Econ Unit 5.2
Consider two situations, A and B. In A, the output gap is positive (an inflationary gap) and the core inflation rate is 3 percent a year. In B, the output gap is negative (a recessionary gap) and the core inflation rate is 1 percent a year. The Fed is likely to have the higher federal funds rate target in situation ______ because ______. A. B; a higher federal funds rate increases the deflationary gap and raises core inflation B. A; a higher federal funds rate decreases the inflationary gap and lowers core inflation C. B; the Fed follows rule-based monetary policy and the state of the economy in situation B dictates a rise in the federal funds rate D. A; the Fed follows rule-based monetary policy and the state of the economy in situation A dictates a rise in the federal funds rate
A.
Departing Fed official takes shot at policies "When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have in fact bought problems," Kansas City Fed President Thomas Hoenig said in his final speech in office. The Fed has cut rates to near zero and bought more than $2 trillion in bonds to boost the economy. Source: Reuters, September 28, 2011 What are some of the problems that near zero interest rates and $2 trillion of quantitative easing have created? The problems that near zero interest rates and $2 trillion of quantitative easing have created include _______. A. the danger of inflation when the economy begins to recover B. the danger of deflation when the economy begins to recover C. a lack of bank reserves D. high unemployment E. a decrease in potential GDP
A.
Do automatic fiscal stabilizers eliminate business cycles? A. No, but they do moderate business cycles. B. No, they increase the likelihood that a business cycle occurs. C. No, they make business cycle fluctuations more severe. D. Yes E. No, because they have no effect if the business cycle is the result of some unanticipated change.
A.
Fed sees no need to raise interest rates soon The Fed has consistently said that it will not raise the federal funds rate any time soon. The Fed's challenge will be how to get monetary policy back to normal over the next several years. The Fed has to make a judgment about timing long dash —tightening too early could send the economy back into recession, as happened during the late 1930s; waiting too long would set the stage for inflation. Source: The New York Times, November 5, 2009 If the recovery continues and inflation starts to rise, what effect will the Fed's decision to not change the federal funds rate have on the U.S. economy? If the recovery continues and inflation starts to rise, and if the Fed decides to leave the federal funds rate unchanged, we would expect ______. A. inflation to increase B. the recessionary gap to increase C. potential GDP to decrease D. potential GDP to increase E. deflation to occur
A.
In the short run, if the Fed wants to raise the federal funds rate, it A. instructs the New York Fed to sell government securities in the open market. B. instructs the New York Fed to buy government securities in the open market. C. tells large commercial banks to raise their interest rates. D. instructs the New York Fed to sell government securities in the foreign exchange market. E. instructs large commercial banks to sell government securities in the open market.
A.
Many ways to blow up an economy Excessive stimulus could bring inflation in the United States in the long term, but for now, inflation is falling. Bond interest rates reflect inflation expectations that are within the Fed's long-term target levels. Source: Australian Financial Review, May 9, 2009 What does it mean to say that inflation expectations are within the Fed's target levels? Prior to 2012, the Fed did not have a numerical target for the inflation rate, but now considers price stability as a core inflation rate _______. A. of 2 percent a year. B. between 2 and 3 percent a year C. between 3 and 4 percent a year D. between 4 and 5 percent a year E. that is less than the unemployment rate
A.
The U.S. economy is at full employment when the world price of oil begins to rise sharply. Short-run aggregate supply decreases. The Fed takes monetary policy actions that are consistent with its objectives as set out in the Federal Reserve Act of 2000. If the Fed promotes stable prices, the price level ______ and the unemployment rate ______. A. falls; increases B. rises; decreases; C. rises; increases D. falls; decreases E. does not change; decreases
A.
The level at which the Fed sets its monetary policy instrument is influenced by ______. A. the output gap and the inflation rate B. nominal GDP and real GDP C. the unemployment rate and the long-term interest rate D. whether there is a Democratic or Republican majority in the House of Representatives E. the quantity of money and the monetary base
A.
When taxes are cut, aggregate demand ________ and aggregate supply ________. A. increases; increases B. increases; does not change C. decreases; decreases D. increases; decreases E. decreases; increases
A.
Fed sees no need to raise interest rates soon The Fed has consistently said that it will not raise the federal funds rate any time soon. The Fed's challenge will be how to get monetary policy back to normal over the next several years. The Fed has to make a judgment about timing-tightening too early could send the economy back into recession, as happened during the late 1930s; waiting too long would set the stage for inflation. Source: The New York Times, November 5, 2009 If the economic recovery slows and the economy slips back into recession, what effect will the Fed's no-change decision have on the economy? If the economic recovery slows and the economy slips back into recession, and if the Fed decides not to change the federal funds rate, we would expect ______. A. a larger fall in the price level than would occur with a rise in the federal funds rate B. a smaller recessionary gap than would occur with a rise in the federal funds rate C. an increase in potential GDP D. a decrease in potential GDP E. a larger recessionary gap than would occur with a rise in the federal funds rate
B.
Many ways to blow up an economy Excessive stimulus could bring inflation in the United States in the long term, but for now, inflation is falling. Bond interest rates reflect inflation expectations that are within the Fed's long-term target levels. Source: Australian Financial Review, May 9, 2009 Explain why inflation was falling in 2009 and how excessive stimulus could bring inflation in the long term. Inflation was falling in 2009 because ______. Excessive stimulus can bring inflation in the long run because lowering the federal funds rate ______. A. aggregate supply was increasing; decreases aggregate supply B. aggregate demand was decreasing; increases aggregate demand C. aggregate demand was decreasing; increases potential GDP D. potential GDP was decreasing; decreases aggregate supply E. potential GDP was increasing and aggregate supply was increasing; increases aggregate demand
B.
The objectives of U.S. monetary policy are to achieve ______. A. zero unemployment and zero inflation B. maximum employment and stable prices C. zero unemployment and stable prices D. maximum employment and predictable prices E. zero unemployment and long-term interest rates that are lower than short-term interest rates
B.
The Fed's monetary policy instrument is ______. A. the core inflation rate B. the federal funds rate C. the quantity of money D. the monetary base E. the long-term interest rate
B.
By using open market operations, the Federal Reserve A. adjusts the supply and demand of reserves to keep the federal funds interest rate equal to its target. B. adjusts the demand of reserves to keep bank rates in line with the federal funds rate target. C. adjusts the supply of reserves to keep the federal funds interest rate equal to its target. D. controls banks' demand for reserves, thereby keeping the federal funds rate equal to its target. E. None of the above answers is correct.
C.
If an economy is in an equilibrium with an inflationary gap, policy-makers can use A. discretionary fiscal policy and increase government expenditure. B. discretionary fiscal policy and cut taxes. C. discretionary fiscal policy and decrease government expenditure. D. automatic fiscal policy and increase government expenditure. E. automatic fiscal policy and cut taxes.
C.
If the economy has been producing at a point where real GDP is less than potential GDP, what fiscal policy can the federal government use to restore real GDP to potential GDP? A. cut government expenditure on goods and services B. raise the interest rate C. cut taxes D. increase taxes E. decrease the quantity of money
C.
In order to reduce inflationary pressure on the economy, what fiscal policy can the government use? A. increase government expenditure on goods and services B. increase the quantity of money C. raise taxes D. cut interest rates E. cut taxes
C.
The Federal Reserve monetary policy goals of maximum employment means A. cyclical unemployment should not necessarily be minimized. B. aiming for an amount of employment that exceeds full employment. C. keeping the unemployment rate close to the natural unemployment rate. D. a zero percent natural unemployment rate. E. a zero percent unemployment rate.
C.
Which of the following is NOT a monetary policy goal? A. keeping long−term interest rates moderate B. promoting maximum employment C. keeping a high exchange rate for the dollar D. maintaining stable prices E. All of the above are monetary policy goals.
C.
Fed is split over time of rate rise In October 2009, the Fed was forecasting that unemployment will average 9.8 percent in 2010 and said the federal funds rate will remain "exceptionally low" for "an extended period." But some officials were beginning to worry about unwinding the $2 trillion in special credits that have boosted the monetary base and to wonder if the interest rate might need to start rising soon. Source: The New York Times, October 9, 2009 Describe the time lags in the operation of monetary policy and explain why they pose a challenge for the Fed in deciding when to start raising the federal funds rate target in a recession. The time lag between the implementation of monetary policy and the resulting change in the inflation rate is approximately ______. This poses a challenge for the Fed in deciding when to start raising the federal funds rate target in a recession because ______. A. a few months; fiscal policy has a shorter lag time and monetary policy and fiscal policy are always coordinated B. 2 years; fiscal policy has a shorter lag time and monetary policy and fiscal policy are always coordinated C. 1 year; if the Fed raises the federal funds rate too soon, it could lengthen the recession D. 2 years; if the Fed raises the federal funds rate too soon, it could lengthen the recession E. a few months; Congress must agree on monetary policy and they are not always in Washington when these decisions must be made
D.
If a tax cut increases aggregate demand more than aggregate supply, real GDP ________ and the price level ________. A. decreases; falls B. decreases; rises C. increases; falls D. increases; rises E. increases; does not change
D.
If the Fed promotes maximum employment, ______. A. the price level falls and the unemployment rate decreases B. the unemployment rate increases and the price level does not change C. the unemployment rate does not change and the price level falls D. the unemployment rate decreases but the price level rises E. the price level falls and the unemployment rate increases
D.
The Federal Reserve Act makes ______ responsible for the conduct of monetary policy. A. Congress B. the Presidents of the Federal Reserve Banks C. the President D. the Board of Governors of the Federal Reserve System and the Federal Open Market Committee
D.
The core inflation rate is the annual percentage change in ______. The core inflation rate fluctuates ______. A. the Personal Consumption Expenditure Price Index excluding the prices of food and energy; more than the total PCEPI inflation rate B. the GDP price index; more than the PCEPI inflation rate C. the Personal Consumption Expenditure Price Index excluding the prices of food, energy, and housing; more than the total PCEPI inflation rate D. the Personal Consumption Expenditure Price Index excluding the prices of food and energy; less than the total PCEPI inflation rate E. the Personal Consumption Expenditure Price Index excluding the prices of food, energy, and housing; less than the total PCEPI inflation rate
D.
Which of the following statements are correct? i. Congress does not play a role in making monetary policy decisions. ii. The FOMC meets eight times a year to make monetary policy decisions. iii. The President of the United States appoints members of the Board of Governors and the Chairman of the Board of Governors, but the President has little other formal authority over monetary policy. A. i and iii B. i,and ii C. ii only D. ii and iii E. i, ii, and iii
D.
When the economy is in a recession, ________ taxes decrease while ________ spending increases and, as a result of this automatic fiscal policy, aggregate demand ________. A. discretionary; needs-tested; increases B. discretionary; induced; is not changed C. induced; discretionary; is not changed D. needs-tested; induced; decreases E. induced; needs-tested; increases
E.
