responsible for monetary policy is not directly controlled by the government.
D)  the agency responsible for fiscal policy is not directly controlled by the government.

Question 20

Which of the following is the path through which contractionary monetary policy works?

Accepted Answer

A)  Money down implies interest rate up implies investment down implies income down.
B)  Money down implies interest rate down implies investment down implies income down.
C)  Money down implies interest rate up implies investment up implies income down.
D)  Money down implies interest rate down implies investment up implies income down.

Exam 29: Monetary Policy

If nominal income increases by 4 percent and the price level increases by 3 percent, real income must:

Correct AnswerverifiedShow Answer

Assume that the federal funds rate is at its target, 2 percent, output is about 1 percent beneath potential, and inflation is roughly 1.5 percent.If the Taylor rule is accurate, the Fed's desired rate of inflation at this time would be:

Correct AnswerverifiedShow Answer

A contractionary monetary policy decreases the money supply and the interest rate, which decreases investment and output.

Correct AnswerverifiedShow Answer

The federal funds rate is the rate banks charge one another for overnight loans.

Correct AnswerverifiedShow Answer

Monetary policy that seeks to minimize the business cycle in the AS/AD model involves:

Correct AnswerverifiedShow Answer

The Fed can conduct monetary policy in all the following ways except:

Correct AnswerverifiedShow Answer

If saving exceeds investment, the appropriate countercyclical monetary policy would be:

Correct AnswerverifiedShow Answer

A monetary policy that reduces both real and nominal income:

Correct AnswerverifiedB

The Federal Reserve kept interest rates low from 2002 through 2016 because:

Correct AnswerverifiedShow Answer

Which of the following Fed actions increases the money supply?

Correct AnswerverifiedShow Answer

In the AS/AD model, an expansionary monetary policy has the greatest effect on the price level when it:

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Suppose the federal funds rate rises by 0.5 percent.If the Taylor rule is correct, this might be because output is:

Correct AnswerverifiedShow Answer

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

Correct AnswerverifiedC

An increase in the federal funds rate could be caused by:

Correct AnswerverifiedShow Answer

If real income increases by 4 percent and the price level increases by 3 percent, nominal income must:

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In the short run if the Fed undertakes contractionary monetary policy, the effect will be to shift the:

Correct AnswerverifiedB

The federal funds rate is the interest rate the:

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If banks are short of reserves, the Fed funds rate will:

Correct AnswerverifiedShow Answer

Unlike the practice in many other countries, in the United States:

Correct AnswerverifiedShow Answer

Which of the following is the path through which contractionary monetary policy works?

Correct AnswerverifiedShow Answer

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B

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C

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B

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