ECON 2010 Ch.35
In addition to monetary policy, the Fed also has the power to:
regulate banks.
Which statement best describes the Federal Reserve timeframe for monetary policy implementation and observable policy effect?
short implementation time with a long lag before observation of effectiveness
The Fed can influence:
the U.S. money supply.
In the 1970s, Keynesians accepted high inflation because _______, but monetarists argued that _______.
in the short run, inflation leads to higher economic output; eventually inflation ceases to stimulate the economy
The Federal Reserve's control of the money supply is:
incomplete and subject to uncertain lags.
The Fed tried to reduce unemployment in the years following the recession of 2001 by:
keeping the Federal funds rate very low.
Which is regarded as a policy rule?
keeping the money supply growth rate consistent with a given inflation rate
If the Fed reduces M to fight inflation after a negative real shock, what should occur?
lower real growth
The Fed's actions leading up to the Great Recession:
may have contributed to the housing bubble and made the recession worse.
If economic data reveals that inflation is rising, the Fed:
may reduce the growth rate of the money supply without really knowing the state of real GDP growth.
What is the name of the monetary policy rule that changes interest rates based on a target for the nominal GDP growth rate?
nominal GDP targeting
The data on which central bankers operate is:
often slow to arrive and subject to revision.
If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by:
increasing money supply growth, lowering real interest rates, and encouraging borrowing.
If the Federal Reserve Bank is able to instigate the growth it desires, it will likely come at the cost of increasing________
inflation
When the Fed increases the money supply to counteract a negative real shock:
inflation increases a lot and growth increases a little.
A negative real shock leads to a higher _____ and a _____ growth rate for GDP.
inflation rate; lower
Suppose that the Federal Reserve Bank achieves the growth it wants, but also experiences the negative consequences. As a result, it will seek to decrease________, at the risk of leading the economy into a________.
inflation; recession
Defining what money is:
isn't easy, and this makes monetary policy more difficult.
Monetary policy is limited in that:
it can only affect real growth in the short run.
If the Fed overshoots when responding to a negative demand shock:
it will cause inflation, which the Fed will fight by reducing the growth rate of the money supply.
Fighting inflation and fighting sluggish growth require:
opposite actions from policy makers.
Inflation can stimulate the economy in the short run because:
people are confused about which prices are rising due to inflation and which are rising due to changes in demand.
The tools of the Federal Reserve:
sometimes rely on other actors, such as banks, who can sometimes be unreliable.
Which of the following explains why the Fed is able to have a dramatic effect on aggregate demand and real output in the short run?
sticky prices that slow the adjustment of the price level
The pitfalls of a strict money supply rule can be avoided if the Fed:
targets nominal GDP growth.
What was troubling about the 2001 recession?
that the unemployment rate remained high, even after the recession ended
If, during a boom, the Fed attempts to pop an asset price bubble, such as one in the housing sector, what sector of the economy is it most sure of having the ability to influence?
the GDP of the broader economy
The Federal Reserve is:
the United States' central bank.
Monetarism focuses on:
the decisions that central banks make with respect to the money supply.
Deflation is best defined as:
a decrease in the average level of prices
deflation
a decrease in the average level of prices; that is, a negative inflation rate
In terms of the aggregate demand model, how does one indicate an increase in the demand for cash?
a decrease in the growth rate of the velocity of money
What growth rate on the money supply did Milton Friedman advocate?
0.03
Housing prices in the United States peaked in:
2006.
How long does it take for the Fed's actions to have their intended effect?
6-18 months
Which of the following would create simultaneous high inflation and high unemployment?
A negative real shock
Which of the following is given in the video as an example of a negative real shock to the economy?
A rapid rise in the price of oil
In the AD-AS diagram, a "tight" monetary policy shifts the:
AD curve to the left.
Which of these demonstrates a negative real shock causing a negative demand shock?
Bad news, like rising oil prices, causes people to become pessimistic and to cut back on their spending.
Which statement describes a difficulty that makes it hard for the Fed to get monetary policy exactly right all of the time?
Banks may be unwilling to lend.
Why doesn't GDP change in the long run when the money supply changes?
Because in the long run, GDP is determined by the fundamental factors of growth, not the money supply.
In what way may the Fed have contributed to the housing bubble?
By making credit cheaper with a low Federal funds rate
Monetarists and Keynesians agree that nominal wages are sticky. Therefore, they tend to have similar beliefs about which of the following?
Deflation can cause a recession.
Which of the following is true?
High inflation may show up in economic data before sluggish growth, even if the two have the same cause.
Which of the statements best describes the monetary rule, as proposed by the economist Milton Friedman?
Inflation is kept in check in the long run by keeping the growth of M1 and M2 on a steady path.
Which of the following is true about the Fed?
It has more power to affect the economy than any other institution.
In which situation would economists say that monetary policy is credible?
It is expected that a central bank will stick with its policy.
Which of the following is true about monetary policy?
It is ineffective in the long run and difficult in the short run.
Which of the following equations is key to understanding monetarism?
M × v = P × Y
The most famous proponent of monetarism was:
Milton Friedman.
Which of these is NOT among the criticisms of monetarism that Professor Cowen discusses in the video?
Monetarist business cycle remedies tend to lead to increasing government debt.
Which of the situations describes a bandwagon effect caused by a lack of confidence in markets?
Rick notices that his brother Steve and many other investors have reduced the amount they invest, and Rick decides to do the same.
Which of the following is NOT mentioned as a difficulty the Fed faces when trying to affect aggregate demand in the short run?
Sticky wages and prices
In the best case scenario, what is the Fed's response to a negative demand shock?
The Fed will increase the growth rate of the money supply to offset the negative demand shock.
Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy?
The Fed's control of the money supply is incomplete and subject to uncertain lags.
Which statement is NOT a criticism of the claim that the Federal Reserve should have raised rates more quickly in response to the housing bubble?
The Federal Reserve knew that the housing bubble would be good for the economy in the short run.
Suppose that the economy is hit by a negative real shock, such as a disruption of the supply of steel. How will this affect the Solow growth curve?
The Solow growth curve would shift to the left.
Which event occurred as a result of falling real estate prices in 2006 and 2007?
The growth rate of the money supply fell.
Which of these is NOT one of the issues that makes it difficult for the Fed to choose the right course of action at the right time?
The time that it takes for the Fed to decide on a course of action
What would happen if banks decided to stop lending altogether and instead held on to enormous amounts of cash?
The tools of monetary policy would become less effective in response to a recession.
What are the two potential dangers for the economy, according to monetarism?
Too much inflation and too little inflation
Why is monetary policy not fully effective in combating a negative supply shock?
When countering a negative supply shock to reduce unemployment, Fed action will raise inflation.
Most of the Fed's policy tools impact aggregate demand as a whole. Is there any way that the Fed could have targeted the housing market directly in the mid-2000s?
Yes, through its power to regulate banks.
disinflation
a reduction in the inflation rate
Disinflation is:
a reduction in the rate of inflation.
The cost of stimulating the economy in the 1970s was:
a severe recession with high unemployment in the 1980s.
Disinflation is best defined as:
a significant reduction in the rate of inflation.
credible,
a strategy or promise is credible if it is in an agent's interest to follow through on that strategy or keep the promise
Suppose that the Federal Reserve Bank wants to address high levels of unemployment in the economy. To do so, it would likely seek to increase________
aggregate demand
When faced with a negative shock to aggregate demand, the central bank can boost aggregate demand through:
an expansionary monetary policy.
If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be:
an increase in money supply growth.
Economic data:
are sometimes revised months or years after their initial release.
A bubble happens when:
asset prices rise higher and faster than can be explained by the fundamentals.
If the Fed responds to a negative real shock by decreasing the money supply, the real growth rate will:
be lower than if the Fed did nothing.
If the Federal Reserve offsets a negative shock to aggregate demand with increased money growth:
both inflation and real GDP growth will rise compared to if the Fed had not acted.
Negative real shocks and negative demand shocks:
commonly come together.
The economy is:
complex, and it operates under uncertain rules.
Monetarists tend to favor:
constraining the central bank through rules.
The central bank can help the inflation rate to decrease after a negative real shock through:
contractionary monetary policy.
The Federal Reserve has the power to:
create money.
In order to fight high inflation the Fed should _______; in order to fight high unemployment the Fed should _______.
decrease the growth rate of the money supply; increase the growth rate of the money supply
The combination of shocks hitting an economy is:
difficult to identify because they are so numerous.
A significant reduction in the rate of inflation is:
disinflation.
According to the quantity theory of money, in the long run, the amount of money in the economy:
doesn't influence real output or real employment.
If the Fed responds to a negative real shock by decreasing the money supply, the Fed is addressing:
the problem of inflation, but not the problem of lower real growth.
One of the problems with a strict monetary policy rule that sets a constant growth rate for the money supply is that when there are large shocks to the economy, the growth rate of _______, causing real GDP growth to slow down.
the velocity of money can fall
Which is a limitation of monetary policy in stabilizing the economy?
Monetary policy is subject to uncertain lags.
If consumers become less confident and begin to borrow and spend less, what will happen in the dynamic AD/AS model?
The aggregate demand curve will shift to the left.
Deflation is:
a decrease in prices; that is, a negative inflation rate.
One of the Federal Reserve's most powerful tools is its influence over _____, not its influence over _____.
expectations; the money supply
In the case of a negative shock to aggregate demand, the central bank should:
increase the rate of growth of the money supply to restore spending growth.
market confidence
one of the Federal Reserve's most powerful tools is its influence over expectations, not its influence over the money supply
The Federal Reserve has:
made some booms and recessions worse rather than better.
In addition to influencing the money supply, the Federal Reserve is able to boost:
market confidence.
The most appropriate monetary policy response to an asset price bubble for a central bank is to:
not react to asset price bubbles because monetary policy can affect only aggregate demand, not demand in a specific market.
The Fed's power to influence aggregate demand is constrained by:
uncertainty and an inability for everyone to fully understand the complexity of the economy.
In addition to keeping interest rates too low for too long, the Fed also:
underestimated the impact of a decline in the housing sector on the whole economy.
Which of the methods is not used by the Federal Reserve to maintain market confidence?
undergoing congressional review to ensure that the Fed is using monetary policy properly
Professor Tabarrok suggests that monetary policy is both an art and a science because of the complexity of answering all of the following questions EXCEPT:
where to apply monetary policy tools.
