ECON 112 Annala F16 Chapter 15

Federal Reserve Board Chairmen Paul​ Volcker, Alan​ Greenspan, and Ben Bernanke all have focused on which of the following as their main goal of monetary​ policy? A. price stability B. high employment C. economic growth D. stability of financial markets

A. price stability

A monetary policy target is a variable that A. the Fed cannot affect directly. B. the Fed can affect directly. C. equals one of the​ Fed's main policy goals. D. the Fed has no ability to change.

B. the Fed can affect directly.

When the Fed increases the money​ supply, A. the interest rate rises and this stimulates investment spending. B. the interest rate falls and this stimulates investment spending. C. people spend less because they have more money. D. the interest rate rises and this stimulates consumption spending.

B. the interest rate falls and this stimulates investment spending.

Which of the following describes what the Fed would do to pursue an expansionary monetary​ policy? A. use open market operations to sell Treasury bills B. use open market operations to buy Treasury bills C. raise the reserve requirement D. use discount policy to raise the discount rate

B. use open market operations to buy Treasury bills

Using the Taylor​ rule, if the current inflation rate equals the target inflation rate and real GDP is greater than potential​ GDP, then the federal funds target rate​ ________ the sum of the current inflation rate plus the real equilibrium federal funds rate. A. will be less than B. will be greater than C. will be the same as D. may be greater than or less than

B. will be greater than

Using the money demand and money supply​ model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to A. not change. B. ​increase, then decrease. C. increase. D. decrease.

C. increase.

When the Federal Reserve increases the money​ supply, at the previous equilibrium interest rate households and firms will now have A. the amount of money that they want to hold. B. to sell Treasury bills. C. more money than they want to hold. D. less money than they want to hold.

C. more money than they want to hold.

Which of the following characterizes the​ Fed's ability to prevent​ recessions? A. The Fed is able to​ "fine tune" the economy and entirely eliminate recessions. B. The Fed is able to eliminate the business cycle and achieve absolute price stability. C. The Fed is incapable of changing aggregate demand through its monetary policy tools. D. The Fed is able to keep a recession shorter and milder than it would otherwise be.

D. The Fed is able to keep a recession shorter and milder than it would otherwise be.

2016 Potential Real GDP $18.0 trillion Real GDP $18.0 trillion Price Level 150 2017 Potential Real GDP 18.5 trillion Real GDP 18.8 trillion Price Level 154 Consider the hypothetical information in the table above for potential real​ GDP, real​ GDP, and the price level in 2016 and in 2017 if the Federal Reserve does not use monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in​ 2017, which of the following will be lower than if the Fed had taken no​ action? A. real GDP and potential GDP B. potential GDP and the inflation rate C. real GDP and the unemployment rate D. real GDP and the inflation rate

D. real GDP and the inflation rate

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.

D. the National Bureau of Economic Research.

Inflation targeting refers to conducting​ ________ policy so as to commit the central bank to achieving a​ ________. A. fiscal; publicly announced level of inflation B. ​monetary; zero inflation rate C. ​fiscal; zero inflation rate D. ​monetary; publicly announced level of inflation

D. ​monetary; publicly announced level of inflation

By the height of the housing bubble in 2005 and early​ 2006, lenders had greatly loosened the standards for obtaining a mortgage​ loan, with many mortgages being granted to​ ________ borrowers with flawed credit histories and​ ________ borrowers who did not document their incomes. A. adjustable​ rate; shadow-banking B. ​"credit crunch"; black market C. "fresh-start"; prime rate D. ​sub-prime; "Alt-A"

D. ​sub-prime; "Alt-A"

Monetary policy is conducted by the U.S. Treasury Department. True False

False

The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association were established by Congress in order to regulate banks that buy and sell​ mortgage-backed securities. True False

False

The Federal​ Reserve's performance in the mid−to−late ​1980s, 1990s, and early 2000s has received high marks from economists because of inflation targeting. True False

False

When the Federal Reserve increases the money​ supply, people spend more because they now have more money. True False

False

A borrower defaults on a loan when he stops making payments on the loan. True False

True

A monetary policy target is a variable that the Fed can affect​ directly, which then affects one or more of the​ Fed's policy goals. True False

True

An argument in favor of the Federal Reserve adopting inflation targeting is that in the long​ run, the Fed can have an impact on inflation but not on real GDP. True False

True

Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Fed listed in the textbook. True False

True

The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand. True False

True

Which of the following explains why mortgages​ weren't considered securities prior to​ 1970? A. Prior to​ 1970, mortgages were rarely resold in the secondary market. B. Until​ 1970, the average annual increase in housing prices did not allow the buying and selling of mortgages to be profitable. There has been a significant annual increase in housing prices and mortgage values since 1970. C. Congress passed a law in 1970 stipulating that mortgages could be classified as securities. D. The Federal Reserve Act of 1913 prohibited mortgages from being considered securities. An amendment to the Act was approved in 1970 that allowed mortgages to be considered securities.

A. Prior to​ 1970, mortgages were rarely resold in the secondary market.

An increase in the money supply will A.decrease the interest rate. B. have no affect on the interest rate. C. increase the interest rate. D. decrease the equilibrium quantity of money in the economy.

A. decrease the interest rate.

The core personal consumption expenditures price index excludes A. food and energy prices. B. energy and housing prices. C. housing and health care prices. D. food and housing prices.

A. food and energy prices.

Lowering the interest rate will A. increase investment projects by firms. B. decrease spending on new homes. C. decrease the value of the dollar and lower net exports. D. decrease spending on consumer durables.

A. increase investment projects by firms.

Suppose that the Federal Reserve Open Market Committee adheres to the ideas expressed by​ ________________. If the economy moves into a​ recession, this Fed would recommend that the federal funds target rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation. A. inflation targeting B. the Taylor Rule C. the gold standard D. the monetarist school of thought

A. inflation targeting

Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often A. lowers interest rates during recessions. B. raises interest rates during recessions. C. lowers income taxes during recessions. D. sells Treasury bills to help the housing market.

A. lowers interest rates during recessions.

When housing prices​ ________, as they did beginning in 2006 following the housing market​ bubble, consumption spending on​ furniture, appliances, and home improvements decline as many households find it​ ________ to borrow against the value of their homes. A. ​fall; harder B. ​fall; easier C.​ rise; easier D. ​rise; harder

A. ​fall; harder

Refer to the diagram to the right. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static ADminus−AS ​model, this would be depicted as a movement from A. C to B. B. A to B. C. B to C. D. A to E. E. C to D.

B. A to B.

Which of the following statements about inflation targeting is​ true? A. Inflation targeting would not reduce the flexibility of monetary policy to address other policy goals. B. Inflation targeting would make it easier for households and firms to form accurate expectations of future​ inflation, improving their planning and the efficiency of the economy. C. Inflation targeting by the central banks in other countries has not lowered inflation. D. Inflation targeting would not allow the central bank the flexibility to take action against a severe recession.

B. Inflation targeting would make it easier for households and firms to form accurate expectations of future​ inflation, improving their planning and the efficiency of the economy.

Which of the following is​ true? A. The loanable funds model is essentially a model that determines the short term real rate of interest. B. The money market model is essentially a model of that determines the short term nominal rate of interest. C. The money market model is essentially a model that determines the short term real rate of interest. D. The loanable funds model is essentially a model that determines the long term nominal rate of interest.

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

The situation in which​ short-term interest rates are pushed to​ zero, leaving the central bank unable to lower them further is known as A. the Taylor rule. B. a liquidity trap. C. a​ zero-sum game. D. an interest rate panic.

B. a liquidity trap.

Using the Taylor​ rule, if the current inflation rate equals the target inflation rate and real GDP equals potential​ GDP, then the federal funds target rate equals the A. current inflation rate. B. current inflation rate plus the real equilibrium federal funds rate. C. current discount rate. D. real equilibrium federal funds rate.

B. current inflation rate plus the real equilibrium federal funds rate.

From an initial long−run macroeconomic​ equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly faster than long−run aggregate​ supply, then the Federal Reserve would most likely A. decrease interest rates. B. increase interest rates. C. increase income tax rates. D. decrease income tax rates.

B. increase interest rates.

An increase in real GDP A. decreases 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 increases 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. increases the buying and selling of goods and decreases the demand for money as a medium of exchange.

B. increases the buying and selling of goods and increases the demand for money as a medium of exchange.

Refer to the diagram to the right. Suppose the economy is in short run equilibrium above potential​ GDP, the unemployment rate is very​ low, and wages and prices are rising. Using the static ADminus−AS ​model, the correct Fed policy for this situation would be depicted as a movement from A. B to C. B. A to E. C. C to B. D. C to D. E. A to B

C. C to B.

In​ 2008, the Treasury and Federal Reserve took several actions in response to the deepening financial crisis. One action was the creation of the Term Securities Lending​ Facility, under which the Fed will loan up to​ $200 billion of treasury securities in exchange for A. required bank reserves. B. stock. C. mortgage−backed securities. D. corporate bonds.

C. mortgage−backed securities.

Federal Reserve Board Chairmen Paul​ Volcker, Alan​ Greenspan, and Ben Bernanke all have focused on which of the following as their main goal of monetary​ policy? A. economic growth B. high employment C. price stability D. stability of financial markets

C. price stability

If the Federal Reserve raises or lowers interest rates too​ late, it could result in a​ ________ policy that destabilizes the economy. A. fiscal B. budgetary C. procyclical D. countercylical

C. procyclical

In the dynamic model of AD−AS in the diagram to the​ right, if the economy is at point A in year 1 and is expected to go to point B in year​ 2, and the Federal Reserve pursues no​ policy, then at point B A. there is pressure on wages and prices to rise. B. incomes and profits are rising. C. the economy is below full employment. D. firms are operating above their normal capacity. E. the unemployment rate is​ very, very low.

C. the economy is below full employment.