Chapter 13-14

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According to a 1994 paper by Mark Gertler and Simon Gilchrest, tight monetary policy has ________, because ________. A) a bigger impact on smaller firms than larger ones; of moral hazard and adverse selection B) a bigger impact on larger firms than smaller ones; large firms have more access to capital markets C) no impact on large firms; they can always issue short-term bonds D) impacts small and large firms the same; neither type of firm borrows from banks

A

According to a study by Romer and Romer, the maximum impact of a monetary tightening: A) took about one year longer for inflation than output. B) took about the same amount of time for inflation and output. C) took about eighteen months longer for output than inflation. D) was almost nothing for inflation and was felt about two years later for output.

A

After ten-plus years, Japan was finally able to pull itself out of an economic slump because: A) a weak yen helped increase Japanese exports. B) savers finally enjoyed higher than usual interest rates. C) tax revenues rose. D) the central bank bought up private banks' bad loans.

A

Deflation is a period of ________ inflation. A) sustained negative B) slowing C) steady and low D) zero

A

Fiscal policy is controlled by ________, and it is the cooperation between them that makes the ________ lag so long. A) Congress and the President; inside B) Federal Reserve Bank Presidents; outside C) Congress and the President; outside D) the FOMC and the U.S. President; inside

A

If bond traders expect that an economy is sliding into recession, they ________ in anticipation of ________. A) bid bond rates down; a decrease in the federal funds target rate B) decrease the price of their services; new regulations on bond trading C) bid bond rates down; an increase in the federal funds target rate D) bid bond rates up; a decline in the stock market

A

If people expect the FOMC to raise the federal funds rate and it does, the: A) yield curve does not change. B) yield curve shifts up. C) Phillips curve shifts left. D) yield curve shifts down.

A

If the Fed raises the federal funds rate in its current meeting, it: A) will likely increase it again at the next meeting. B) will likely lower it at the next meeting. C) has no incentive to change it again. D) knows inflation is in check.

A

If the tax rate on savings is 20%, the nominal interest rate is 3%, and the inflation rate is 5%, the after-tax nominal interest rate is ________ and the after-tax real interest rate is ________. A) 2.4%; -2.6% B) 2.4%; 1.4% C) 2.85%; 1.9% D) 3%; 1.9%

A

If the tax rate on savings is 20%, the nominal interest rate is 4%, and the inflation rate is 3.2%, the after-tax real interest rate is: A) 0%. B) 3.2%. C) 6.4%%. D) -2.4%.

A

In the 1880s and 1890s, there was a debate over whether to adopt bimetallism, which is defined as using ________. However, since there was a silver production boom going on during this period, had bimetallism been adopted, the growth of silver would have ________. A) both gold and silver as money; increased inflation B) both gold and silver as money; raised unemployment C) silver in day-to-day transactions and gold as a reserve commodity; resulted in disinflation D) gold to conduct foreign exchange transactions; caused a recession

A

In the long run, inflation is determined by the: A) growth rate of money. B) level of unemployment. C) natural rate of output. D) Treasury Secretary.

A

One reason that monetary policy may take some time to impact the AE curves is that: A) firm investment takes time to plan and implement. B) consumers are completely insensitive to interest rate changes. C) the federal government must assess interest rate changes. D) it takes time for checks to be mailed to households.

A

The act of the central government borrowing by selling large numbers of bonds directly to the central bank is colloquially called: A) "printing money." B) "deficit spending." C) "the time value of money." D) "deflation finance."

A

The phenomenon that in the long run monetary policy has NO impact on economic growth is called: A) long-run neutrality. B) the ineffectiveness of money principle. C) the quasi-Phillips relationship. D) the money illusion.

A

The reason cited in the text for the recession of 2001 was: A) a fall in investment. B) increase in computer expenditures. C) an increase in wealth. D) rising real estate prices.

A

To capture ________ found in the data, when we model the Phillips curve we want to see the relationship between ________ and ________. A) monetary policy lags; past output; current inflation B) inflation expectations; current inflation; past inflation C) inflation expectations; the current real interest rate; current output D) None of the answers is correct.

A

Use the quantity equation to answer the following: If the central bank maintains money growth at 2%, velocity growth is 1%, and output is growing at 4%, the rate of inflation is ________; this is called ________. A) -1%; deflation B) 5%; hyperinflation C) 1%; inflation D) 3%; inflation

A

When the Fed increases the federal funds target rate: I. it reduces the present value of earnings on assets. II. the dollar appreciates. III. it increases bank lending. A) I and II B) I and III C) II only D) II and III

A

With fiat money, money supply is controlled by: A) the central bank. B) discoveries of new reserves of gold. C) the central government. D) commercial banks who lend money.

A

. Changes in monetary policy first impact: A) output. B) financial markets. C) inflation. D) unemployment.

B

A fall in the Dow Jones Industrial index will lead to a: A) rightward shift in the aggregate expenditure function. B) leftward shift in the aggregate expenditure function. C) leftward shift in the Phillips curve. D) rightward movement along the aggregate expenditure function.

B

A graphical representation of interest rates of various maturities is called the: A) liquidity curve. B) yield curve. C) bond yield representation. D) Engel Curve.

B

A rise in aggregate expenditure ________ firms' earnings, which pushes ________, which ________. A) increases; investment down; reduces aggregate expenditure B) increases; investment up; increases aggregate expenditure C) increases; household income down; reduces aggregate expenditure D) reduces; household income down; reduces aggregate expenditure

B

Generally, monetary policy first impacts ________ and then ________. A) unemployment; output B) output; inflation C) inflation; interest rates D) net exports; exchange rates

B

High inflation ________, which ________, harming economic efficiency. A) increases shoe leather costs; distorts firm sales B) increases price variation; distorts household purchases and firm sales C) reduces price variation; increases shoe leather costs D) decreases inflation surprises; reduces firm distraction

B

Hyperinflation is defined as inflation of: A) 50% per year or more. B) 50% per month or more. C) 150% per month or more. D) 1,000% per year or more.

B

IIn the long run, the majority of differences in inflation rates across countries is explained by ________, particularly in high-inflation countries. A) unemployment rates B) money growth rates C) output growth D) changes in velocity

B

If the FOMC unexpectedly raises the federal funds rate, ________ will ________. A) long-term interest rates; rise along the yield curve B) the yield curve; shift up C) inflation; rise D) changes in inflation expectations; shift Okun's curve

B

If your stock portfolio increases by $1.00, research has demonstrated that you will: A) decrease your consumption by $0.20. B) increase your consumption by $0.04. C) increase your savings by $0.04. D) begin to worry about inflation.

B

In response to the subprime mortgage crisis, the President and Congress ________ while the Fed ________. The federal government's policy has a long ________ and the Fed's is very short. A) bought houses in foreclosure; left interest rates unchanged; inside lag B) gave taxpayers a tax rebate; cut interest rates; inside lag C) offered an economic recovery package; cut interest rates; outside lag D) gave taxpayers a tax rebate; bought houses in foreclosure; outside lag

B

In the 1896 election, Democratic candidate William Jennings Bryan's primary campaign issue was ________; in other words, ________. A) "Liberate Silver"; use silver as commodity money B) "Free Silver"; bimetallism C) "Free Trade"; allow more gold imports to increase the money supply D) "Free Gold"; end high tariffs on commodity imports

B

In the equation V=PY/M, V is velocity, PY is ________, and M is ________. A) real GDP; money demand B) total spending or nominal GDP; money supply C) nominal GDP; total spending D) real GDP; a monetary policy variable

B

In the late 1970s, policy makers accommodated a(n) ________, allowing inflation to rise. In 1979, Chairman of the Fed Volcker decided to ________ and accepted ________. A) adverse supply shock; increase money growth; higher rates of inflation to reduce unemployment B) adverse supply shock; reduce money growth; a deep recession C) positive demand shock; decrease taxes; a deep recession D) negative demand shock; reduce money growth; a lower unemployment rate

B

Inflation ________ the overall real return to savings. A) increases B) reduces C) has no impact on D) There is not enough information provided to answer the question.

B

Kenneth Kuttner's study showed that ________, just as the ________ theory predicts. A) the effects of federal funds rate changes are the same for all interest rate maturities; expectations B) the effects of federal funds rate changes die out for long interest rate maturities; expectations C) the federal funds rate has no impact on long-term interest rates; liquidity preference theory D) changes in the monetary base have no impact on interest rates; Kuhn-Tucker

B

The catalyst for the German hyperinflation in 1923 was: A) high global energy prices accompanied by dwindling supplies of wheat. B) the high war reparations paid to the victors of World War C) increasing global interest rates. D) political unrest and the rise of global communism.

B

The equation MV = PY is called the: A) liquidity constraint. B) quantity equation of money. C) monetary policy equation. D) monetary equilibrium equation.

B

The seed of the Japanese slump occurred when: A) the yen depreciated. B) loans to large firms fell. C) unemployment fell. D) Junichiro Koizumi was elected prime minister of Japan.

B

The time between the policy response and the effects on the economy is called the ________ lag. A) inside B) outside C) policy D) effectiveness

B

To capture the ________ found in the data, when we model aggregate expenditure we want to see the relationship between the ________ and ________. A) monetary policy time lag; current inflation rate; the previous period's real interest rate B) monetary policy time lag; previous period's real interest rate; current output C) level of inflation; previous inflation rate; current output D) None of the answers is correct.

B

To escape the liquidity trap, John Maynard Keynes suggested ________, which would increase inflation along the ________. A) expansionary fiscal policy; Lucas curve B) expansionary fiscal policy; Phillips curve C) contractionary fiscal policy; Engel curve D) expansionary fiscal policy; aggregate expenditure curve

B

To examine the relationship between the federal funds rate and longer-term interest rates, we can use the: A) Phillips curve. B) term structure. C) Fisher Relation. D) monetary transmission mechanism.

B

Velocity is defined as: A) the speed with which an asset can be made liquid. B) how quickly money moves through an economy. C) the acceleration of inflation. D) the Fed's response to an expenditure shock

B

When savings are taxed, if you see that inflation is too high it gives you a(n) ________, because the ________. A) disincentive to save; nominal interest rate is negative B) disincentive to save; real interest rate is negative C) incentive to spend; real interest rate is higher than the nominal interest rate D) incentive to save; real interest rate is higher than the nominal interest rate

B

You read in the paper that bond interest rates have risen. From the behavior of these rates, you might deduce that: A) bond traders are greedy and want higher returns. B) bond traders expect the FOMC to raise the target federal funds rate next time they meet. C) foreigners are buying off their U.S. securities. D) the stock market is in decline.

B

A contributing factor to high inflation rates in the 1970s was that after oil prices rose, a(n) ________, and the Fed ________ by increasing money supply in an effort to ________. However, this increased inflation. A) adverse demand shock occurred; conducted contractionary monetary policy; prevent an inflationary spiral B) positive demand shock occurred; accommodated the shock; keep unemployment high C) adverse supply shock occurred; accommodated the shock; prevent a recession D) positive supply shock occurred; conducted expansionary monetary policy; reduce inflation

C

According to the ________, when the Fed lowers the federal funds rate, longer-term interest rates will ________. A) expectations theory; rise B) liquidity preference model; rise C) expectations theory; fall D) loanable funds model; fall

C

Bimetallism is defined as a system in which: A) gold is used as a reserve and silver is used to make coins. B) gold is the reserve currency and silver is used in day-to-day transactions. C) money is backed by gold and silver. D) gold is used to conduct foreign exchange transactions, but not to control the money supply.

C

Central banks often adopt ________ to keep ________. A) high money growth rates; inflation low B) zero money growth rate; unemployment low C) low money growth rates; inflation low D) low money growth rates; interest rates low

C

During the 1880s and 1890s, farmers and their political allies wanted to ________, in order to ________ to reduce farmer debt burdens. A) generate deflation; reduce the ex ante real interest rate B) adopt a gold standard; keep inflation at zero C) generate inflation; reduce the ex post real interest rate D) issue agricultural bonds; pay off loans

C

In addition to changes in asset prices, which of the following may also discourage bank lending? I. risk perceptions II. changes in regulation III. a reduction in capital requirements A) I only B) II only C) I and II D) II and III

C

In the 1990s, banking regulation prevented Japanese banks from engaging in new lines of business; therefore they relied more heavily on ________ to generate profits which, among other things, contributed to________. A) investment banking; a decline in investment B) offering savings accounts; a decline in transaction accounts C) real estate loans; a real estate bubble D) tax revenues; an increase in personal savings

C

In the long run, differences in the inflation rate are explained by differences in ________ across countries. A) output growth B) changes in velocity C) money growth rates D) All of the answers are correct.

C

Monetary policy's impact on ________ is ________ in the long run. A) real variables; positive B) nominal variables; neutral C) real variables; neutral D) unemployment; negative

C

Shoe leather costs ________ in times of high inflation because people ________. A) fall; enjoy low real interest rates B) are unaffected; rarely buy leather-soled shoes anymore C) rise; don't want to hold cash D) rise; pay higher taxes on nominal income

C

The ________ is shorter for monetary policy and the ________ is shorter for fiscal policy. A) outside lag; inside lag B) inside lag; policy lag C) inside lag; outside lag D) policy lag; recognition lag

C

The general consensus on the impact of wealth is that: A) $0.04 of new wealth increases consumption by $1.00. B) a dollar of new wealth increases savings by $0.04. C) a dollar of new wealth increases consumption by $0.04. D) a dollar of new wealth has no impact on consumption.

C

The impact of changes in monetary policy on the real economy is called A) volatility. B) fiscal stimuli. C) the money transmission mechanism. D) the monetary base.

C

The interval between changes in the federal funds rate and impact on the real economy is called: A) the monetary wait. B) the interest rate time differential. C) time lags. D) Okun's Law.

C

The liquidity trap is a situation where: A) vault cash falls to zero. B) the central bank loses all its deposits. C) the central bank loses its ability to manage the inflation rate. D) real interest rates are zero.

C

The monetary transmission mechanism can be summarized by which of the following? A) Federal funds rate increase --> Longer-term interest rates increase --> Savings increase --> AE increase B) Federal funds rate increase --> Exchange rate decrease --> Net exports increase --> AE increase C) Federal funds rate decrease --> Moral hazard decrease --> Investment increase -->AE increase D) None of the answers is correct.

C

The phenomenon that new investment magnifies investment fluctuations in aggregate expenditure is called the: A) investment coefficient. B) profit magnifier. C) investment multiplier. D) interest rate amplification.

C

Uncertainty about inflation ________ borrowers and lenders (from)(to) enter(ing) the loan market because of the effects on the ________. A) encourages; ex post real interest rate B) encourages; ex ante real interest rate C) discourages; ex post real interest rate D) discourages; nominal real interest rate

C

Use the quantity equation to answer the following: Suppose the central bank wants to maintain a long-run inflation rate of 3%. If velocity growth is 1% and output is growing at 4%, what money growth rate should the central bank choose? A) 5% B) 1% C) 6% D) 3%

C

Velocity is written as: A) V= Real GDP/M B) V= M/Total Spending C) V=Total Spending/M D) V= Nominal GDP/Real GDP

C

Velocity is written as: A) V= Y/M B) V= M/PY C) V=PY/M D) V= Nominal GDP/Real GDP

C

When the central bank accommodates a negative supply shock, it ________; however,its main goal is to ________. A) allows unemployment to rise; keep output from falling below its potential B) allows inflation to rise; keep output from rising too far above potential, which may cause an inflationary spiral C) allows inflation to rise; keep output from falling below its potential D) has no control over inflation; reduce unemployment

C

Which of the following contributed to the vicious cycle of the Japanese economy in the 1990s? I. Japanese firms experienced weak earnings, which increased loan defaults. II. Japanese savers put more money into savings accounts at Japanese banks. III. Higher interest rates were charged by foreign banks to Japanese banks. A) I only B) I and II C) I and III D) II and III

C

Your parents are growing anxious over the declining state of the economy. They read the paper and see that the Fed has lowered the federal funds rate by 1%. They ask you when the economy will start to recover. What do you tell them? A) "Economic research has found that monetary policy is losing its effectiveness, so we had better wait for a tax rebate." B) "There is very little connection between monetary policy and the real economy, but prices should start to adjust within a year." C) "Economic research has found that output will begin to recover in about a year, and prices will take about twice as long to adjust." D) "I'm not sure; I majored in Art History, remember?"

C

A key implication of the Phillips curve is that central banks may have: A) a difficult time increasing short-run output while maintaining low inflation. B) a difficult time reducing unemployment while maintaining low inflation. C) to accept higher inflation if they increase short-run output. D) All of the answers are correct.

D

According to the quantity equation of money, in the long run there is ________ relationship between money growth rate and inflation. A) no B) less than a one-for-one C) greater than a one-for-one D) a one-for-one

D

During the deep Japanese recession in the 1990s and early 2000s, the Bank of Japan attempted to restart the economy with ________. However, because of a ________, the policy was ineffectual. A) large tax cuts; liquidity trap B) contractionary monetary policy; liquidity trap C) higher real interest rates; high government debt D) large expansionary open-market operations; liquidity trap

D

During the late 1990s, the Dow Jones Industrial Average grew about 120%. This would push ________ by ________ than the original change because of ________. A) the Phillips curve down; less; Okun's Law B) government expenditure function down; less; the money multiplier C) aggregate expenditure up; less; the Fisher equation D) aggregated expenditure up; more; the investment multiplier

D

High inflation in Latin America in the 1980s is blamed on: A) rising government deficit spending. B) falling tax revenues. C) increased programs to help the poor. D) All of the answers are correct.

D

If stock prices begin to rise: A) aggregate household expenditure will rise. B) firms will increase their investment expenditures. C) banks will be willing to give more loans. D) All of the answers are correct.

D

In a paper that investigated the impacts of monetary tightening on small- and large-firm inventories, Gertler and Gilchrest found that for large firms ________ and for small firms ________. A) short-term debt rose and then fell; inventories fell B) inventories did not change significantly; short-term debt fell C) inventories did not change significantly; inventories fell D) All of the answers are correct.

D

Kenneth Kuttner's study of interest rates and the federal funds rate: A) increased confidence in the size of the liquidity premium. B) decreased confidence in the expectations theory of term structure. C) found no connection between those two interest rates. D) increased confidence in the expectations theory of term structure.

D

Keynes suggested a solution to the liquidity trap: A) expansionary fiscal policy. B) lower taxes. C) increased government spending. D) All of the answers are correct.

D

Long-run changes in velocity are determined by: A) the increased use of ATMs. B) changes in transaction technologies. C) the increased use of on-line banking. D) All of the answers are correct.

D

Suppose inflation is close to zero and an adverse expenditure shock occurs. By the time monetary policy is effective, due to the _________, it is possible for the economy to enter a(n) ________. A) inside lag; liquidity trap B) inside and outside lags; stagflationary environment C) outside lag; inflation spiral D) outside lag; liquidity trap

D

The cause of the capital crunch in the subprime mortgage crisis of 2007-2008 was: A) risk perceptions. B) increased regulation. C) banks became more conservative. D) All of the answers are correct.

D

The deflation that occurred in the early 1930s was caused by the decline in the ________ caused by bank panics. A) M2 money supply B) real interest rate C) tax revenues D) money multiplier

D

The harmful effects of high rates of inflation include: A) shoe leather costs. B) relative price volatility. C) income inequality. D) All of the answers are correct.

D

The monetary transmission mechanism can be summarized by which of the following? A) Federal funds rate increases --> Longer-term interest rates increase --> Investment decrease --> AE decrease B) Federal funds rate increases --> Exchange rate increase --> Net exports decrease --> AE decrease C) Federal funds rate decreases --> Moral hazard decrease --> Investment increase --> AE increase D) All of the answers are correct.

D

The process through which monetary policy affects the real economy is called: A) the Fisher Equation. B) Okun's Law. C) fiscal policy. D) the monetary transmission mechanism.

D

The time between a shock and the policy response is called the: A) outside lag. B) period of adaptation. C) recognition lag. D) inside lag.

D

When the Fed lowers the federal funds rate, the impact on inflation lags output because: A) it is difficult for firms to figure out what is happening to demand. B) they all must convene and discuss how much to raise prices. C) there is no effect of monetary policy on prices. D) firms fear they will lose market share when they raise their prices.

D

Which of the following describes the investment multiplier? A) AE increases --> Firms' earnings increase --> Investment increase -->AE increase B) AE decrease--> Firms' earnings decrease --> Investment decrease -->AE decrease C) AE increase --> Investment increase --> AE increase D) All of the answers are correct.

D

Which of the following explains why worldwide inflation rates have fallen over the past few decades? I. an understanding of the long-run neutrality of money II. more conservative fiscal policy world wide III. a growing distaste for inflation A) I and II B) I and III C) II D) I, II, and III

D

Which of the following occurred during the Japanese downturn from 1992-2002? A) rising unemployment B) political discontent C) increased suicide D) All of the answers are correct.

D

Without time lags, correctly devised monetary policy should be able to ________ the effects of a negative expenditure shock by ________. A) worsen; lowering real interest rates B) reverse; keeping real interest rates constant C) accelerate; lowering taxes D) completely eliminate; lowering real interest rates

D


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