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Exam 15: Monetary Policy

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Question 51

Multiple Choice

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A monetary growth rule means that

A) the Fed will lower interest rates if it thinks a recession is on the horizon.
B) the Fed will raise interest rates if it thinks the economy is growing faster than potential.
C) the money supply should grow at a constant rate.
D) the money supply should grow in response to economic conditions.

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Question 52

Multiple Choice

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Suppose the Fed decreases the money supply.In response households and firms will ________ short term assets and this will drive ________ interest rates.

A) buy; up
B) buy; down
C) sell; up
D) sell; down

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Question 53

Essay

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What actions should the Fed take if it believes the economy is about to fall into recession?

Table 15-5 -Refer to Table 15-5.Suppose the table above illustrates the values of real and potential GDP and the price level,if the Fed does not vote to change their current policy to be more contractionary or expansionary.Suppose that the Fed uses an appropriate policy and is successful in keeping real GDP at potential in 2015.State whether each of the following will be higher or lower than if the Fed had taken no action: a.Real GDP b.Potential real GDP c.The price level d.The unemployment rate

Present two arguments as to why the Fed should adopt inflation targeting as a framework for monetary policy.

If the amount you owe on your house is greater than the price of the house,you have

An increase in real GDP can shift

The economy suffered a mild recession in 2001.Despite the recession,home sales and durable goods sales remained high.Which of the following is a plausible explanation?

Consider the Taylor rule for the target of the federal funds rate.Suppose the equilibrium real federal funds rate is 2 percent,the target rate of inflation is 3 percent,the current inflation rate is 3 percent,real GDP equals potential real GDP,and the weights are 1/2 for the inflation gap and the output gap.Using the Taylor rule,what does the target for the federal funds rate equal? Next,if the Federal Reserve lowered the target for the inflation rate to 1 percent,how much would the target for the federal funds rate change?

Firms that participate in regular open market transactions with the Federal Reserve are called

When the Federal Reserve System was established in 1913,its main policy goal was

Beginning in 2008,The Federal Reserve and the U.S.Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways.Briefly summarize the actions of the Fed and Treasury.

Prior to 1970,mortgages were ________ resold in the secondary market.

An increase in the money supply will

If the Federal Reserve targets the interest rate and the money demand curve shifts to the left,then the Fed

If the Fed orders an expansionary monetary policy,describe what will happen to the following variables relative to what would have happened without the policy: a.The money supply b.Interest rates c.Investment d.Consumption e.Net Exports f.The aggregate demand curve g.Real GDP h.The price level

If the Federal Reserve targets the money supply,and the money demand curve shifts to the left,then the Fed

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.

Figure 15-7 -Refer to Figure 15-7.Suppose the economy is in short-run equilibrium above potential GDP,the unemployment rate is very low,and wages and prices are rising.Using the static AD-AS model in the figure above,the correct Fed policy for this situation would be depicted as a movement from

The consumer price index (CPI) ,the personal consumption expenditures price index (PCE) ,and the core PCE have over the last 10 years