Page 58
283.
One advantage of inflation targeting over the Taylor rule is that with inflation targeting,
because the public knows the target in advance, uncertainty is reduced.
A)
True
B)
False
284.
One advantage of inflation targeting over the Taylor rule is that the central bank’s policy
can be evaluated by seeing how close to the target actual inflation rates are.
A)
True
B)
False
285.
The zero lower bound for interest rates is the target that the Taylor rule sets.
A)
True
B)
False
286.
Quantitative easing occurs when instead of purchasing only short-term government
debt, the Fed buys long-term government debt as well.
A)
True
B)
False
287.
The appropriate monetary policy to stabilize the economy during a recession is an
expansionary policy.
A)
True
B)
False
288.
A contractionary monetary policy is appropriate during a recession.
A)
True
B)
False
289.
A contractionary monetary policy is appropriate during an expansion.
A)
True
B)
False
290.
The interest rate is determined in the loanable funds market in the short run.
A)
True
B)
False
Page 59
291.
The interest rate is determined in the money market in the short run.
A)
True
B)
False
292.
The Fed prints money only when it is conducting monetary policy.
A)
True
B)
False
293.
In the long run, changes in the money supply will change prices, real GDP, and interest
rates.
A)
True
B)
False
294.
In the long-run, changes in the money supply will change prices but not real GDP or
interest rates.
A)
True
B)
False
295.
Monetary policy affects both the aggregate price level and output in the long run.
A)
True
B)
False
296.
If the economy is at potential output and the Fed increases the money supply, interest
rates will likely increase in the short run.
A)
True
B)
False
297.
If the economy is at potential output and the Fed decreases the money supply, in the
short run the likely result will be a decrease in investment and a decrease in
consumption.
A)
True
B)
False
298.
If the economy is at potential output and the Fed increases the money supply, the
aggregate demand will likely decrease in the short run.
A)
True
B)
False
Page 60
299.
If the economy is at potential output and the Fed decreases the money supply, run the
price level will likely decrease in the short run.
A)
True
B)
False
300.
If the economy is at potential output and the Fed increases the money supply, run real
GDP will likely remain the same in the short run.
A)
True
B)
False
301.
If the economy is at potential output and the Fed decreases the money supply so that
actual output is less than potential output, eventually nominal wages will decrease.
A)
True
B)
False
302.
When nominal wages decrease, the short-run aggregate supply curve shifts to the left.
A)
True
B)
False
303.
If the economy is at potential output and the Fed increases the money supply, in the long
run the price level will likely increase.
A)
True
B)
False
304.
If the economy is at potential output and the Fed decreases the money supply, run real
GDP will likely decrease in the long run.
A)
True
B)
False
305.
The concept of monetary neutrality means that changes in the money supply have no
real effects on real output in the long run.
A)
True
B)
False
306.
If the money supply decreases by 10%, the aggregate price level will remain constant in
the long run.
A)
True
B)
False
Page 61
307.
The theory of monetary neutrality implies that monetary policy is effective in the short
run but not in the long run.
A)
True
B)
False
308.
The theory of monetary neutrality means that monetary policy is completely irrelevant.
A)
True
B)
False
309.
In the long run, if the money supply rises by 10%, then the price level may rise by more
than 10%.
A)
True
B)
False
310.
In the short run, changes in the money supply change the interest rate, but in the long
run, changes in the money supply have no effect on interest rates.
A)
True
B)
False
311.
In the short run, changes in the money supply change interest rates but not real output
and prices.
A)
True
B)
False
312.
In the long run, changes in the money supply change prices but not real output and
interest rates.
A)
True
B)
False
313.
Changes in the money supply have no long-run effects on the interest rate because when
the price level changes, the demand for money changes to offset the short-run changes
in the money supply.
A)
True
B)
False
314.
International data for 1970–2015 show that monetary neutrality occurs only in wealthy
countries.
A)
True
B)
False
315.
Between 1970 and 2015, in general, the money supply grew more rapidly in poorer
countries than in wealthy ones.
A)
True
B)
False
316.
In the long run, a change in monetary policy will affect only the aggregate price level.
A)
True
B)
False
317.
The equilibrium interest rate in the loanable funds market is the same as the equilibrium
interest rate in the money market.
A)
True
B)
False
318.
What is the opportunity cost of holding money?
on the vertical axis. Why use this short-term interest on the vertical axis and not the rate
of return on other financial assets?
320.
Why does a recession, all else equal, decrease the demand for money?
321.
How would a significant fall in the interest rate on short-term certificates of deposit
(CDs) affect the money demand curve?
322.
What is the goal of expansionary monetary policy, and how does it work in the short
run?
323.
What is the goal of contractionary monetary policy, and how does it work in the short
run?
Page 63
324.
Suppose that the inflation rate is 2.5%. The unemployment gap is 2%. Use the Taylor
rule to estimate the target Federal funds rate.
325.
If the economy is operating at potential output, how does a contractionary monetary
policy affect short-run and long-run prices and real output?
326.
Explain what is meant by money neutrality. Use an example of expansionary monetary
policy, both in the short run and the long run.
327.
How does an increase in the money supply affect interest rates if the economy is
operating at potential output?
328.
Suppose that the annual inflation rate is at 2% and 8.5% of the labor force is
unemployed. If you were on the Federal Open Market Committee, what action would
you prescribe? How would this affect the economy, the inflation rate, and the
unemployment rate?
329.
Suppose that the annual inflation rate is at 7% and 3% of the labor force is unemployed.
If you were on the Federal Open Market Committee, what action would you prescribe?
How would this affect the economy, the inflation rate, and the unemployment rate?
330.
Firms and businesses hold some of their assets in the form of money because:
A)
it allows them to make purchases directly.
B)
it is a form of M2.
C)
bonds are more liquid.
D)
interest rates on money tend to be lower than other types of assets.
331.
The difference between the interest rate on assets that are not money and the interest
rate on assets that are money is:
A)
the opportunity cost of holding money.
B)
the rate of return of holding money.
C)
short-term interest rates.
D)
long-term interest rates.
Page 64
332.
The higher the short-term interest rate, the:
A)
lower the opportunity cost of holding money.
B)
higher the opportunity cost of holding money.
C)
more quantity demanded of money the public will be willing to hold.
D)
higher the level of investment spending.
333.
Short-term interest rates:
A)
fluctuate widely depending on their terms.
B)
tend to move together.
C)
move in the same direction as long-term interest rates.
D)
are always less than long-term interest rates.
334.
If the price level doubled and someone wanted to maintain the same level of purchasing
power, the nominal quantity of money demanded must:
A)
also double.
B)
increase by 50%.
C)
stay the same.
D)
decrease.
335.
If aggregate output decreases in an economy whose central bank is not changing its
monetary policy, one would expect the:
A)
demand for money to fall.
B)
interest rate to rise.
C)
demand for money to rise.
D)
demand for money to be unchanged.
336.
Suppose that a new regulation lowers the interest rates banks can offer on checking
account funds. This will result in a shift _____ of the money _____ curve.
A)
leftward; demand
B)
rightward; demand
C)
rightward; supply
D)
leftward; supply
337.
When the quantity of money demanded is less than the quantity of money supplied:
A)
interest rates will fall.
B)
people want to decrease their money holdings.
C)
people will begin to sell their nonmonetary assets.
D)
interest rates will remain unchanged.
Page 65
338.
When the quantity of money demanded exceeds the quantity of money supplied:
A)
people offering to sell nonmonetary financial assets must increase the interest rate
these assets pay to sell them.
B)
interest rates will fall.
C)
the opportunity cost of holding money will fall.
D)
more people will hold money.
339.
If the interest rate is too low, it is possible that:
A)
the quantity of money demanded is greater than the quantity of money supplied.
B)
money supply is equal to money demand.
C)
the money supply curve is downward sloping.
D)
money demand is vertical.
340.
Interest rates can be determined in models of:
A)
money demand and supply.
B)
M1 markets only.
C)
the demand and supply of loanable funds.
D)
demand and supply of both money and loanable funds.
341.
If the Federal Open Market Committee decides to decrease the federal funds target rate,
it will:
A)
perform an open market purchase.
B)
perform an open market sale.
C)
increase the demand for money.
D)
offer tax breaks to specific businesses.
342.
If the Federal Open Market Committee conducts an open market purchase:
A)
interest rates will fall.
B)
interest rates will remain unchanged.
C)
interest rates will rise.
D)
the money supply will decrease.
343.
If the Federal Open Market Committee engages in an open market purchase, it will shift
the money _____ curve to the _____,
A)
supply; right
B)
supply; left
C)
demand; left
D)
demand; right
Page 66
344.
The Fed uses _____ to target the federal funds rate.
A)
open market operations
B)
changes in the discount rate
C)
changes in deposit insurance maximums
D)
government spending
345.
Contractionary monetary policy will, holding everything else constant, _____ the
interest rate and shift the AD curve to the _____.
A)
increase; right
B)
increase; left
C)
decrease; left
D)
decrease; right
346.
The Taylor rule:
A)
provides guidance for setting a federal funds rate target.
B)
says that interest rates often should be negative.
C)
provides guidance on timing of monetary policy with fiscal policy.
D)
refers to a discretionary fiscal policy rule.
347.
If a central bank announces an inflation target, it:
A)
may have to sacrifice some control over interest rates.
B)
is in effect also announcing an interest rate target.
C)
will achieve this goal only by allowing price levels to vary.
D)
must do so in coordination with fiscal policy makers.
348.
If an economy is operating at an aggregate output level above its potential output level,
the Federal Reserve may:
A)
conduct an open market sale.
B)
conduct an open market purchase.
C)
lower the federal funds rate target.
D)
decrease government spending.
349.
If an economy is in long-run equilibrium at its potential output level, this also means:
A)
the money market is in equilibrium.
B)
money demand is greater than money supply.
C)
money supply is greater than money demand.
D)
there is excess money in the money market.
Page 67
350.
If the Federal Reserve conducts an open market purchase, holding everything else
constant, in the long run there will be:
A)
an increase in the aggregate price level.
B)
an increase in the aggregate output level.
C)
a decrease in unemployment.
D)
no effects on output, unemployment, or the price level.
351.
If the AD curve shifts to the right, in the short run there will be a(n) _____ in aggregate
output and a(n) _____ in the price level.
A)
increase; increase
B)
increase; decrease
C)
decrease; decrease
D)
decrease; increase
352.
If an economy is operating below its potential output level, holding everything else
constant, one would expect:
A)
nominal wages to rise.
B)
nominal wages to stay the same.
C)
nominal wages to fall.
D)
price levels to increase.
353.
Money is neutral in _____ since it cannot alter _____.
A)
the short run; real aggregate output
B)
both the short and long run; price levels
C)
the long run; real aggregate output
D)
the short run; price levels
Answer Key
Page 69
45.
D
46.
A
47.
D
48.
A
49.
A
50.
A
51.
B
52.
D
53.
D
54.
B
55.
B
56.
A
57.
B
58.
A
59.
B
60.
C
61.
B
62.
A
63.
A
64.
B
65.
A
66.
C
67.
B
68.
A
69.
A
70.
A
71.
B
72.
B
73.
C
74.
B
75.
C
76.
D
77.
B
78.
C
79.
A
80.
B
81.
C
82.
C
83.
A
84.
D
85.
A
86.
C
87.
C
88.
D
89.
A
90.
B
Page 70
91.
A
92.
B
93.
D
94.
D
95.
B
96.
C
97.
B
98.
D
99.
A
100.
B
101.
C
102.
D
103.
A
104.
C
105.
D
106.
A
107.
B
108.
B
109.
D
110.
A
111.
A
112.
D
113.
D
114.
C
115.
B
116.
A
117.
C
118.
B
119.
C
120.
C
121.
B
122.
A
123.
C
124.
A
125.
B
126.
C
127.
A
128.
B
129.
C
130.
B
131.
C
132.
B
133.
C
134.
B
135.
C
136.
A
Page 71
137.
C
138.
D
139.
C
140.
C
141.
B
142.
A
143.
C
144.
C
145.
A
146.
D
147.
D
148.
B
149.
A
150.
B
151.
C
152.
C
153.
B
154.
A
155.
C
156.
D
157.
D
158.
A
159.
B
160.
D
161.
B
162.
D
163.
D
164.
D
165.
C
166.
C
167.
B
168.
B
169.
A
170.
B
171.
B
172.
A
173.
C
174.
C
175.
B
176.
A
177.
C
178.
C
179.
D
180.
C
181.
A
182.
C
Page 72
183.
D
184.
A
185.
B
186.
A
187.
D
188.
B
189.
A
190.
B
191.
D
192.
C
193.
A
194.
D
195.
B
196.
C
197.
B
198.
A
199.
A
200.
A
201.
A
202.
B
203.
D
204.
A
205.
A
206.
A
207.
D
208.
B
209.
A
210.
D
211.
C
212.
C
213.
A
214.
C
215.
C
216.
D
217.
B
218.
C
219.
A
220.
B
221.
A
222.
B
223.
B
224.
A
225.
D
226.
D
227.
D
228.
C
Page 73
229.
C
230.
A
231.
D
232.
D
233.
B
234.
C
235.
C
236.
C
237.
D
238.
A
239.
A
240.
C
241.
B
242.
A
243.
A
244.
B
245.
A
246.
B
247.
A
248.
B
249.
B
250.
A
251.
B
252.
A
253.
B
254.
B
255.
A
256.
B
257.
A
258.
A
259.
B
260.
B
261.
A
262.
A
263.
B
264.
A
265.
B
266.
A
267.
B
268.
A
269.
B
270.
A
271.
B
272.
A
273.
B
274.
A
Page 74
275.
B
276.
A
277.
A
278.
B
279.
A
280.
B
281.
A
282.
B
283.
A
284.
A
285.
B
286.
A
287.
A
288.
B
289.
A
290.
B
291.
A
292.
B
293.
B
294.
A
295.
B
296.
B
297.
A
298.
B
299.
A
300.
B
301.
A
302.
B
303.
A
304.
B
305.
A
306.
B
307.
A
308.
B
309.
B
310.
A
311.
B
312.
A
313.
A
314.
B
315.
A
316.
A
317.
B
318.
319.
320.
Page 75
321.
322.
323.
324.
325.
326.
327.
328.
329.
330.
A
331.
A
332.
B
333.
B
334.
A
335.
A
336.
A
337.
A
338.
A
339.
A
340.
D
341.
A
342.
A
343.
A
344.
A
345.
B
346.
A
347.
A
348.
A
349.
A
350.
A
351.
A
352.
C
353.
C