Chapter 5—Monetary Policy
1. The Fed can affect the interaction between the demand for money and the supply of money to
influence interest rates, the aggregate level of spending, and therefore economic growth.
a. True
b. False
2. The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money
supply.
a.
increase; decreasing
b.
decrease; increasing
c.
decrease; decreasing
d.
increase; increasing
3. A credit crunch occurs when:
a.
interest rates decline.
b.
interest rates rise.
c.
creditors restrict the amount of loans they are willing to provide.
d.
the economy is strong.
4. According to the theory of rational expectations, higher inflationary expectations encourage businesses
and households to reduce their demand for loanable funds.
a. True
b. False
5. A passive monetary policy adjusts money supply automatically in response to economic conditions.
a. True
b. False
6. If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated
substantially from the Fed’s target inflation rate, the Fed could lose credibility.
a. True
b. False
7. In general, there is:
a.
a positive relationship between unemployment and inflation.
b.
an inverse relationship between unemployment and inflation.
c.
an inverse relationship between GNP and inflation.
d.
a positive relationship between GNP and unemployment.
8. A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.
a.
tight; loose
b.
loose; tight
c.
tight; tight
d.
loose; loose
9. A loose money policy tends to ____ economic growth and ____ the inflation rate.
a.
stimulate; place downward pressure on
b.
stimulate; place upward pressure on
c.
dampen; place upward pressure on
d.
dampen; place downward pressure on
10. When both inflation and unemployment are relatively high, there is more disagreement among FOMC
members about the proper monetary policy to implement.
a. True
b. False
11. ____ serves as the most direct indicator of economic growth in the United States.
a.
Gross domestic product (GDP)
b.
National income
c.
The unemployment rate
d.
The industrial production index
12. Which of the following is not an indicator of inflation?
a.
housing price indexes
b.
wage rates
c.
oil prices
d.
consumer confidence surveys
13. The ____ indicators tend to occur before a business cycle.
a.
leading
b.
lagging
c.
coincident
d.
none of the above
14. The ____ indicators tend to occur after a business cycle.
a.
leading
b.
lagging
c.
coincident
d.
none of the above
15. The ____ indicators tend to occur before a business cycle.
a.
leading
b.
lagging
c.
coincident
d.
none of the above
16. The time lag between when an economic problem arises and when it is reported in economic statistics
is the
a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.
17. The time between when an economic problem is realized and when the Fed tries to correct it with its
policies is the
a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.
18. The time between when the Fed adjusts the money supply and when interest rates change reflects the
a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.
19. If the Fed attempts to reduce inflation, it would likely increase money supply growth.
a. True
b. False
20. Which of the following best describes the relationship between the Fed and the Administration?
a.
The Fed must receive approval by the Administration before conducting monetary policy.
b.
The Fed must implement a monetary policy specifically to the support the
Administration’s policy.
c.
The Administration must receive approval from the Fed before implementing fiscal policy.
d.
A and C
e.
none of the above
21. A high budget deficit tends to place ____ pressure on interest rates; the Fed’s tightening of the money
supply tends to place ____ pressure on interest rates.
a.
upward; upward
b.
upward; downward
c.
downward; downward
d.
downward; upward
22. The Fed is usually more willing to monetize the debt when inflation is relatively high.
a. True
b. False
23. International flows of funds can affect the Fed’s monetary policy. For example, if there is downward
pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel
compelled to use a ____ monetary policy.
a.
inflows; loose
b.
inflows; tight
c.
outflows; loose
d.
outflows; tight
e.
none of the above
24. Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate
loans. It should be adversely affected when the Fed:
a.
monetizes the debt.
b.
maintains a stable money supply.
c.
uses a tight-money policy.
d.
uses a loose-money policy.
25. The ____ lag represents the time from when an economic problem exists until it is recognized.
a.
recognition
b.
adjustment
c.
implementation
d.
none of the above
26. A ____ dollar tends to exert inflationary pressure in the U.S.
a.
stable
b.
strong
c.
weak
d.
both A and B
27. According to the theory of rational expectations, ____ inflationary expectations encourage businesses
and households to ____ their demand for loanable funds in order to borrow and make planned
expenditures increase.
a.
higher; reduce
b.
higher; increase
c.
lower; reduce
d.
lower; increase
28. Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation
tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.
a.
increase; upward
b.
increase; downward
c.
decrease; downward
d.
decrease; upward
29. If the Fed uses a passive monetary policy during weak economic conditions,
a.
it increases money supply substantially.
b.
it reduces money supply substantially.
c.
it allows the economy to fix itself.
d.
it focuses on monetizing the debt.
30. Which of the following is true?
a.
Federal deficits require that the Fed purchase government securities.
b.
Federal deficits will always result in an increase in money supply.
c.
The Federal Reserve monetizes debt by selling securities which ultimately increases
money supply.
d.
An agreement between the Fed and the Treasury exists whereby the Fed is directly
responsible for monetizing the debt whenever the deficit increases.
e.
None of the above.
31. Inflation is commonly the result of a
a.
large budget deficit.
b.
high level of interest rates.
c.
high level of unemployment.
d.
high level of aggregate demand.
32. According to the theory of rational expectations, if the Fed uses open market operations in order to
increase the supply of loanable funds, the ultimate effect on interest rates is definitely
a.
a reduction in interest rates.
b.
an increase in interest rates.
c.
no effect on the interest rates.
d.
the impact on interest rates cannot be determined.
33. The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if
oil prices are
a.
low and steady.
b.
low, but rising.
c.
very high, but declining slightly.
d.
very high and rising.
34. Global crowding out is described in the text to mean the impact of
a.
excessive U.S. population growth on interest rates.
b.
excessive global population growth on interest rates.
c.
an excessive budget deficit in one country on interest rates of another country.
d.
an excessive budget deficit in one country on exchange rates.
35. If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the
private sector is not, this reflects
a.
the crowding-out effect.
b.
dynamic open market operations.
c.
defensive open market operations.
d.
monetizing the debt.
36. When the Fed uses open market operations by purchasing Treasury securities from various financial
institutions in the U.S., there will be
a.
an outward shift in the supply schedule of loanable funds.
b.
an inward shift in the supply schedule of loanable funds.
c.
no shift in the supply schedule of loanable funds.
d.
an inward shift in the demand schedule for loanable funds.
37. When the Fed uses open market operations by selling some of its Treasury securities to investors in the
U.S., there will be
a.
an outward shift in the supply schedule of loanable funds.
b.
an inward shift in the supply schedule of loanable funds.
c.
no shift in the supply schedule of loanable funds.
d.
an outward shift in the demand schedule for loanable funds.
38. Which of the following is not a disadvantage of inflation targeting?
a.
If the U.S. inflation rate deviates substantially from the Fed’s target inflation rate, the Fed
could lose credibility.
b.
The Fed’s complete focus on inflation could result in a much higher unemployment level.
c.
The Fed’s complete focus on inflation could result in much higher interest rates, which
would discourage economic growth.
d.
All of the above are disadvantages of inflation targeting.
39. Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension
funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest
rates.
a.
unfavorably; decreases
b.
unfavorably; increases
c.
favorably; increases
d.
Answer A and C are correct.
40. According to the theory of rational expectations, higher inflationary expectations encourage businesses
and households to reduce their demand for loanable funds.
a. True
b. False
41. A passive monetary policy adjusts money supply automatically in response to economic conditions.
a. True
b. False
42. If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated
substantially from the Fed’s target inflation rate, the Fed could lose credibility.
a. True
b. False
43. If the Fed attempts to reduce inflation, it would likely increase money supply growth.
a. True
b. False
44. The relationship between the interest rate on loanable funds and the level of business investment is
positive.
a. True
b. False
45. The supply schedule of loanable funds indicates the quantity of funds that would be demanded at
various possible interest rates.
a. True
b. False
46. To correct excessive inflation, the Fed could use open market operations by buying Treasury securities
in the secondary market.
a. True
b. False
47. One of the disadvantages of inflation targeting is that the Fed could lose credibility is the U.S. inflation
rate deviates substantially from the Fed’s target inflation rate.
a. True
b. False
48. Economists who work at the Fed recognize that a stimulative monetary policy will not always cure a
high unemployment rate and could even ignite inflation.
a. True
b. False
49. An attempt by the Fed to stimulate the economy by reducing short-term interest rates may have a
limited effect if long-term interest rates remain unaffected.
a. True
b. False
50. The Fed needs the approval of the presidential administration to make decisions.
a. True
b. False
51. The Fed is more likely to use a stimulative policy during a strong-dollar period.
a. True
b. False
52. A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the
level of business investment.
a.
increase; decrease
b.
decrease; decrease
c.
increase; increase
d.
decrease; increase
53. Which of the following is probably not a goal the Fed is trying to achieve consistently?
a.
low inflation
b.
high interest rates
c.
steady GNP growth
d.
low unemployment
54. The ____ is not an indicator of economic growth.
a.
producer price index
b.
gross domestic product
c.
national income
d.
unemployment rate
e.
All of the above are indicators of economic growth.
55. Which of the following is not true with respect to inflation targeting?
a.
The Fed could lose credibility is the inflation rate deviates substantially from the Fed’s
target inflation rate.
b.
A complete focus on inflation could result in a much higher unemployment rate.
c.
Inflation targeting may not only satisfy the inflation goal, but could also achieve the
employment stabilization goal in the long run.
d.
If unemployment is slightly higher than normal, while inflation is at the peak of the target
range, and inflation targeting approach would like advocate a loose monetary policy.
56. A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and
contractions.
a.
leading
b.
coincident
c.
lagging
d.
none of the above
57. A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy.
a.
U.S. exports; U.S. imports; weaken
b.
U.S. exports; U.S. imports; stimulate
c.
U.S. imports; U.S. exports; stimulate
d.
none of the above
58. The interest rate that the Fed targets for its monetary policy is the:
a.
commercial paper rate.
b.
federal funds rate.
c.
Treasury bond coupon rate.
d.
1-year certificate of deposit rate.
59. When the Fed purchases Treasury securities, the account balances of the investors who sell their
securities to the Fed _________, and there are _________ in the account balances of other financial
institutions.
a.
increase; offsetting decreases
b.
increase; no offsetting decreases
c.
decrease; offsetting increases
d.
decrease; no offsetting increases
60. The Fed’s monetary policy is commonly intended to alter the supply of funds in the banking system in
order to achieve a specific targeted:
a.
discount rate.
b.
required reserve requirement.
c.
federal funds rate.
d.
prime rate.
61. If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will
be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury
security rate to 6 percent, the cost of borrowing for the firm will be ________.
a.
7 percent; 10 percent
b.
4 percent; 6 percent
c.
7 percent; 9 percent
d.
1 percent; 3 percent
62. In the “operation twist” strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and
used the proceeds to purchase ________ Treasury securities.
a.
long-term; short-term
b.
short-term; long-term
c.
short-term; long-term
d.
long-term; short-term
63. The intent of the Fed’s operation twist strategy in 2011 and 2012 was to:.
a.
increase long-term interest rates.
b.
require corporations to issue more commercial paper.
c.
require bond rating agencies to impose higher standards on their ratings.
d.
reduce long-term interest rates.
64. Which of the following is not a reason that a stimulative monetary policy may be ineffective?
a.
The effects of a stimulative policy may be disrupted by expectations of inflation.
b.
Retirees who rely on interest income may restrict their spending
c.
Lending institutions may increase their standards for borrowers, so some potential
borrowers may not qualify for loans.
d.
Higher interest rates encourage individuals to increase their savings.
65. In 2012, the Fed stated that it would continue to purchase Treasury bonds in the financial markets
until GDP growth increased to a target level.
a. True
b. False
66. Which of the following was not true of the eurozone during the Greek crisis?
a.
Fear of a financial crisis throughout Europe discouraged investors and firms from moving
funds into Europe.
b.
By using a more stimulative monetary policy than it desired, the European Central Bank
aroused concerns about potential inflation in the eurozone.
c.
There was concern that the austerity conditions could weaken the country’s economy
further.
d.
Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to
stimulate their economies.