77) When the Fed fears inlation, the Fed ________ government securities, so that the
federal funds rate ________ and the quantity of money ________.
A) sells; falls; decreases
B) sells; rises; decreases
C) sells; falls; increases
D) buys; falls; increases
E) buys; rises; decreases
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
78) When the Fed raises the federal funds rate, eventually there is
A) an upward movement along the investment demand curve and along the aggregate
demand curve.
B) an upward movement along the investment demand curve and the aggregate demand
curve shifts leftward.
C) an upward movement along the investment demand curve and the aggregate demand
curve shifts rightward.
D) a leftward shift of the investment demand curve and the aggregate demand curve shifts
leftward.
E) a leftward shift of both the aggregate demand curve and the aggregate supply curve.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
79) If the AS and the AD curve intersect at a level of real GDP that exceeds potential GDP,
then the appropriate monetary policy is one that ________ the federal funds rate and
________ aggregate demand.
A) raises; increases
B) raises; decreases
C) lowers; increases
D) lowers; decreases
E) raises; has no efect on
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
41
80) If real GDP exceeds potential GDP, to move the economy to potential GDP the Fed
A) raises the federal funds rate to increase potential GDP but not real GDP.
B) lowers the federal funds rate to decrease real GDP but not potential GDP.
C) raises the federal funds rate to decrease real GDP but not potential GDP.
D) lowers the federal funds rate to increase potential GDP but not real GDP.
E) raises the federal funds rate to decrease both real GDP and potential GDP.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
81) If the Fed raises the federal funds rate, eventually the
A) AD curve shifts rightward and real GDP increases.
B) AD curve shifts leftward and real GDP decreases.
C) AS curve shifts rightward and real GDP increases.
D) AS curve shifts leftward and real GDP decreases.
E) AD curve shifts rightward and real GDP decreases.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
82) If the Fed raises the federal funds rate, eventually the
A) AD curve shifts leftward, decreasing real GDP and increasing the price level.
B) AS curve shifts leftward, decreasing real GDP and increasing the price level.
C) AD curve shifts rightward, increasing real GDP and the price level.
D) AD curve shifts leftward, decreasing real GDP and the price level.
E) AS curve shifts rightward, decreasing real GDP and increasing the price level.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
42
83) When there is a threat of inlation in the economy, the Fed can ________ the federal
funds rate to ________ aggregate demand and ________ the price level.
A) lower; increase; decrease
B) raise; decrease; increase
C) lower; increase; increase
D) raise; decrease; decrease
E) raise; increase; decrease
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
84) Raising 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) leftward; increases; rises
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
85) Which of the following is a problem in pursuing monetary policy?
A) The lag between a change in the quantity of money and its efect on economic activity
may be long.
B) Monetary policy must be approved by the Congress.
C) The Fed must reveal to the public anytime the Fed changes its policy.
D) The Fed cannot control the federal funds rate.
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
43
86) One problem with the ripple efect from the Fed’s monetary policy is
A) the fact that the monetary policy transmission process is long and drawn out.
B) that changing the Federal funds target rate seldom has an efect on the markets for
reserves and loanable funds.
C) that the Fed’s policy sometimes has a large impact on potential GDP as well as its usual
impact on aggregate demand.
D) the tight relationship between that the Federal funds rate has to aggregate spending.
E) the frequent misalignment of the spread between the Federal funds rate and the Federal
funds rate target.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
87) When the Fed lowers the federal funds rate, which of the following economic variables
responds most rapidly?
A) consumption expenditure
B) the supply of loanable funds
C) the long-term real interest rate
D) other short-term interest rates
E) the inlation rate
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
88) When the Fed lowers the federal funds rate, which of the following economic variables
responds most slowly?
A) consumption expenditure
B) the supply of loanable funds
C) the long-term real interest rate
D) other short-term interest rates
E) the inlation rate
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
44
89) When the Fed lowers the federal funds rate, the quantity of money ________ and the
supply of loanable funds ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
E) increases; does not change
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
90) When the Fed raises the federal funds rate, the consumption expenditure ________ and
investment ________.
A) does not change; does not change
B) does not change; decreases
C) increases; decreases
D) increases; increases
E) decreases; decreases
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
91) When the Fed raises the federal funds rate, the exchange rate ________ and net exports
________.
A) does not change; does not change
B) does not change; decreases
C) increases; decreases
D) increases; increases
E) decreases; decreases
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
45
92) A change in the federal funds rate ________ the supply of loanable funds, ________ the
long-term real interest rate, and ________ investment.
A) afects; afects; afects
B) afects; afects; does not afect
C) does not afect; afects; does not afect
D) afects; does not afect; afects
E) does not afect; does not afect; does not afect
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
93) If the Fed wants to ight recession, it will ________ the federal funds rate in order to
________.
A) raise; increase aggregate demand
B) raise; decrease aggregate supply
C) raise; increase aggregate supply
D) lower; increase aggregate supply
E) lower; increase aggregate demand
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
94) If the Fed wants to ight inlation, it will ________ the federal funds rate in order to
________.
A) raise; decrease aggregate demand
B) raise; decrease aggregate supply
C) raise; increase aggregate supply
D) lower; increase aggregate supply
E) lower; decrease aggregate demand
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
46
17.3 Alternative Monetary Policy Strategies
1) Discretionary monetary policy is deined as policy
A) for which the markets make all decisions.
B) that is based on the judgments of policymakers.
C) that is pursued regardless of the current state of the economy.
D) that responds to a changing economy with predetermined rules.
E) for which the policymaker always publicizes the policy as extensively as possible
because its efectiveness depends on the public’s knowledge of the policy.
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
2) Discretionary monetary policy is monetary policy that is based on
A) the judgment of Congress about the current needs of the economy.
B) a rule that allows no discretion in how policymakers respond to the state of the economy.
C) the ups and downs of the stock market.
D) the judgment of the monetary policymakers about the current needs of the economy.
E) rules that depend upon the state of the economy.
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
3) If the Fed bases its monetary policy on judgments of its policymakers about the current
needs of the economy, it is following
A) a monetary base instrument rule.
B) discretionary policy.
C) an inlation targeting rule.
D) wait-and-see policy.
E) a money targeting rule.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
47
4) Which of the following is NOT an alternative rule for monetary policy?
A) a monetary base instrument rule
B) a money targeting rule
C) a natural unemployment rate targeting rule
D) a nominal GDP targeting rule
E) an inlation rate targeting rule
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
5) Of the following, which is NOT a monetary policy rule the Fed could follow?
A) a nominal GDP targeting rule
B) an unemployment rate targeting rule
C) an inlation targeting rule
D) a k-percent rule
E) a money targeting rule
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
6) Maintaining the growth of the money supply at a constant rate is an example of
A) discretionary policy.
B) a money targeting rule.
C) a money demand rule.
D) an inlation targeting rule.
E) a nominal GDP targeting rule.
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
48
7) The proposal to keep the quantity of money growing at a slow constant rate is an
example of
A) discretionary policy.
B) an inlation rate targeting rule.
C) a constant federal funds rate rule.
D) a money targeting rule.
E) a nominal GDP targeting rule.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
8) Milton Friedman’s k-percent rule says to set the rate of growth of the quantity of money
equal to
A) the unemployment rate.
B) the rate of growth of potential GDP.
C) last year’s growth rate of real GDP.
D) the real interest rate.
E) a constant rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
9) An example of Friedman’s k-percent rule is
A) “every time GDP decreases, decrease the growth rate of the quantity of money.”
B) “set the growth rate of the quantity money equal to the unemployment rate.”
C) “every time GDP decreases, increase the growth rate of the quantity of money.”
D) “do not change the growth rate of the quantity of money.”
E) “use all information available to determine the growth rate of the quantity of money
each time GDP changes.”
Skill: Level 2: Using deinitions
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
49
10) Under a k-percent rule, if the economy goes into expansion, the Fed would
A) raise the federal funds rate.
B) lower tax rates to keep revenue constant.
C) lower the federal funds rate.
D) increase the quantity of money.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
11) As irms expect future proits to increase, they increase their investment. As a result,
real GDP rises above potential GDP. If the Fed followed Friedman’s k-percent rule, the Fed
would
A) increase the quantity of money more than usual.
B) decrease the quantity of money.
C) continue allowing the quantity of money to grow at “k” percent.
D) raise the federal funds rate.
E) lower the federal funds rate.
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
12) Consumer conidence in the economy falls, and as a result, aggregate demand
decreases. As real GDP falls below potential GDP, if the Fed followed Friedman’s k-percent
rule, the Fed would
A) increase the quantity of money more than usual.
B) increase government expenditures.
C) continue allowing the quantity of money to grow at “k” percent.
D) lower the federal funds rate.
E) raise the federal funds rate.
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
50