"Chapter 15 Economics"

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.

) decrease the interest rate

What are the Fed's four monetary policy goals intended to promote a well-functioning economy?

1. Price stability 2. High employment 3. Economic growth 4. Stability of financial markets and institutions

What is the federal funds rate?

1. the interest rate banks charge each other for overnight loans 2. set by the Federal Open Market Committee after each meeting

Describe expansionary monetary policy

1. used to fight a recession 2. lowers interest rates to increase consumption, investment, and net exports

Describe contractionary monetary policy.

1. used to reduce the inflation rate 2. raises interest rates to decrease consumption, investment, and net exports

What is a countercyclical policy?

A macroeconomic policy that successfully reduces the severity of the business cycle

. 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

A) The Fed increased its reliance on interest rate targets since the mid 1990s.

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.

A) increases the buying and selling of goods and increases the demand for money as a medium of exchange

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

A) negative slope

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.

A) shift money demand to the left and decrease the interest rate

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

B) medium of exchange; store of value

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.

B) selling Treasury bills, which decreases bank reserves

Refer to Figure 15-5. 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 AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from C to B. A to B. C to D. B to C. A to E.

C to B.

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.

C) $971

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.

C) 7 percent.

. 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

C) federal funds rate

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

C) increase investment projects by firms.

. 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

C) reduce; lower

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

C) sell; up

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.

D) At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.

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.

D) decrease consumption spending

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

D) lowers interest rates during recessions

. 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.

D) the money supply and interest rates to pursue its economic objectives.

Since World War II, the Federal Reserve has not been involved in carrying out monetary policy. True False

False

Monetary policy refers to the actions the Federal Reserve takes to manage government spending and taxes to pursue its economic objectives. President and Congress take to manage government spending and taxes to pursue their economic objectives. Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives. President and Congress take to manage the money supply and interest rates to pursue their economic objectives

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

Expansionary monetary policy refers to the ________ to increase real GDP. Federal Reserve's increasing the money supply and decreasing interest rates government's decreasing spending and raising taxes Federal Reserve's decreasing the money supply and increasing interest rates government's increasing spending and lowering taxes

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

In response to already low interest rates doing little to stimulate the economy, the Fed announced a new program in September 2011 under which it would purchase long-term Treasury securities while selling an equal amount of shorter-term Treasury securities. This policy was known as securities-bubble deflating. Operation Twist. inflation targeting. quantitative easing

Operation Twist.

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 Emergency Economic Stabilization Act required the Fed and the Treasury to provide financial assistance to firms that participated in regular open market actions with the Fed. The failure of these firms would have forced the Fed to increase interest rates, which could have led to a severe recession. The bankruptcy of a large financial firm would force the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail. The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the firms before they went bankrupt.

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

In October 2008, Congress passed the ________, under which the Treasury provided funds to banks in exchange for stock. Mortgage Transfer Agency (MTA) Financial Assurance Association (FAA) Troubled Asset Relief Program (TARP) Bank Rescue Alliance Treaty (BRAT)

Troubled Asset Relief Program (TARP)

Inflation rates during the years 1979-1981 were the highest the United States has ever experienced during peacetime. True False

True

An increase in the interest rate causes a movement up along the money demand curve. a movement down along the money demand curve. the money demand curve to shift to the right. the money demand curve to shift to the left.

a movement up along the money demand curve.

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

a. It links the Fed's target for the federal funds rate to economic variables

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.

a. a higher target federal funds rate

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

a. inflation

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

a. inflation targeting.

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.

a. is used to attempt to stabilize the economy.

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

a. more; rise

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.

a. the money demand curve shifts to the right.

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.

a. the money demand curve shifts to the right.

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

a. when interest rates are high

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%

b. 5.26%

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.

b. The FOMC reduced the target for the federal funds rate steadily throughout 2001.

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

b. a strategy of keeping inflation low and stable in the long run, but without inflation targeting

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

b. an increase in real GDP

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

b. expansionary monetary policy to increase aggregate demand

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.

b. inadvertently increases the severity of the business cycle.

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

b. inflation in the long run

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

b. manage the money supply and interest rates.

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

b. move in opposite directions

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.

b. the 1970s

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

b. the money supply and the interest rate

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.

b. the money supply curve will shift to the left, and the equilibrium interest rate will rise.

Refer to Figure 15-2. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will want to hold less money. buy Treasury bills. sell Treasury bills. neither buy nor sell Treasury bills.

buy Treasury bills.

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

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

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.

c. buy U.S. Treasury securities

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.

c. contractionary monetary policy.

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

c. expansionary monetary policy

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.

c. high employment and economic growth

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.

c. keep the money supply growing at a constant rate

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

c. low; high

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.

c. monetary policy that lowered interest rates.

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.

c. there is a movement down along a stationary money demand curve

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 long-term interest rates. changes in both short-term and long-term interest rates with equal effect on both. no change in both short-term and long-term interest rates. changes in both short-term and long-term interest rates with more of an effect on short-term interest rates.

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

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.

d. The Fed is forced to choose between the interest rate and the money supply as its monetary policy target

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

d. all of the above

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

d. all of the above

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

d. all of the above

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

d. all of the above

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

d. faster; higher

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

d. federal funds rate.

a. price stability b. high employment c. economic growth d. low interest rates

d. low interest rates

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

d. lower; higher

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

d. rise; increase; fall

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

d. sell; reducing; increasing

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

d. stability of financial markets

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely decrease income tax rates. decrease interest rates. increase interest rates. increase income tax rates

decrease interest rates

Refer to Figure 15-6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely not change interest rates. decrease interest rates. decrease the inflation rate. increase interest rates.

decrease interest rates.

An increase in interest rates decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports. decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports

decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports.

What are the Fed's monetary policy targets?

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

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the prime rate. Treasury bill rate. federal funds rate. discount rate.

federal funds rate.

An increase in the interest rate should ________ the demand for dollars and the value of the dollar, and net exports should ________. increase; not change decrease; decrease decrease; increase increase; increase increase; decrease

increase; decrease

In September 2011, the Fed announced a new policy in which it would invest in additional mortgage-backed securities in an attempt to further reduce mortgage rates and boost the housing market. Lower mortgage rates should lead to an increase in refinancing, which should ________ disposable income and therefore ________ aggregate demand. decrease; increase decrease; decrease increase; increase increase; decrease

increase; increase

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds. increase; less decrease; less increase; similar increase; more decrease; more

increase; more

An increase in the interest rate increases the opportunity cost of holding money. decreases the percentage yield of holding money. decreases the opportunity cost of holding money. increases the percentage yield of holding money.

increases the opportunity cost of holding money

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 inflation targeting. contractionary monetary policy. securities-bubble deflating. quantitative easing.

inflation targeting.

By the 2000s, an important change in the mortgage market had occurred when ________ became significant participants in the secondary market for mortgages. savings banks commercial banks investment banks Federal Reserve Banks

investment banks

A financial asset is considered a security if its value increases after it is sold in a primary market. it can be sold in a secondary market. the owner of the security receives dividends and realizes a capital gain when the asset is sold. its value is secure; that is, the owner will not suffer a financial loss when the asset is sold.

it can be sold in a secondary market.

If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time. low; does not change high; raises high; lowers low; lowers low; raises

low and lowers

Refer to Figure 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 interest rates. raise interest rates. raise income taxes. lower income taxes.

lower interest rates

If the amount you owe on your house is greater than the price of the house, you have a mortgage rate that is too high. a reverse mortgage on your house. negative equity in your house. no value to your house.

negative equity in your house.

Refer to Figure 15-1. In the figure, the money demand curve would move from MD1 to MD2 if real GDP increased. the price level decreased. the interest rate increased. the Federal Reserve sold Treasury securities.

real GDP increased.

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 reduce the rate of inflation. reassure financial markets and promote financial stability. reduce unemployment. stimulate economic growth. reduce the current account deficit.

reassure financial markets and promote financial stability

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.

shift the money supply curve to the right and reduce the interest rate

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. sub-prime; "Alt-A" "fresh-start"; prime rate "credit crunch"; black market adjustable rate; shadow-banking

sub-prime; "Alt-A"

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

the Fed is able to reduce the severity of a recession, but unable to eliminate it entirely

What is monetary policy?

the actions the Fed takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives

Describe inflation targeting.

which monetary policy is conducted to commit the central bank to achieving a publicly announced inflation target