Econ: Chapter 26 – Flashcards
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What is monetary policy?
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the actions the Fed takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives
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What are the Fed's four monetary policy goals intended to promote a well-functioning economy?
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1. Price stability 2. High employment 3. Economic growth 4. Stability of financial markets and institutions
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What are the Fed's monetary policy targets?
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economic variables that it can affect directly and that in turn affect variables such as real GDP and the price level that are closely related to the Fed's policy goals
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What is the federal funds rate?
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1. the interest rate banks charge each other for overnight loans 2. set by the Federal Open Market Committee after each meeting
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Describe expansionary monetary policy
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1. used to fight a recession 2. lowers interest rates to increase consumption, investment, and net exports
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Describe contractionary monetary policy.
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1. used to reduce the inflation rate 2. raises interest rates to decrease consumption, investment, and net exports
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Describe inflation targeting.
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which monetary policy is conducted to commit the central bank to achieving a publicly announced inflation target
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What is a countercyclical policy?
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A macroeconomic policy that successfully reduces the severity of the business cycle
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In early 2001, the members of the Federal Open Market Committee (FOMC) concluded that a recession was about to begin. To keep the recession as short and mild as possible, they implemented a a. fiscal policy that increased government spending and reduced taxes. b. fiscal policy that decreased government spending and increased taxes. c. monetary policy that lowered interest rates. d. monetary policy that raised interest rates.
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c. monetary policy that lowered interest rates.
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2. Which of the following are monetary policy goals of the Federal Reserve? a. price stability b. high employment and economic growth c. stability of financial markets d. all of the above
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d. all of the above
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Monetary policy refers to the actions the Fed takes to a. regulate business activity. b. manage the money supply and interest rates. c. manage government spending and taxation. d. all of the above
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b. manage the money supply and interest rates.
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4. Which of the following periods had the highest inflation rate? a. the 1950s and 1960s b. the 1970s c. the 1990s d. All of the periods above experienced similar inflation rates.
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b. the 1970s
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5. Attempts to ensure that there will be an efficient flow of funds from savers to borrowers is the objective of which monetary policy goal? a. price stability b. high employment c. economic growth d. stability of financial markets
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d. stability of financial markets
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6. Which two policy goals can be pursued simultaneously without being at odds with each other? a. high employment and inflation reduction b. economic growth and inflation reduction c. high employment and economic growth d. Any of the combinations above can be pursued simultaneously without being at odds with each other.
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c. high employment and economic growth
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7. Which of these two variables are the main monetary policy targets of the Fed? a. real GDP and the price level b. the money supply and the interest rate c. the inflation rate and the unemployment rate d. economic growth and productivity
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b. the money supply and the interest rate
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a. price stability b. high employment c. economic growth d. low interest rates
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d. low interest rates
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When is the opportunity cost of holding money higher? a. when interest rates are high b. when interest rates are low c. when the inflation rate is lower d. when the money supply increases
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a. when interest rates are high
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When the interest rate decreases, a. the money demand curve shifts to the right. b. the money demand curve shifts to the left. c. there is a movement down along a stationary money demand curve. d. there is a movement up along a stationary money demand curve.
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c. there is a movement down along a stationary money demand curve
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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. high; high c. low; high d. high; high
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c. low; high
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12. If real GDP increases, a. the money demand curve shifts to the right. b. the money demand curve shifts to the left. c. there is a movement down along a stationary money demand curve. d. there is a movement up along a stationary money demand curve.
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a. the money demand curve shifts to the right.
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13. If the price level increases, a. the money demand curve shifts to the right. b. the money demand curve shifts to the left. c. there is a movement down along a stationary money demand curve. d. there is a movement up along a stationary money demand curve.
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a. the money demand curve shifts to the right.
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If the FOMC decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to a. buy stocks. b. sell stocks. c. buy U.S. Treasury securities. d. sell U.S. Treasury securities.
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c. buy U.S. Treasury securities
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15. If the FOMC orders the trading desk to sell Treasury securities, a. the money supply curve will shift to the left, and the equilibrium interest rate will fall. b. the money supply curve will shift to the left, and the equilibrium interest rate will rise. c. the money supply curve will shift to the right, and the equilibrium interest rate will rise. d. the money supply curve will shift to the right, and the equilibrium interest rate will fall.
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b. the money supply curve will shift to the left, and the equilibrium interest rate will rise.
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The prices of financial assets and the interest rates on these assets a. move in the same direction. b. move in opposite directions. c. are identical. d. are unrelated
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b. move in opposite directions
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17. Suppose you buy for $950 a U.S. Treasury bill that matures in one year, at which time the Treasury will pay you $1,000. How much interest will you earn on your investment of $950? a. 4.75% b. 5.26% c. 19% d. 5%
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b. 5.26%
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Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. Households and firms will then _________ Treasury bills and other financial assets, thereby _________ their prices, and _________ their interest rates. a. buy; increasing; increasing b. sell; increasing; reducing c. buy; reducing; reducing d. sell; reducing; increasing
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d. sell; reducing; increasing
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Which of the following will shift the money demand curve to the right? a. an increase in the interest rate b. an increase in real GDP c. a decrease in the interest rate d. an increase in the money supply
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b. an increase in real GDP
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The interest rate that banks charge each other for overnight loans is called the a. Treasury bill rate. b. prime lending rate. c. discount rate. d. federal funds rate
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d. federal funds rate.
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Which of the following statements is correct? a. Changes in the federal funds rate usually will result in changes in both short-term and long-term interest rates on financial assets. b. The effect of a change in the federal funds rate on long-term interest rates is usually smaller than it is on short-term interest rates. c. A majority of economists support the Fed's choice of the interest rate as its monetary policy target, but some economists believe the Fed should concentrate on the money supply instead. d. all of the above
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d. all of the above
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As interest rates decline, stocks become a __________ attractive investment relative to bonds, and this causes the demand for stocks and their prices to __________. a. more; rise b. more; fall c. less; rise d. less; fall
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a. more; rise
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23. If interest rates in the United States rise relative to interest rates in other countries, the demand for dollars will __________, which will __________ the value of the dollar and cause net exports to _________. a. fall; lower; fall b. rise; increase; rise c. fall; lower; rise d. rise; increase; fall
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d. rise; increase; fall
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An increase in the money supply will a. shift the money demand curve to the right and reduce the interest rate. b. shift the money supply curve to the right and increase the interest rate. c. shift the money demand curve to the left and increase the interest rate. d. shift the money supply curve to the right and reduce the interest rate.
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shift the money supply curve to the right and reduce the interest rate
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The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called a. reactionary monetary policy. b. contractionary monetary policy. c. expansionary monetary policy. d. contractionary fiscal policy
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c. expansionary monetary policy
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Suppose that the FOMC meets and learns that real GDP will fall short of potential real GDP by $200 billion. If the FOMC tries to correct this situation, it will enact which type of policy? a. expansionary monetary policy to decrease short-run aggregate supply b. expansionary monetary policy to increase aggregate demand c. expansionary monetary policy to increase short-run aggregate supply d. contractionary monetary policy to decrease long-run aggregate supply
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b. expansionary monetary policy to increase aggregate demand
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How did the FOMC react to the recession that began in March 2001? a. The FOMC increased the target for the federal funds rate steadily throughout 2001. b. The FOMC reduced the target for the federal funds rate steadily throughout 2001. c. The FOMC decided to leave interest rates unchanged for the remainder of 2001. d. The FOMC did not react because it failed to recognize that a recession was taking place.
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b. The FOMC reduced the target for the federal funds rate steadily throughout 2001.
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The actions of the Fed during the 2001 recession demonstrated that a. the ability of the Fed to head off a severe recession is almost nonexistent. b. the Fed is able to "fine tune" the economy, practically eliminating the business cycle, and achieving absolute price stability. c. the Fed is able to reduce the severity of a recession, but unable to eliminate it entirely. d. the Fed prefers to allow the economy to correct its problems on its own, without active monetary policy
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the Fed is able to reduce the severity of a recession, but unable to eliminate it entirely
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Which of the following is a consequence of deflation? a. an increase in real interest rates b. an increase in the real value of debts c. consumers may postpone their purchases in the hope of experiencing even lower prices in the future d. all of the above
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d. all of the above
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When the Fed acts as it did during 2000, decreasing the money supply and increasing interest rates in order to reduce inflation, it is engaging in a. contractionary fiscal policy. b. expansionary monetary policy. c. contractionary monetary policy. d. discretionary fiscal policy.
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c. contractionary monetary policy.
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A procyclical policy is one that a. is used to stabilize the economy. b. inadvertently increases the severity of the business cycle. c. minimizes the cost of economic recessions. d. enhances the benefits of economic expansions.
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b. inadvertently increases the severity of the business cycle.
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A countercyclical policy is one that a. is used to attempt to stabilize the economy. b. inadvertently increases the severity of the business cycle. c. follows the fluctuations in the business cycle. d. enhances the benefits of economic expansions.
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a. is used to attempt to stabilize the economy.
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Monetarism is a school of economic thought that favors a. a plan for increasing the money supply at a constant rate that does not change in response to economic conditions. b. a monetary growth rule. c. increasing the money supply every year at a rate equal to the long-run growth rate of real GDP. d. all of the above
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d. all of the above
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If the economy moves into recession, monetarists argue that the Fed should a. increase the money supply. b. decrease the money supply. c. keep the money supply growing at a constant rate. d. keep the money supply fixed.
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c. keep the money supply growing at a constant rate
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Which of the following statements is true? a. The only monetary policy target the Fed can choose is the money supply. b. The only monetary policy target the Fed can choose is the interest rate. c. The Fed could simultaneously choose an interest rate and the money supply as its monetary policy targets. d. The Fed is forced to choose between the interest rate and the money supply as its monetary policy target.
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d. The Fed is forced to choose between the interest rate and the money supply as its monetary policy target
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The Taylor rule for federal funds rate targeting does which of the following? a. It links the Fed's target for the federal funds rate to economic variables. b. It sets the target for the federal funds rate so that it is equal to the sum of the inflation rate and the unemployment rate. c. It multiplies the inflation gap by the output gap to obtain a target of the federal funds rate. d. all of the above
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a. It links the Fed's target for the federal funds rate to economic variables
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The federal funds rate target predicted by the Taylor Rule is__________ than the actual target used by the Fed during the period of the late 1970s and early 1980s when Paul Volcker was Federal Reserve Chairman, and __________ than the actual federal funds target used by the Fed when Arthur Burns was chairman from 1970 to 1978. a. higher; higher b. lower; lower c. higher; lower d. lower; higher
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d. lower; higher
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According to the Taylor Rule, if the Fed reduces its target for the inflation rate, this will result in a. a higher target federal funds rate. b. no change in the target federal funds rate. c. a lower target federal funds rate. d. a higher target output growth rate.
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a. a higher target federal funds rate
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When the central bank commits to conducting policy in a manner that achieves a publicly announced inflation target, it is using a. inflation targeting. b. the Taylor rule. c. contractionary monetary policy. d. monetary policy independence
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a. inflation targeting.
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Which of the following can be affected by monetary policy? a. the level of real GDP in the long run b. inflation in the long run c. both the level of real GDP and inflation in the long run d. neither the level of real GDP nor inflation in the long run
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b. inflation in the long run
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The Fed's performance in the 1980s, 1990s, and early 2000s received high marks from economists. Which of the following contributed to the Fed's good performance during those years? a. inflation targeting b. a strategy of keeping inflation low and stable in the long run, but without inflation targeting c. the ability of the Fed to conduct monetary policy in close coordination with Congress and the president d. the pursuit of effective fiscal policy
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b. a strategy of keeping inflation low and stable in the long run, but without inflation targeting
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The main reason to keep the Fed - or any country's central bank - independent of the rest of the government is to avoid a. inflation. b. unusually low interest rates. c. high taxes. d. all of the above
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a. inflation
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The more bonds the central bank buys, the _________ the money supply grows, and the _________ the inflation rate will be. a. slower; lower b. slower; higher c. faster; lower d. faster; higher
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d. faster; higher
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The Federal Reserve System is a. less independent than others agencies of the federal government. b. required to ask Congress for the funds it needs to operate. c. an institution where the chairman has only one vote in seven on the Board of Governors but plays an outsized role in policy setting. d. all of the above
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c. an institution where the chairman has only one vote in seven on the Board of Governors but plays an outsized role in policy setting
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. Monetary policy refers to the actions the Federal Reserve takes to manage A) government spending and income tax rates to pursue its economic objectives. B) income tax rates and interest rates to pursue its economic objectives. C) the money supply and income tax rates to pursue its economic objectives. D) the money supply and interest rates to pursue its economic objectives.
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D) the money supply and interest rates to pursue its economic objectives.
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Rising prices erode the value of money as a ________ and as a ________. A) unit of barter; unit of account B) medium of exchange; store of value C) store of value; unit of liquidity D) store of value; unit of barter
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B) medium of exchange; store of value
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. If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run. A) increase; raise B) reduce; raise C) reduce; lower D) increase; lower
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C) reduce; lower
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The money demand curve, against possible levels of interest rates, has a A) negative slope. B) positive slope for low levels of money demand, a negative slope for high levels of money demand. C) zero slope. D) positive slope
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A) negative slope
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5. An increase in real GDP A) increases the buying and selling of goods and increases the demand for money as a medium of exchange. B) increases the buying and selling of goods and decreases the demand for money as a medium of exchange. C) decreases the buying and selling of goods and decreases the demand for money as a medium of exchange. D) decreases the buying and selling of goods and increases the demand for money as a medium of exchange.
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A) increases the buying and selling of goods and increases the demand for money as a medium of exchange
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7. Suppose the Fed increases the money supply. Which of the following is true? A) At the original interest rate, the quantity of money demanded is equal to the quantity of money supplied. B) The interest rate must rise for the money market to clear. C) At the original interest rate, the quantity of money demanded is greater than the quantity of money supplied. D) At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.
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D) At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.
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Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates. A) buy; up B) sell; down C) sell; up D) buy; down
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C) sell; up
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An increase in the money supply will A) have no affect on the interest rate. B) increase the interest rate. C) decrease the interest rate. D) decrease the equilibrium quantity of money in the economy.
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) decrease the interest rate
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A decrease in real GDP can A) shift money demand to the left and decrease the interest rate. B) shift money demand to the right and increase the interest rate. C) shift money demand to the left and increase the interest rate. D) shift money demand to the right and decrease the interest rate.
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A) shift money demand to the left and decrease the interest rate
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The interest rate on a Treasury bill that pays $1,000 in one year and has a purchase price of $935 is A) 5 percent. B) 6 percent. C) 7 percent. D) 4 percent.
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C) 7 percent.
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3. The purchase price of a Treasury bill that pays $1,000 in one year and has an interest rate of 3 percent is A) $962 B) $952. C) $971 D) $943.
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C) $971
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. Which of the following correctly describes what the Fed used as monetary targets in the past? A) The Fed increased its reliance on interest rate targets since the mid 1990s. B) The Fed used M1 and M2 as targets after 1993. C) The Fed focused on M1 as a target after deregulation of the financial markets. D) After 1980 and before the 1990s, the Fed focused on interest rate targets
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A) The Fed increased its reliance on interest rate targets since the mid 1990s.
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. The rate of interest banks charge other banks for overnight loans of reserves is the: A) real rate. B) prime rate. C) federal funds .rate D) discount rate
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C) federal funds .rate
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6. The Fed can increase the federal funds rate by A) buying Treasury bills, which decreases bank reserves. B) selling Treasury bills, which decreases bank reserves. C) buying Treasury bills, which increases bank reserves. D) selling Treasury bills, which increases bank reserves.
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B) selling Treasury bills, which decreases bank reserves
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Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often A) sells Treasury bills to help the housing market. B) raises interest rates during recessions. C) lowers income taxes during recessions. D) lowers interest rates during recession
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D) lowers interest rates during recessions
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8. Lowering the interest rate will A) decrease spending on new homes. B) decrease spending on consumer durables. C) increase investment projects by firms. D) decrease the value of the dollar and lower net exports
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C) increase investment projects by firms.
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An increase in the domestic interest rate relative to other interest rates should A) increase government spending. B) increase net exports. C) increase investment spending. D) decrease consumption spending.
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D) decrease consumption spending
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A stock market bubble A) occurs when stock prices rise above levels that can be justified by the profitability of the firms issuing the stock. B) is caused by overenthusiastic investors underestimating the true value of the stock. C) is caused by investors assuming they can profit by selling the stock at a lower price before the bubble bursts. D) ends when investors decide the stock is undervalued.
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A) occurs when stock prices rise above levels that can be justified by the profitability of the firms issuing the stock.
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If the Fed pursues expansionary monetary policy then A) the money supply will increase, interest rates will rise and GDP will rise. B) the money supply will decrease, interest rates will rise and GDP will fall. C) the money supply will increase, interest rates will fall and GDP will rise. D) the money supply will decrease, interest rates will fall and GDP will fal
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C) the money supply will increase, interest rates will fall and GDP will rise
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4. Which of the following describes what the Fed would do to pursue an expansionary monetary policy? A) Use open market operations to buy Treasury bills. B) The Fed would raise the reserve requirement. C) Use discount policy to raise the discount rate. D) Use open market operations to sell Treasury bills.
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A) Use open market operations to buy Treasury bills.
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. Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy? A) Aggregate demand is growing too fast to keep the economy at full employment. B) Potential GDP is forecasted to be lower than equilibrium GDP. C) Aggregate demand is growing too slowly and the economy is in danger of producing GDP above full employment. D) Potential GDP is forecasted to be higher than equilibrium GDP.
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D) Potential GDP is forecasted to be higher than equilibrium GDP
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6. If the Fed raises its target for the federal fund rate, this indicates that A) the Fed is attempting to combat deflation. B) the Fed is pursuing a contractionary monetary policy. C) the Fed is pursuing an expansionary monetary policy. D) The Fed is concerned that the growth in aggregate demand is too slow to keep up with potential GDP
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B) the Fed is pursuing a contractionary monetary policy
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Contractionary monetary policy causes A) aggregate demand to fall, and the price level to rise. B) aggregate demand to rise, and the price level to fall. C) aggregate demand to rise, and the price level to rise. D) aggregate demand to fall, and the price level to fall.
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D) aggregate demand to fall, and the price level to fall.
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8. In which of the following situations would the Fed conduct contractionary fiscal policy? A) The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP. B) The Fed is worried that deflation will become a problem. C) The Fed fears that unemployment is climbing above the natural rate. D) The Fed believes that aggregate demand was growing too slowly to keep up with potential GDP.
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A) The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.
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31. Wall Street A) does not consider monetary policy when stocks are bought and sold. B) cares about monetary policy because changes in the interest rate affect the economy. C) considers monetary policy important only because changes in policy may affect bond prices. D) None of the above are correct.
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B) cares about monetary policy because changes in the interest rate affect the economy
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When the Fed increases the money supply A) people spend less because they have more money. B) the interest rate rises and this stimulates consumption spending. C) the interest rate rises and this stimulates investment spending. D) the interest rate falls and this stimulates investment spending.
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D) the interest rate falls and this stimulates investment spending.
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. The body that is responsible for dating the beginning and ending dates for a recession is A) the Bureau of Economic Analysis. B) the Congress. C) the Fed. D) the National Bureau of Economic Research.
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the National Bureau of Economic Research
