File: Chapter 29 Monetary Policy
True/False
[Question]
1. In the AS/AD model, an increase in the money supply causes an increase in the interest rate
and an increase in investment spending.
2. A contractionary monetary policy decreases the money supply and the interest rate, which
decreases investment and output.
3. The Fed’s duties include acting as a lender of last resort and supervising or regulating a
variety of financial institutions.
4. The three tools of monetary policy are open market operations, setting prices, and setting the
velocity of money.
5. An increase in the federal funds rate is a signal that the Fed wants a tighter monetary policy.
6. A decrease in the federal funds rate is an indication that monetary policy is expansionary.
7. The federal funds rate is the rate banks charge one another for overnight loans.
8. The Taylor Rule relates changes in the money supply to changes in interest rates.
9. The art of monetary policy requires acting in accordance with the Taylor Rule.
10. According to the Taylor Rule, if current inflation is 2.5 percent, the target inflation rate is 2
percent, and output is 1 percent above potential, the Fed should target the federal funds rate at
5.25 percent.
11. The difference between a standard and an inverted yield curve is that when the yield curve is
inverted, the longer-term bond pays a lower interest rate than a short-term bond.
12. The Federal Reserve controls the long-term interest rate.
13. Who determines U.S. monetary policy?
A. Congress
B. the president
C. the Internal Revenue Service
D. the Federal Reserve
14. Monetary policy is one of the two main macroeconomic tools governments use to control the
aggregate economy. The other is:
A. fiscal policy.
B. foreign policy.
C. trade policy.
D. immigration policy.
15. Which of the following is not directly affected by monetary policy?
A. The money supply
B. The banking system
C. The availability of credit
D. The budget deficit
16. In the short run if the Fed undertakes expansionary monetary policy, the effect will be to shift
the:
A. AD curve out to the right.
B. AD curve in to the left.
C. SAS curve up.
D. SAS curve down.
17. In the short run if the Fed undertakes contractionary monetary policy, the effect will be to
shift the:
A. AD curve out to the right.
B. AD curve in to the left.
C. SAS curve up.
D. SAS curve down.
18. Which of the following is the path through which contractionary monetary policy works?
A. Money down implies interest rate up implies investment down implies income down.
B. Money down implies interest rate down implies investment down implies income down.
C. Money down implies interest rate up implies investment up implies income down.
D. Money down implies interest rate down implies investment up implies income down.
19. Monetary policy directly affects:
A. social spending.
B. tax rates.
C. the availability of credit.
D. the antitrust laws.
20. Expansionary monetary policy is always expected to increase:
A. nominal income but never real income.
B. real income but never nominal income.
C. nominal income.
D. real income.
21. A monetary policy that reduces both real and nominal income:
A. must be expansionary.
B. must be contractionary.
C. cannot be expansionary or contractionary.
D. could be expansionary or contractionary.
22. In the AS/AD model, in the short run monetary policy affects:
A. only inflation.
B. only real output.
C. both inflation and real output.
D. neither inflation nor real output.
23. Assuming an economy is initially at potential output, in the long run, an expansionary
monetary policy is expected:
A. not to affect output in the long run.
B. not to affect output in either the short run or the long run.
C. to affect output, but only in the long run.
D. to affect output in both the short run and the long run.
24. If prices are inflexible, monetary policy:
A. affects both inflation and real output.
B. affects real output but not inflation.
C. affects inflation but not real output.
D. doesn’t affect real output or inflation.
25. If prices are inflexible, monetary policy:
A. affects both nominal and real income.
B. affects real income but not nominal income.
C. affects nominal income but not real income.
D. does not affect real or nominal income.
26. If a contractionary monetary policy reduces nominal income in the short run but not real
income, it must be true that prices:
A. are perfectly flexible.
B. are at least partially flexible.
C. are completely inflexible.
D. have not fully adjusted to the change in aggregate demand.
27. With an upward sloping SAS curve, an expansionary monetary policy that affects the price
level but not real output could be the result of a shift of:
A. both the AD and SAS curves.
B. only the AD curve.
C. only the SAS curve.
D. neither the SAS curve nor the AD curve.
28. In the AS/AD model, an expansionary monetary policy has the greatest effect on the price
level when it:
A. increases both nominal and real income.
B. increases real income but not nominal income.
C. increases nominal income but not real income.
D. doesn’t increase real or nominal income.
29. If nominal income increases by 3 percent and real income increases by 4 percent, the price
level must:
A. increase by 7 percent.
B. increase by 1 percent.
C. decrease by 1 percent.
D. decrease by 7 percent.
30. If nominal income increases by 4 percent and the price level increases by 3 percent, real
income must:
A. increase by 7 percent.
B. increase by 1 percent.
C. decrease by 1 percent.
D. decrease by 7 percent.
31. If real income increases by 4 percent and the price level increases by 3 percent, nominal
income must:
A. increase by 7 percent.
B. increase by 1 percent.
C. decrease by 1 percent.
D. decrease by 7 percent.
32. Refer to the graph shown. Monetary policy that shifts the AD curve from AD0 to AD2 is
A. expansionary.
B. contractionary.
C. neither expansionary nor contractionary since it does not affect output.
D. neither expansionary nor contractionary since it does not affect inflation.
33. Refer to the graph shown. Monetary policy that shifts the AD curve from AD0 to AD1 and
moves the economy from A to B:
Real output
Price level
AD
0
AD
2
SAS
0
SAS
1
AD
1
SAS
2
C
A
B
D
E
LAS
Real output
Price level
AD
0
AD
2
SAS
0
SAS
1
AD
1
SAS
2
C
A
B
D
E
LAS
A. increases nominal output but not real output in the short run.
B. increases both real and nominal output in the short run.
C. increases real output but not nominal output in the short run.
D. doesn’t increase real or nominal output in the short run.
34. Refer to the graph shown. Suppose the economy is initially at A but then the Fed adopts an
expansionary monetary policy. The initial effect of this policy will be pressure to move the
economy to:
A. E.
B. B.
C. C.
D. D.
Real output
Price level
AD
0
AD
2
SAS
0
SAS
1
AD
1
SAS
2
C
A
B
D
E
LAS
35. Refer to the graph shown. Suppose the economy is initially at A but then the Fed adopts a
contractionary monetary policy. The long-term effect of this policy will be to move the economy
to:
A. E.
B. B.
C. C.
D. D.
36. Refer to the graph shown. Suppose the economy is initially at A but then the Fed adopts a
contractionary monetary policy. Using the standard AS/AD model reasoning, this policy will
cause the economy to move to:
Real output
Price level
AD
0
AD
2
SAS
0
SAS
1
AD
1
SAS
2
C
A
B
D
E
LAS
A. B in the short run and the long run.
B. A in the short run and the long run.
C. C in the short run and A in the long run.
D. C in the short run and E in the long run.
37. Other things equal, a rise in interest rates can be expected to:
A. increase the quantity of investment.
B. decrease the quantity of investment.
C. have no effect upon the quantity of investment.
D. increase equilibrium income.
Real output
Price level
AD
0
AD
2
SAS
0
SAS
1
AD
1
SAS
2
C
A
B
D
E
LAS
38. An expansionary monetary policy is most likely to:
A. increases interest rates, raises investment, and increases income.
B. decreases interest rates, raises investment, and increases income.
C. increases interest rates, reduces investment, and decreases income.
D. decreases interest rates, reduces investment, and decreases income.
39. Contractionary monetary policy is most likely to:
A. increases interest rates, raises investment, and increases income.
B. decreases interest rates, raises investment, and increases income.
C. increases interest rates, reduces investment, and decreases income.
D. decreases interest rates, reduces investment, and decreases income.
40. In the AS/AD model, a contractionary monetary policy:
A. reduces investment but increases aggregate demand.
B. increases both investment and aggregate demand.
C. reduces both investment and aggregate demand.
D. increases investment but reduces aggregate demand.
41. In the AS/AD model, an effect of an expansionary monetary policy is to:
A. reduce investment spending.
B. shift the aggregate demand curve to the left.
C. raise interest rates.
D. lower interest rates.
42. In the AS/AD model, higher interest rates are produced by:
A. an expansionary monetary policy.
B. an activist monetary policy.
C. a contractionary monetary policy.
D. a steady-as-you-go monetary policy.
43. Monetary policy that seeks to minimize the business cycle in the AS/AD model involves:
A. contractionary monetary policy throughout the business cycle.
B. expansionary monetary policy throughout the business cycle.
C. contractionary monetary policy when the economy is above trend growth and expansionary
policy when the economy is below trend growth.
D. expansionary monetary policy when the economy is above trend growth and contractionary
policy when the economy is below trend growth.
44. Expansionary monetary policy results in a shift of the aggregate demand curve to the right.
The effect of the monetary policy on the aggregate demand is:
A. direct from the money supply to the aggregate demand.
B. indirect through the short-term and long-term interest rates.
C. direct from the money supply to the aggregate supply.
D. indirect through the government expenditures.
45. One year the lead sentence in a Wall Street Journal article read, “Tight job markets, rising
wages, and the economy’s continued strength put more pressure on the Federal Reserve to raise
short-term interest rates.” If the Fed responded to this pressure, it would adopt:
A. a contractionary monetary policy that reduces output.
B. a contractionary monetary policy that raises output.
C. an expansionary monetary policy that reduces output.
D. an expansionary monetary policy that raises output.
46. Central banks are responsible for:
A. both monetary policy and fiscal policy.
B. monetary policy but not fiscal policy.
C. fiscal policy but not monetary policy.
D. neither monetary policy nor fiscal policy.
47. The central bank of the United States is:
A. the Treasury.
B. the Fed.
C. the Bank of the United States.
D. Old Lady of Threadneedle Street.
48. In the United States monetary policy is:
A. also known as fiscal policy.
B. undertaken by the Treasury.
C. undertaken by the Fed.
D. also known as global policy.
49. One of the duties of the Fed is to:
A. change the demand for money.
B. set the market interest rate.
C. offer financial advising to the government.
D. offer financial advising to the public.
50. Unlike the practice in many other countries, in the United States:
A. only monetary policy is used to influence the economy, and fiscal policy is not allowed.
B. only fiscal policy is used to influence the economy, and monetary policy is not allowed.
C. the agency responsible for monetary policy is not directly controlled by the government.
D. the agency responsible for fiscal policy is not directly controlled by the government.
51. Fed watchers are:
A. financial advisers for the government, telling them when raising taxes will raise revenue and
when it won’t.
B. part of the Fed governor system and are given voting power on the FOMC.
C. individuals or organizations whose sole occupation is to follow the Fed’s FOMC.
D. individuals or organizations whose sole occupation is to predict the future of the interest
rates.
52. The chairperson of the Federal Reserve’s Board of Governors is:
A. elected by the public.
B. selected by commercial banks.
C. appointed by the president.
D. appointed by the Board of Governors.
53. In the fall of 2008 the Federal Reserve lowered its target for the federal funds rate to close to
0 percent. What is the name of the group within the Federal Reserve that made this decision?
A. Federal Advisory Committee
B. Federal Deposit Insurance Corporation
C. Federal Funds Operating Group
D. Federal Open Market Committee
54. FOMC stands for:
A. Federal Open Money Committee.
B. Federal Open Market Committee.
C. Fixed Open Market Commitments.
D. Federation of Open Monies Committee.
55. The group that is comprised of five presidents of Fed regional banks and seven Fed
governors that gathers around a table to discuss whether to increase interest rates is the:
A. Federal Open Market Committee.
B. Federal Depository Insurance Corporation.
C. Federal Advisory Council.
D. National Federal Reserve Bank.