Chapter 15 Review

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Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

lowers the interest rate, and firms increase investment spending

The supporters of a monetary growth rule believe that active monetary policy

destabilizes the economy, increasing the number of recessions and their severity

When the Fed uses contractionary policy

the price level rises less than it would if the Fed did not pursue policy

When housing prices fall, as they did beginning in 2006 following the housing market bubble, consumption spending in furniture, appliances, and home improvements (blank) as many households found it (blank) to borrow against the value of their homes

declined; harder

When Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics

When calculating GDP, the Bureau of Economic Analysis revises its quarterly data

many times over the next several years

Expansionary monetary policy refers to the (blank) to increase real GDP

Federal Reserve’s increasing the money supply and decreasing interest rates

A decrease in interest rates can (blank) the demand for stocks as stocks become relatively (blank) attractive investments as compared to bonds

increase; more

The Federal Reserve can directly affect its monetary policy (blank) , which then affect its monetary policy (blank)

targets; goals

Changes in the federal funds rate usually result in

changes in both short-term and long-term interest rates with more of an effect on short-term interest rates

An increase in the price level causes

the money demand curve to shift to the right

If the Federal Reserve targets the interest rate and the money demand curve shifts to the left, then the Fed

can maintain the interest rate target, but at a lower quantity of the money supply

The Federal Reserve’s two main (blank) are the money supply and the interest rate

monetary policy targets

The ability to the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

real interest rates

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to


During the turmoil in the market for subprime mortgages in 2007 and 2008, the Fed increased the volume of discount loans. the goal of the Fed was to

reassure financial markets and promote financial stability

Which of the following will lead to a decrease in the equilibrium interest rate in the economy

a decrease in GDP

Which of the following would cause the money demand curve to shift to the left

a decrease in real GDP

15-5. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

15-3. In the figure above, when the money supply shifts from MS 1 to MS 2 at the interest rate of 3 percent households and firms

buy Treasury bills

In 2008, the Treasury and Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these measures were taken

The bankruptcy of a large financial firm would force the firm to sell its holding of securities, which could cause other firms that hold these securities to also fail

Monetarists think that the Fed should use (blank) as a target when conducting monetary policy

the money supply

The Federal Reserve cannot target both the money supply and the interest rate because it does not control

money demand

When the Federal Reserve increase the money supply, at the previous equilibrium interest rate households and firms will now have

more money than they want to hold

Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long-run rate of growth of

real GDP

The monetary policy target the Federal Reserve focuses primarily on today is

the interest rate

Which of the following is true

The money market model is essentially a model that determines the short-term nominal rate of interest

In response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as

quantitive easing

Suppose that households become mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand an money supply model and assuming everything else is held constant, the equilibrium interest rate should


15-5. Suppose the Fed sells Treasury Bills in pursuit of confectionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

C to B

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives

The situation in which short-term interest rates are pushed to a zero, leaving the central bank unable to lower them further is known as

a liquidity cap

15-1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2015 if the Fed does not use monetary policy. Which of the following policies make sense if the Fed wants to keep real GDP at its potential level in 2015?

The Fed should lower the target for the federal funds rate

Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve

cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be

Which of the following describes what the Fed would do to pursue an expansionary monetary policy

use open market operations to buy Treasury bills

An increase in the interest rate

increases the opportunity cost of holding money

15-4. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to

lower increase rates

In the figure above, when the money supply shifts from MS 1 to MS 2, at the interest rate of 3 percent households and firms will

sell Treasury bills

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