Economics Chap 15

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The Fed changes the discount rate as part of its policy to reach all of the following objectives except
A. Price stability
B. High employment
C. Economic growth

B

Monetary policy is defined as:
A. The actions Congress takes to manage tax policy and interest rates
B. The actions Congress takes to manage the money supply and interest rates
C. The actions the federal reserve takes to manage the money supply and interest rates

C

Which of the following is a monetary policy target used by the Fed?
A. Budget deficit
B. Interest rate
C. Growth rate of GDP

B

The Fed uses policy targets of interest rate and/or money supply because
A. The inflation rate is controlled by Congress and the White House
B. The target for the GDP growth rate is set by Congress
C. It can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level

C

The federal funds rate is
A. The required reserve ratio that the federal reserve requires banks to maintain
B. The interest rate that banks charge for loans to its important commercial borrowers
C. The interest rate that banks charge each other for overnight loans

C

Additionally, the federal funds rate is
A. Very important for the Fed’s monetary policy because individual borrowers pay this interest rate for mortgage loans
B. Very important for the Fed’s monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations
C. Very important for the Fed’s monetary policy because it is Administratively set by the Fed

B

When the federal reserve sells bonds as a part of a contractionary monetary policy, there is:
A. A decrease in the money supply and a decrease in interest rate
B. A decrease in the money supply and an increase in interest rate
C. An increase in the money supply and a decrease in interest rate

B

The Federal Reserve cannot affect the price level directly; therefore, the Fed typically uses the following as its policy target:
A. Interest rates
B. Government expenditures
C. Inflation

A

What are the Fed’s main monetary policy targets?
A. The money supply and interest rates
B. Taxes and government spending
C. Price stability and economic growth

A

What is considered the most relevant interest rate when conducting monetary policy?
A. Short-term nominal interest rate
B. Long-term nominal interest rate
C. Annual nominal interest rate

A

When interest rates on treasury bills and other financial assets are low, the opportunity cost of holding money is _______, so the quantity of money demanded will be _______.
A. Low; low
B. Low; high
C. High; low

B

If real GDP increases,
A. The money demand curve shifts to the left
B. The money demand curves just to the right
C. There is movement down along a stationary money demand curve

B

If the price level decreases,
A. The money demand curve shifts to the left
B. There is a movement down along a stationary money demand curve
C. The money demand curve shifts to the right.

A

An increase in interest rates affects aggregate demand by
A. Shifting the aggregate demand curve to the right, increasing real GDP and lowering the price level
B. Shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level
C. Shifting the aggregate supply curve to the left, decreasing real GDP and increasing the price level

B

As the interest rate increases
A. Consumption, investment, and net exports increase, and aggregate demand increases
B. Consumption increases but investment and net exports decrease; aggregate demand remains unchanged
C. Consumption, investment, and net exports decrease; aggregate demand decreases

C

If the Fed believes the economy is about to fall into recession, it should
A. Use an expansionary monetary policy to lower the interest rate and shift AD to the right
B. Use an expansionary fiscal policy to increase the interest rate and shift AD to the right
C. Use a contractionary monetary policy to lower the interest rate and shift AD to the right

A

If the Fed believes the inflation rate is about to increase, it should
A. Use a Contractionary fiscal policy to increase the interest rate and shift AD to left
B. Use an expansionary monetary policy to lower the interest rate and shift AD to the right
C. Use a contractionary monetary policy to increase the interest rate and shift AD to the left

C

The government would want the economy to contract when real GDP is
A. Above potential GDP and the price level is falling
B. Below potential GDP in the price level is falling
C. Above potential GDP and the price level is rising

C

Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand?
A. Business investment projects
D. The value of the dollar
C. Consumption of durable goods
D. All of the above

D

The Fed’s strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
A. Contractionary fiscal policy
B. Expansionary monetary policy
C. Expansionary fiscal policy

B

Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
A. The Fed intends to reduce unemployment, which occurs if real GDP is greater than potential GDP
B. The Fed intends to reduce real GDP so that real GDP will grow again but at a faster pace
C. The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP

C

For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. It has not targeted money supply at the same time because the
A. Fed does not have the authority to control both targets
B. Fed cannot target both at the same time: it has to choose between targeting an interest rate and targeting the money supply
C. Fed can target both at the same time, but it has chosen to target the interest rate as it is more reliable as a target

B

What is inflation targeting?
A. Committing the central bank to achieve an unannounced level of inflation
B. A policy that attempts to reduce inflation to zero
C. A target that links the Feds target for the federal funds rate to inflation

A

All of the following are arguments against an explicit inflation targeting rule for monetary policy except:
A. An explicit target assumes that the Fed can accurately forecast future inflation rates
B. An explicit target reduces the flexibility of monetary policy to address other economic issues
C. An explicit target is easier to understand by households and firms which makes monetary policy more transparent

C

When the Fed uses monetary policy targets, they cannot use both a money supply target and an interest rate target at the same time because
A. It is easier for the Fed to keep track of, and influence, the interest rate
B. Interest rates are determined by money supply and money demand that the Fed does not control money demand
C. The Fed is only allowed to choose one target at a time to publish the Congress

B

If the economy moves into recession, monetarists argue that the Fed should
A. Keep the money supply growing at a constant rate
B. Keep the money supply fixed
C. Increased the federal funds rate

A

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