49) When the exchange rate falls, imports ________ and exports ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) decrease; do not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
50) If the Fed buys government securities, other things the same, the exchange rate
________ and U.S. exports ________.
A) rises; increase
B) rises; decrease
C) falls; increase
D) falls; decrease
E) falls; do not change because they are autonomous expenditure
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
51) If the Fed lowers the interest rate, then
A) only consumption expenditure decreases.
B) only investment decreases.
C) both consumption expenditure and investment decrease.
D) net exports will increase.
E) consumption expenditure decreases and investment increases.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
31
52) If the Fed raises the federal funds rate,
A) investment increases.
B) real GDP increases.
C) exports increase and imports decrease.
D) exports decrease and imports increase.
E) in the short run the interest rate falls.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
53) Because investment, consumption expenditure, and net exports are interest-sensitive
components of expenditure, a ________ in the federal funds rate brings ________ in ________.
A) fall; a decrease; aggregate demand
B) fall; an increase; aggregate demand
C) rise; an increase; aggregate supply
D) rise; an increase; aggregate demand
E) fall; a decrease; aggregate supply
Skill: Level 1: Deinition
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
54) If the Fed’s policies aim to increase aggregate demand, the Fed must fear
A) inlation.
B) recession.
C) staglation.
D) a supply shock that decreases potential GDP.
E) a supply shock that increases aggregate supply.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
32
55) If the Fed fears a recession, it
A) sells government securities.
B) decreases the quantity of money.
C) buys government securities.
D) decreases aggregate demand.
E) decreases aggregate supply.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
56) To ight a recession, the Fed can
A) lower the federal funds rate by buying securities.
B) lower the federal funds rate by selling securities.
C) raise the federal funds rate by buying securities.
D) raise the federal funds rate by selling securities.
E) lower income taxes on interest income.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
57) If the Fed is concerned about a possible recession, it ________ the federal funds rate
and, in response, long-term interest rates ________ by a ________ amount than the change in
short-term rates.
A) raises; increase; larger
B) lowers; increase; smaller
C) raises; decrease; larger
D) lowers; decrease; smaller
E) raises; increase; smaller
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
33
58) The Federal Reserve fears that the United States economy is growing too slowly and is
stuck in a recession. To move the economy back to its potential GDP, the most likely policy
action for the Fed is to ________ the federal funds and thus ________ .
A) raise; increase aggregate demand
B) raise; decrease aggregate demand
C) lower; increase aggregate supply
D) lower; decrease aggregate supply
E) lower; increase aggregate demand
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
59) As the Fed lowers the federal funds rate,
A) aggregate demand increases.
B) real GDP decreases.
C) the price level falls.
D) aggregate income decreases.
E) aggregate supply increases.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
60) If the Federal Reserve uses open market operations to ofset a recession, the Fed
________ government securities in order to ________ the federal funds rate.
A) sells; raise
B) sells; lower
C) buys; raise
D) buys; lower
E) buys; not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
34
61) If the Fed lowers the federal funds rate, eventually the
A) AD curve shifts leftward, decreasing real GDP and raising the price level.
B) AS curve shifts leftward, decreasing real GDP and raising the price level.
C) AD curve shifts rightward, increasing real GDP and raising the price level.
D) AD curve shifts leftward, decreasing real GDP and lowering the price level.
E) AS curve shifts rightward, decreasing real GDP and raising the price level.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
62) When the economy is in a recession, the Fed can ________ the federal funds rate, which
________ aggregate demand and ________ real GDP.
A) lower; increases; decreases
B) raise; decreases; increases
C) lower; increases; increases
D) raise; increases; decreases
E) lower; decreases; decreases
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
63) If the Fed increases the quantity of money and lowers the federal funds rate, real GDP
________ and the price level ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
35
64) In the short run, lowering the federal funds rate shifts the aggregate demand curve
________ so that real GDP ________ and the price level ________.
A) rightward; increases; rises
B) leftward; decreases; rises
C) rightward; increases; falls
D) leftward; decreases; falls
E) rightward; decreases; rises
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
65) In a recession, the Fed’s monetary policy aims to ________ the real interest rate, ________
aggregate demand, and ________ aggregate supply.
A) increase; decrease; not change.
B) decrease; increase; not change
C) increase; not change; increase
D) decrease; increase; increase
E) increase; increase; increase
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
66) To ight a recession, an appropriate monetary policy would be that the Fed conducts an
open market operation that ________ government securities, ________ the federal funds rate,
and ________ aggregate demand.
A) sells; raises; increases
B) sells; raises; decreases
C) buys; lowers; increases
D) buys; lowers; decreases
E) sells; lowers; increases
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
67) Using the data in the above table, if potential GDP for this economy is $25 billion, then
at the present moment real GDP is
A) less than potential GDP.
B) equal to potential GDP.
36
C) greater than potential GDP.
D) at the full-employment level of output.
E) not comparable to potential GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
68) Using the data in the above table, if potential GDP for this economy is $25 billion, then
in order to restore full employment, the federal funds rate can be
A) lowered so that government expenditure on goods and services increases.
B) raised so that consumption expenditure, investment, and net exports increase.
C) lowered so that consumption expenditure, investment, and net exports increase.
D) raised so that net exports increase.
E) lowered so that consumption expenditure and investment increase, though net exports
decrease.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
69) The economy is at the equilibrium shown as point a in the above igure. To restore the
economy to potential GDP, the Fed should
A) buy government securities and thereby increase aggregate demand.
B) sell government securities and thereby increase aggregate demand.
C) sell government securities and thereby decrease aggregate demand.
D) buy government securities and thereby decrease aggregate demand.
E) buy government securities and thereby increase aggregate supply.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
70) The economy is at the equilibrium shown at point a in the above igure. If the Fed
37
A) buys government securities, the economy moves to an equilibrium at point c.
B) buys government securities, the economy moves to an equilibrium at point b.
C) sells government securities, the economy moves to an equilibrium at point c.
D) sells government securities, the economy moves to an equilibrium at point b.
E) None of the above is correct because the economy will remain at point a if the Fed buys
or if the Fed sells government securities.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
38
71) The Fed raises the interest rate when it
A) fears recession.
B) wants to increase the quantity of money.
C) fears inlation.
D) wants to encourage bank lending.
E) cannot change the quantity of money.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
72) When the Federal Reserve wants to slow inlation, it
A) lowers the federal funds rate.
B) raises the federal funds rate target.
C) cuts the federal funds rate target aggressively to almost zero.
D) increases aggregate income, output, and employment.
E) increases taxes on interest income.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
73) If the Fed fears inlation, it ________ by ________ government securities.
A) increases aggregate demand; selling
B) increases aggregate supply; buying
C) decreases aggregate demand; selling
D) decreases aggregate supply; buying
E) decreases aggregate supply; selling
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
39
74) If the Fed fears inlation, then the Fed
A) directs banks to lower the nominal interest rate.
B) directs banks to raise the nominal interest rate.
C) will sell government securities in the open market.
D) will buy government securities in the open market.
E) will increase the income tax rate on interest income.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
75) The Fed is concerned that inlation might occur. To help eliminate this possibility, the
Fed could ________ government securities to ________ the federal funds rate in the short run.
A) buy; lower
B) buy; raise
C) sell; lower
D) sell; raise
E) sell; not change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
76) When the Fed worries about inlation, it ________ the federal funds rate and, in the short
run, ________ the real interest rate.
A) lowers; lowers
B) lowers; raises
C) raises; lowers
D) raises; raises
E) does not change; the Fed raises
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
40