Additional Application MAKING THE FEDERAL RESERVE MORE
TRANSPARENT What are the advantages and disadvantages of the Federal Reserve
becoming more transparent about its actions and decisions and disclosing more
information to the public? In recent years, the Fed has gradually become more open in
its deliberations. For many years, the Fed would not even say if it had changed interest
rates. These policies began to change slowly in the 1990s. Starting in 2000, after each
FOMC meeting the Fed announces its target for the federal funds rate and makes a brief
statement explaining its actions. But should the Fed go further in describing its intended
future policies? There was enough interest on this very topic for the FOMC to hold a
special meeting—the first since 1979—to discuss the issue. Some members of the
FOMC, including the current chairman Ben Bernanke, believed that the financial
markets needed more information so that they would have a clearer idea of what future
Fed policy—and short-term interest rates—were likely to be. Other members, including
William Poole, the president of the St. Louis Federal Reserve Bank, disagreed. Poole
felt that the financial markets understood the implicit rules that the Fed followed and
that issuing a more complex public statement would just confuse
matters. The special meeting did not lead to any dramatic change in the Fed’s
communication policies. But now the members of the FOMC participate in drafting
statements. The Fed clearly recognizes that its statements may be just as important as its
actions. According to the application, some members of the FOMC are against making
its intended policies more explicit because:
A) making a more complex public statement could cause a recession.
B) making a more complex public statement would confuse the financial market.
C) making a more complex public statement would allow the possibility for increased
bank profits.
D) making a more complex public statement would make the Fed useless.
At a price of $1000, Dell Computer Co. is willing to sell 20 laptops and Compaq is
willing to sell 40 laptops. IBM will only sell laptops if the price is $1300 or higher.
From the point of view of IBM, $1300 is the:
A) minimum supply price.
B) minimum cost.
C) the equilibrium price.
D) minimum loss price.
If the quantity of money demanded exceeds the quantity of money supplied, then the
A) equilibrium interest rate stays the same.
B) equilibrium interest rate will increase.
C) equilibrium interest rate will decrease.
D) effect on the equilibrium interest rate is indeterminate.
If there was a positive technological shock which increased the demand for labor, then
A) GDP would increase.
B) GDP would decrease.
C) imports would increase.
D) imports would decrease.
When deciding whether to engage in an activity or how much to do, people should
follow
A) the principle of microeconomics.
B) the principle of macroeconomics.
C) the marginal principle.
D) the law of supply and demand.
According to the growth version of the quantity equation, if the money supply doubles
while all else stays constant, then:
A) nominal GDP doubles.
B) the inflation rate doubles.
C) real GDP doubles.
D) the interest rates doubles.
If a country’s currency depreciates, the country will experience a ________ in exports
and a ________ in imports.
A) rise; rise
B) fall; fall
C) rise; fall
D) fall; rise
Actions by the Federal Reserve to influence the level of GDP are known as
A) monetary policy.
B) fiscal policy.
C) cyclical policy.
D) procyclical policy.
Firms react to unplanned increases in inventories by:
A) reducing output.
B) increasing output.
C) increasing planned investment.
D) increasing consumption.
Recall Application 2, “What Have Been the Local Effects of Chinese Imports?” to
answer the following questions:
According to the Application, what effects of the Chinese imports were advantageous to
local communities, but are usually not included in the study done by Autor, Dorn and
Hanson?
A) lower prices for consumers
B) improved US-China relations
C) a stronger local currency
D) more export opportunities for U.S. producers
A federal budget ________ occurs when the federal government spends more than it
collects in taxes.
A) surplus
B) deficit
C) equilibrium
D) ceiling
An account statement for a bank that shows the sources of its funds and the uses of its
funds is called:
A) a bank’s balance sheet.
B) a bank’s income statement.
C) a bank’s profit report.
D) a person’s checking account.
Suppose there are three economies with 3 different consumption functions:
Country A: C = 100 + 0.8Y
Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y If the government spending increases by 10, in which of
these countries would the shift of the AD curve be the largest?
A) Country B
B) Country A
C) Country C
D) All countries have the same shifts in the aggregate demand.
Which of the following is NOT an example of technological progress?
A) builders constructing a new office building that uses less energy
B) an increase in Florida’s orange crop resulting from a mild winter
C) the invention of wireless internet access
D) the development of blue tooth headsets