Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
The top policy goal for Paul Volker when he became chairman of the Federal Reserve’s Board of
Governors in 1979 was
1)
A)
a low current account deficit.
B)
increasing regulation of commercial banks.
C)
increasing employment.
D)
fighting inflation.
E)
increasing economic growth.
Table 16–1
Year Potential Real GDP Real GDP Price Level
2014 $14.2 trillion $14.2 trillion 145
2015 $14.6 trillion $14.5 trillion 147
2)
Refer to Table 16–1. The hypothetical information in the table shows what the values for real GDP
and the price level will be in 2015 if the Fed does not use monetary policy. Which of the following
policies makes sense if the Fed wants to keep real GDP at its potential level in 2015?
2)
A)
The trading desk should sell Treasury securities.
B)
The Fed should lower the target for the federal funds rate.
C)
The Fed should lower capital gains taxes.
D)
The Fed should pursue contractionary policy.
B
3)
With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth
of the money supply would
3)
A)
increase.
B)
decrease.
C)
not change.
D)
decrease or increase depending on economic conditions.
C
D
4)
An increase in demand for Treasury bills will
4)
A)
increase the opportunity cost of holding money versus Treasury bills.
B)
eventually cause households to hold less money.
C)
increase the price of Treasury bills.
D)
increase the interest rate on Treasury bills.
5)
Asset market bubbles form when investors
5)
A)
decide the asset is undervalued and many investors sell the asset.
B)
underestimate the value of the asset.
C)
decide the asset is overvalued and many investors sell the asset.
D)
overestimate the value of the asset.
D
6)
By the 2000s, an important change in the mortgage market had occurred when ________ became
significant participants in the secondary market for mortgages.
6)
A)
investment banks
B)
Federal Reserve Banks
C)
savings banks
D)
commercial banks
A
C
Figure 16–5
7)
Refer to Figure 16–5. In the dynamic model of AD–AS in the figure above, if the economy is at
point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely
7)
A)
increase interest rates.
B)
not change interest rates.
C)
decrease the inflation rate.
D)
decrease interest rates.
8)
Using the money demand and money supply model, an open market purchase of Treasury
securities by the Federal Reserve would cause the interest rate to
8)
A)
not change.
B)
increase.
C)
decrease.
D)
increase if the economy is in a recession.
9)
An increase in the interest rate causes
9)
A)
the money demand curve to shift to the right.
B)
the money demand curve to shift to the left.
C)
a movement up along the money demand curve.
D)
a movement down along the money demand curve.
10)
An increase in the interest rate should ________ the demand for dollars and the value of the dollar,
and net exports should ________.
10)
A)
increase; increase
B)
increase; not change
C)
increase; decrease
D)
decrease; decrease
E)
decrease; increase
C
11)
Which of the following tools did the Fed employ during the stock market crash of 1987 and the Y2K
difficulties in late 1999?
11)
A)
changing the reserve requirement
B)
contractionary open market operations
C)
expansionary open market operations
D)
increasing the volume of discount loans
D
C
Figure 16–4
12)
Refer to Figure 16–4. Suppose the economy is in a recession and no policy is pursued. Using the
static AD–AS model in the figure above, this situation would be depicted as a movement from
12)
A)
A to E.
B)
A to B.
C)
C to D.
D)
B to A.
E)
C to B.
Figure 16–6
13)
Refer to Figure 16–6. In the dynamic AD–AS model, if the economy is at point A in year 1 and is
expected to go to point B in year 2, the Federal Reserve would most likely
13)
A)
not change interest rates.
B)
increase the inflation rate.
C)
increase interest rates.
D)
decrease interest rates.
14)
Which of the following statements about inflation targeting is true?
14)
A)
Inflation targeting would not allow the central bank the flexibility to take action against a
severe recession.
B)
Inflation targeting is practiced strongly in the U.S. but is ignored in Europe.
C)
With changes in leadership over time at the Federal Reserve, inflation targeting could help
institutionalize good U.S. monetary policy.
D)
Inflation targeting has been adopted by the central banks of fewer than five countries.
15)
Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent,
the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the
weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the
federal funds target rate equals
15)
A)
6 percent.
B)
4 percent.
C)
10 percent.
D)
8 percent.
16)
Changes in interest rates affect stock prices because changes in interest rates affect
16)
A)
the amount of money in the economy.
B)
government purchases, which affects the profitability of firms.
C)
government purchases, which increases the amount of money in the economy.
D)
real GDP, which affects the profitability of firms.
17)
The Federal Reserve can affect directly its monetary policy ________, which then affect its monetary
policy ________.
17)
A)
targets; tools
B)
goals; tools
C)
goals; targets
D)
targets; goals
18)
Expansionary monetary policy to prevent real GDP from falling below potential real GDP would
cause the inflation rate to be relatively ________ and real GDP to be relatively ________.
18)
A)
higher; higher
B)
lower; lower
C)
lower; higher
D)
higher; lower
19)
The Federal Reserve responded to the housing market crisis in several ways. Which of the
following is not one of the ways the Fed responded?
19)
A)
The Fed lent investment banks Treasury securities in exchange for mortage–backed securities.
B)
The Fed lowered the required reserve ratio on demand deposit accounts in order to increase
the amount of bank reserves.
C)
The Fed helped JP Morgan to acquire Bear Stearns, a nearly bankrupt investment bank.
D)
The Fed made investment banks eligible for discount loans.
20)
Contractionary monetary policy to prevent real GDP from rising above potential real GDP would
cause the inflation rate to be ________ and real GDP to be ________.
20)
A)
higher; lower
B)
higher; higher
C)
lower; higher
D)
lower; lower
21)
Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP
equals potential GDP, then the federal funds target rate equals the
21)
A)
current inflation rate.
B)
current discount rate.
C)
real equilibrium federal funds rate.
D)
current inflation rate plus the real equilibrium federal funds rate.
22)
A geographic area may be suffering a housing bubble if
22)
A)
an increasing proportion of real estate buyers are granted standard and not subprime
mortgages.
B)
the rental rates in the area are substantially below monthly mortgage payments.
C)
an increasing number of buyers are purchasing houses to live in and not for investing
purposes.
D)
housing prices reflect the value of the housing services that the house provides.
23)
If the Federal Reserve targets the interest rate, and the money demand curve shifts to the left, then
the Fed can
23)
A)
not maintain the interest rate target.
B)
maintain the interest rate target, but at a higher quantity of the money supply.
C)
maintain the interest rate target, but at a lower quantity of the money supply.
D)
maintain the interest rate target with no change in the money supply.
24)
Which of the following will lead to a decrease in interest rates in the economy?
24)
A)
a sale of government securities by the Fed
B)
an increase in the reserve requirement
C)
a decrease in GDP
D)
an increase in the discount rate
E)
an increase in the price level
C
25)
The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal
of ________, it also can achieve the goal of ________ simultaneously.
25)
A)
high employment; price stability
B)
stability of financial markets; a low current account deficit
C)
economic growth; a low current account deficit
D)
high employment; economic growth
D
26)
From an initial long–run macroeconomic equilibrium, if the Federal Reserve anticipated that next
year aggregate demand would grow significantly faster than long–run aggregate supply, then the
Federal Reserve would most likely
26)
A)
decrease interest rates.
B)
increase interest rates.
C)
decrease income tax rates.
D)
increase income tax rates.
B
C
27)
Expansionary monetary policy refers to the ________ to increase real GDP.
27)
A)
Federal Reserve’s decreasing the money supply and increasing interest rates
B)
government’s increasing spending and lowering taxes
C)
Federal Reserve’s increasing the money supply and decreasing interest rates
D)
government’s decreasing spending and raising taxes
28)
Since 2000, the Fed uses ________ to measure inflation.
28)
A)
the index of leading economic indicators
B)
the producer price index
C)
the personal consumption expenditures index
D)
the consumer price index
E)
the GDP deflator
29)
When the Federal Reserve increases the money supply, at the previous equilibrium interest rate
households and firms will now have
29)
A)
more money than they want to hold.
B)
to sell Treasury bills.
C)
the amount of money that they want to hold.
D)
less money than they want to hold.
30)
The supporters of a monetary growth rule believe that active monetary policy
30)
A)
cannot change the inflation rate.
B)
destabilizes the economy, increasing the number of recessions and their severity.
C)
cannot change real GDP.
D)
stabilizes the economy, decreasing the number of recessions and their severity.
31)
If the Federal Reserve targets the money supply, and the money demand curve shifts to the left,
then the Fed can
31)
A)
maintain the money supply target, but at a higher interest rate.
B)
maintain the money supply target with no change in the interest rate.
C)
not maintain the money supply target.
D)
maintain the money supply target, but at a lower interest rate.
Figure 16–4
32)
Refer to Figure 16–4. Suppose the Fed lowers its target for the federal funds rate. Using the static
AD–AS model in the figure above, this situation would be depicted as a movement from
32)
A)
C to B.
B)
E to A.
C)
B to A.
D)
A to B.
E)
C to D.
33)
Inflation targeting refers to conducting ________ policy so as to commit the central bank to
achieving a ________.
33)
A)
fiscal; zero inflation rate
B)
monetary; zero inflation rate
C)
monetary; publicly announced level of inflation
D)
fiscal; publicly announced level of inflation
34)
From an initial long–run macroeconomic equilibrium, if the Federal Reserve anticipated that next
year aggregate demand would grow significantly slower than long–run aggregate supply, then the
Federal Reserve would most likely
34)
A)
increase income tax rates.
B)
increase interest rates.
C)
decrease income tax rates.
D)
decrease interest rates.
35)
The interest rate on a Treasury bill that you pay $870 for today that matures in one year and pays
$1,000 is
35)
A)
15 percent.
B)
13 percent.
C)
12 percent.
D)
14 percent.
36)
Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is
less than potential GDP, then the federal funds target rate ________ the sum of the current inflation
rate plus the real equilibrium federal funds rate.
36)
A)
will be greater than
B)
will be less than
C)
may be greater than or less than
D)
will be the same as
37)
When the Federal Reserve System was established in 1913, its main policy goal was
37)
A)
promoting price stability.
B)
encouraging strong economic growth.
C)
keeping employment high.
D)
preventing bank panics.
38)
Which of the following statements about inflation targeting is true?
38)
A)
Inflation targeting would not reduce the flexibility of monetary policy to address other policy
goals.
B)
Inflation targeting would not allow the central bank the flexibility to take action against a
severe recession.
C)
Inflation targeting would make it easier for households and firms to form accurate
expectations of future inflation, improving their planning and the efficiency of the economy.
D)
Inflation targeting by the central banks in other countries has not lowered inflation.
39)
Which of the following is true about the Federal Reserve and its ability to prevent recessions? The
Federal Reserve
39)
A)
can fine tune the economy and realistically hope to keep the economy from experiencing
recessions.
B)
cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder
than they would otherwise be.
C)
does not try to eliminate recessions, but instead focuses on preventing inflation.
D)
cannot realistically fine tune the economy and has little to no effect on the magnitude and
length of recessions.
40)
Stock prices tend to rise when investors expect that the Federal Reserve will be
40)
A)
raising the inflation rate.
B)
leaving interest rates unchanged.
C)
raising interest rates.
D)
lowering interest rates.
41)
Monetarists think that the Fed should use ________ as a target when conducting monetary policy.
41)
A)
the Treasury bill rate
B)
the money supply
C)
the unemployment rate
D)
the federal funds rate
E)
the inflation rate
42)
The money demand curve has a
42)
A)
negative slope because an increase in the interest rate decreases the quantity of money
demanded.
B)
positive slope because an increase in the interest rate increases the quantity of money
demanded.
C)
positive slope because an increase in the price level increases the quantity of money
demanded.
D)
negative slope because an increase in the price level decreases the quantity of money
demanded.
43)
Your roommate is having trouble grasping how monetary policy works. Which of the following
explanations could you use to correctly describe the mechanism by which the Fed can affect the
economy through monetary policy? Increasing the money supply
43)
A)
lowers the interest rate, and firms increase investment spending.
B)
causes people to spend more because they know prices will rise in the future.
C)
lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises
net exports.
D)
raises the interest rate and consumers decrease spending on durable goods.
44)
Using the money demand and money supply model, an open market sale of Treasury securities by
the Federal Reserve would cause the interest rate to
44)
A)
increase.
B)
increase, then decrease.
C)
decrease.
D)
not change.
45)
A financial asset is considered a security if
45)
A)
its value increases after it is sold in a primary market.
B)
its value is secure; that is, the owner will not suffer a financial loss when the asset is sold.
C)
the owner of the security receives dividends and realizes a capital gain when the asset is sold.
D)
it can be sold in a secondary market.
46)
The monetary policy target the Federal Reserve focuses primarily on today is the
46)
A)
unemployment rate.
B)
interest rate.
C)
M1.
D)
inflation rate.
E)
M2.
Figure 16–5
47)
Refer to Figure 16–5. In the dynamic model of AD–AS in the figure above, if the economy is at
point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no
policy, then at point B
47)
A)
the economy is below full employment.
B)
there is pressure on wages and prices to rise.
C)
firms are operating above their normal capacity.
D)
the unemployment rate is very, very low.
E)
incomes and profits are rising.
48)
An increase in the interest rate
48)
A)
increases the percentage yield of holding money.
B)
decreases the percentage yield of holding money.
C)
decreases the opportunity cost of holding money.
D)
increases the opportunity cost of holding money.
49)
If the interest rate is 9 percent, the price of a Treasury bill that pays $1,000 in one year is
49)
A)
$917.
B)
$910.
C)
$1,090.
D)
$945.
50)
For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the
50)
A)
Treasury bill rate.
B)
discount rate.
C)
prime rate.
D)
federal funds rate.
51)
Using the money demand and money supply model, an increase in money demand would cause
the interest rate to
51)
A)
increase, then decrease.
B)
decrease.
C)
increase.
D)
not change.
52)
If the interest rate is 3 percent, the price of a Treasury bill that pays $1,000 in one year is
52)
A)
$980.
B)
$990.
C)
$1,030.
D)
$971.
Figure 16–4
53)
Refer to Figure 16–4. Suppose the economy is in a recession and the Fed pursues an expansionary
monetary policy. Using the static AD–AS model in the figure above, this would be depicted as a
movement from
53)
A)
A to B.
B)
B to C.
C)
C to D.
D)
C to B.
E)
A to E.
54)
Suppose that households became mistrustful of the banking system and decide to decrease their
checking accounts and increase their holdings of currency. Using the money demand and money
supply model and assuming everything else is held constant, the interest rate should
54)
A)
increase, then decrease.
B)
not change.
C)
decrease.
D)
increase.
55)
Under the monetary growth rule proposed by the monetarists, the money supply would grow each
year at a constant rate equal to the long–run rate of growth of
55)
A)
interest rates.
B)
inflation.
C)
employment.
D)
real GDP.
56)
If the probability of losing your job remains ________, a recession would be a good time to
purchase a home because the Fed usually ________ interest rates during this time.
56)
A)
high; raises
B)
low; does not change
C)
high; lowers
D)
low; raises
E)
low; lowers
57)
Most economists believe that the best monetary policy target is
57)
A)
an interest rate.
B)
the money supply.
C)
the discount rate.
D)
total bank reserves.
Figure 16–6
58)
Refer to Figure 16–6. In the dynamic AD–AS model, if the economy is at point A in year 1 and is
expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B
58)
A)
incomes and profits are falling.
B)
there is pressure on wages and prices to fall.
C)
the unemployment rate is greater than the natural rate of unemployment.
D)
firms are producing above capacity.
59)
During the turmoil in the market for subprime mortgages in 2007 and 2008 the Fed increased the
volume of discount loans. The goal of the Fed was to
59)
A)
reduce unemployment.
B)
stimulate economic growth.
C)
reduce the rate of inflation.
D)
reduce the current account deficit.
E)
reassure financial markets and promote financial stability.
60)
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?
60)
A)
The Fed reduced the federal funds rate to its lowest level in 40 years.
B)
Home building and consumer durable purchases are always high during a recession.
C)
Rising inflation encouraged many to invest in the real estate market.
D)
The Fed’s pursuit of contractionary policy stimulated these markets.
Figure 16–5
61)
Refer to Figure 16–5. In the dynamic model of AD–AS in the figure above, the economy is at point
A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This
will result in
61)
A)
inflation higher than what would occur if no policy had been pursued.
B)
short term interest rates higher than what would occur if no policy had been pursued.
C)
real GDP lower than what would occur if no policy had been pursued.
D)
unemployment rates higher than what would occur if no policy had been pursued.