13) Which of the following are TRUE regarding Milton Friedman’s k-percent money
targeting rule?
i. Currently this policy is used by many policy makers.
ii. This rule sets the growth rate of the quantity of money independently of the economy‘s
behavior.
iii. For this policy to work well, the velocity of circulation must be stable.
A) i only
B) ii only
C) ii and iii
D) i and ii
E) iii only
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
14) The k-percent rule, an example of a money targeting rule, relies on a relatively stable
A) demand for money.
B) nominal GDP.
C) supply of money.
D) federal funds rate.
E) real interest rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
15) Discretionary monetary policy has the drawback that it
A) must lead to very high inlation.
B) is currently illegal in the United States.
C) cannot be implemented using changes in the federal funds rate.
D) makes inlation expectations harder to manage.
E) None of the above answers is correct.
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
51
16) Which monetary policy rule needs a stable demand for money to work well?
A) discretionary monetary policy
B) monetary base instrument rule
C) k-percent rule
D) nominal GDP targeting rule
E) inlation targeting rule
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
17) Under a nominal GDP targeting rule, the Federal Reserve
A) cannot use the federal funds rate to conduct monetary policy.
B) lowers its interest rate when nominal GDP falls below target.
C) changes the interest rate only when real GDP, and hence nominal GDP, is of target.
D) loses its ability to inluence the inlation rate.
E) must publish its expected inlation rate.
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
18) Inlation targeting requires that the central bank
A) use a short-term interest rate as its policy instrument.
B) adopt a k-percent rule for the inlation rate.
C) avoid changing the amount of the monetary base.
D) publicize its targeted inlation rate.
E) set a ixed price real assets.
Skill: Level 1: Deinition
Section: Checkpoint 17.3
Status: Old
AACSB: Relective thinking
52
17.4 Chapter Figures
The igure above shows the market for reserves.
1) If the Fed wants to increase the federal funds rate, it will conduct an open market
operation in which it ________ government securities and thereby shifts the ________ curve
________.
A) sells; RS; rightward
B) sells; RD; leftward
C) buys; RD; rightward
D) buys; RS; leftward
E) sells; RS; leftward
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
53
The igure above shows the market for reserves.
2) To shift the RS curve rightward as illustrated, the Fed has ________ government
securities in the open market. The Fed will undertake this type of policy if it is concerned
about ________.
A) sold; inlation
B) bought; inlation
C) sold; recession
D) bought; recession
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
54
3) The rightward shift of the RS curve will lead to a ________ in the real interest rate,
________ in investment, and ________ in aggregate demand.
A) rise; an increase; an increase
B) rise; an increase; a decrease
C) rise; a decrease; a decrease
D) fall; an increase; an increase
E) fall; an increase; a decrease
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
4) The rightward shift of the RS curve will lead to a ________ in the U.S. exchange rate,
________ in real GDP, and a ________ in the price level.
A) rise; an increase; rise
B) rise; an increase; fall
C) rise; a decrease; fall
D) fall; an increase; rise
E) fall; an increase; fall
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
55
The igure above shows the market for loanable funds. The supply of loanable funds curve
shifts rightward.
5) The change illustrated in the igure above can be the result of the Fed ________
government securities in the open market and will ultimately lead to ________ in aggregate
demand.
A) selling; an increase
B) buying; an increase
C) selling; a decrease
D) buying; no change
E) selling; no change
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
56
6) The change illustrated in the igure above is part of the transmission process of the Fed’s
monetary policy. As a result of the increase in the supply of loanable funds, aggregate
demand ________, real GDP ________, and the price level ________.
A) increases; decreases; falls
B) increases; increases; rises
C) decreases; decreases; falls
D) increases; does not change; does not change
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
7) The change illustrated in the igure above is part of the transmission process of the Fed’s
monetary policy. As a result of the increase in the supply of loanable funds, in the short run
aggregate demand ________, aggregate supply ________, and potential GDP ________.
A) increases; decreases; decreases
B) increases; increases; increases
C) decreases; decreases; decreases
D) increases; does not change; does not change
E) decreases; increases; increases
Skill: Level 4: Applying models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
17.5 Integrative Questions
1) When a central bank targets inlation, its inlation targets are usually speciied as
A) a range for the inlation rate.
B) a speciic inlation rate target, for example, 1 percent.
C) deviations from the inlation rate.
D) a point on the short-run Phillips curve.
E) the short-term interest rate minus 2 percent.
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
57
2) While the Fed has a “dual mandate” of goals to achieve, most economists believe that in
the long run the single key role is attaining
A) price stability.
B) high levels of income and output.
C) high inlation rates.
D) low economic growth rates.
E) stable velocity of money.
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
3) In late 2007, the Fed began a series of cuts in the federal funds rate. Because the core
inlation rate was about two percent, the most likely reason for these interest rate cuts was
A) to raise the price of the dollar in the foreign exchange market.
B) to avoid a recession.
C) to encourage households to save more money.
D) to reduce the natural unemployment rate.
E) to increase the real interest rate.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
4) The Fed decreases the quantity of money to counteract
A) a recessionary gap.
B) a federal budget deicit.
C) positive net exports.
D) an inlationary gap.
E) a rise in the unemployment rate.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Relective thinking
58
5) The Fed increases the quantity of money to counteract
A) a recessionary gap.
B) a federal budget surplus.
C) negative net exports.
D) an inlationary gap.
E) inlation.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Relective thinking
6) During the Great Depression, real GDP decreased, unemployment soared, and the
inlation rate was negative. Which would have been the appropriate federal government
policy combination to improve economic performance?
A) increase government expenditure, decrease taxes, increase the quantity of money
B) increase government expenditure, decrease taxes, decrease the quantity of money
C) decrease government expenditure, increase taxes, decrease the quantity of money
D) do not change government expenditures or taxes , increase the quantity of money
E) decrease government expenditures, increase taxes, do not change the quantity of money
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
7) During the late 1960s, real GDP increased, unemployment fell, and the inlation rate
started to rise. Which would have been the appropriate federal government policy
combination to improve economic performance by lowering the inlation rate?
A) increase government expenditures, decrease taxes, increase the quantity of money
B) increase government expenditures, decrease taxes, decrease the quantity of money
C) decrease government expenditures, increase taxes, decrease the quantity of money
D) do not change government expenditures or taxes , increase the quantity of money
E) increase government expenditures, decrease taxes, do not change the quantity of money
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
59
8) A(n) ________ in the supply of loanable funds ________ the real interest rate and ________
investment.
A) increase; raises; decreases
B) increase; raises; increases
C) decrease; raises; decreases
D) decrease; lowers; decreases
E) decrease; raises; increases
Skill: Level 5: Critical thinking
Section: Integrative
Status: New
AACSB: Analytical thinking
9) When the Fed ________ the federal funds rate, other short-term interest rates and the
exchange rate also ________. The quantity of money and the supply of loanable funds
________.
A) raises; rise; increase
B) raises; fall; increase
C) lowers; fall; increase
D) lowers; rise; increase
E) lowers; fall; decrease
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
10) An increase in the supply of bank loans ________ the supply of loanable funds so the real
interest rate ________ and investment ________.
A) increases; falls; decreases
B) decreases; rises; increases
C) decreases; falls; increases
D) increases; falls; increases
E) increases; rises; increases
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
60