Name:
Class:
Date:
chapter 5
Indicate whether the statement is true or false.
1. In recent years, the Fed has made an effort to be more transparent in its communications to financial markets about its
future policy.
a. True
b. False
2. 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
3. When the Fed wants to encourage businesses to increase their spending on long-term projects, it may use a stimulative
policy focused on reducing long-term Treasury yields.
a. True
b. False
4. If the Fed attempts to reduce inflation, it would likely increase money supply growth.
a. True
b. False
5. The Fed is usually more willing to maintain a stimulative monetary policy when inflation is relatively high.
a. True
b. False
6. A passive monetary policy adjusts the money supply automatically in response to economic conditions.
a. True
b. False
7. 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
8. 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
9. To correct excessive inflation, the Fed could use open market operations by buying Treasury securities in the secondary
market.
a. True
b. False
Name:
Class:
Date:
chapter 5
10. 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
11. During the 2008–2015 period, the Fed increased the federal funds rate in an effort to stimulate the economy.
a. True
b. False
12. The Fed is more likely to use a stimulative policy during a strong-dollar period.
a. True
b. False
13. Economists who work at the Fed recognize that a stimulative monetary policy will not always reduce a high
unemployment rate and could even ignite inflation.
a. True
b. False
14. The Fed needs the approval of the presidential administration to make decisions.
a. True
b. False
15. The relationship between the interest rate on loanable funds and the level of business investment is positive.
a. True
b. False
16. The supply schedule of loanable funds indicates the quantity of funds that would be demanded at various possible
interest rates.
a. True
b. False
17. The Fed faces a trade-off in monetary policy between reducing unemployment and reducing the federal government’s
budget deficit.
a. True
b. False
18. One reason that a stimulative monetary policy might fail is that savers such as retirees who rely on interest income to
meet their expenses may have to reduce their spending.
a. True
b. False
19. 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
Name:
Class:
Date:
chapter 5
20. The Fed’s monetary policy is primarily intended to regulate commercial loans.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
21. According to the theory of rational expectations, if the Fed uses open market operations to increase the supply of
loanable funds, the ultimate effect on interest rates
a. is a reduction in interest rates.
b. is an increase in interest rates.
c. is no effect on interest rates.
d. cannot be determined because the effects may be offsetting.
22. Which of the following is true with respect to inflation targeting?
a. Inflation targeting would allow the Fed more control over inflation caused by excessive aggregate demand.
b. Inflation targeting would require the Fed to maintain very strong economic growth.
c. Inflation targeting could control the inflation caused by higher oil prices.
d. Inflation targeting would allow the Fed to have more control over the unemployment rate.
23. Which of the following might be monitored as an indicator of inflation?
a. consumer price index
b. gold prices
c. oil prices
d. All of these may be indicators of inflation.
24. If the Fed uses a passive monetary policy during weak economic conditions,
a. it increases the money supply substantially.
b. it reduces the money supply substantially.
c. it allows the economy to fix itself.
d. it purchases commercial paper and mortgage-backed securities.
25. ____ serves as the most direct indicator of economic growth in the United States.
a. Gross domestic product (GDP)
b. Technology
c. The Treasury bond rate
d. The industrial production index
26. Which of the following is NOT an effect of a stimulative monetary policy?
a. The risk-free rate and the credit risk premium increase.
b. A firm’s cost of debt decreases.
c. A firm’s cost of equity decreases.
d. Depository institutions experience an increase in their supply of funds.
27. The ____ indicators tend to rise or fall after a business cycle.
Name:
Class:
Date:
chapter 5
a. leading
b. lagging
c. coincident
d. None of these are correct.
28. 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.
29. Which of the following is true about an increase in the U.S. government’s budget deficit?
a. It will lead to global crowding out if U.S. interest rates fall below the level of interest rates in other countries.
b. It will cause outflows of foreign funds from the United States as foreign investors move their funds to other
countries.
c. It will cause an inward shift in the aggregate demand for loanable funds curve.
d. None of these are correct.
30. The time between when the Fed adjusts the money supply and when the adjustment has an effect on the economy is
the
a. recognition lag.
b. implementation lag.
c. impact lag.
d. open-market lag.
31. Which of the following is NOT an indicator of inflation?
a. housing price indexes
b. wage rates
c. oil prices
d. consumer confidence surveys
32. 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 these are correct.
33. The ____ lag is the time from when an economic problem arises until it is recognized.
a. recognition
b. adjustment
c. implementation
d. None of these are correct.
34. 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. purchases Treasury securities.
Name:
Class:
Date:
chapter 5
b. maintains a stable money supply.
c. uses a tight-money policy.
d. uses a loose-money policy.
35. 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
36. A ____ dollar tends to exert inflationary pressure in the United States.
a. stable
b. strong
c. weak
d. stable AND strong
37. 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. one-year certificate of deposit rate.
38. 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.
39. Global crowding out refers to the impact that
a. excessive U.S. population growth can have on interest rates.
b. excessive global population growth can have on interest rates.
c. an excessive budget deficit in one country can have on interest rates of other countries.
d. an excessive budget deficit in one country can have on exchange rates.
40. 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.
41. Which of the following best describes the relationship between the Fed and the presidential administration?
a. The Fed must receive the administration’s approval before conducting monetary policy.
b. The Fed must implement a monetary policy specifically to support the administration’s policy.
c. The administration must receive approval from the Fed before implementing fiscal policy.
Name:
Class:
Date:
chapter 5
d. The Fed must receive the administration’s approval before conducting monetary policy AND the administration
must receive approval from the Fed before implementing fiscal policy.
e. None of these are correct.
42. There is some evidence that high money supply growth may lead to _______ U.S. inflation over time, which in turn
places ____ pressure on U.S. interest rates.
a. higher; upward
b. higher; downward
c. lower; downward
d. lower; upward
43. 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
44. 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 focus on inflation could result in a much higher unemployment level.
c. The Fed’s focus on inflation will likely lead to a higher government budget deficit.
d. All of these are disadvantages of inflation targeting.
45. 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
46. When the Fed uses open market operations to sell some of its Treasury securities, 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.
47. 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.
48. The intent of the Fed’s strategy to resolve the credit crisis in 2008–2009 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.
Name:
Class:
Date:
chapter 5
d. reduce interest rates.
49. A weak dollar can 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 these are correct.
50. The ____ indicators tend to rise or fall at the same time as a business cycle.
a. leading
b. lagging
c. coincident
d. None of these are correct.
51. Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain
large portfolios of bonds, so their portfolios are ____ affected when the Fed ____ interest rates.
a. adversely; decreases
b. adversely; increases
c. favorably; increases
d. adversely; decreases AND favorably; increase
52. 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
53. 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 GDP and inflation.
d. a positive relationship between GDP and unemployment.
54. 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
55. Inflation is commonly the result of a
a. large budget deficit.
b. high level of interest rates.
c. high level of unemployment.
Name:
Class:
Date:
chapter 5
d. high level of aggregate demand.
56. The Fed normally controls the money supply by buying and selling ________.
a. Federal Reserve notes
b. Treasury securities
c. certificates of deposit
d. federal fund notes
57. 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
58. 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 caused by the stimulative policy might reduce economic growth.
Name:
Class:
Date:
chapter 5
Answer Key
Name:
Class:
Date:
chapter 5
Name:
Class:
Date:
chapter 5