Macro Ch 15

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output Qf in the economy, the Fed should Multiple Choice increase aggregate demand by increasing the interest rate. decrease aggregate demand by increasing the interest rate. increase aggregate demand by decreasing the interest rate. make no change in the interest rate. Correct

make no change in the interest rate.

A newspaper headline reads, "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to Multiple Choice stimulate the economy. increase the money supply. reduce the cost of credit. reduce inflation in the economy.

reduce inflation in the economy.

In a reverse repo transaction, Multiple Choice banks return foreclosed property to previous owners. banks sell foreclosed property to new owners. the Fed borrows money from nonbank financial firms. Correct the Fed loans money to nonbank financial firms.

the Fed borrows money from nonbank financial firms

Interest Rate (1)Investment (2)Investment(3)4%$ 100$ 8059070680607705086040 Refer to the table, in which investment is in billions. Which of the following scenarios would be consistent with the occurrence of cyclical asymmetry? Multiple Choice the Fed lowers the interest rate from 5 to 4 percent, then investment demand changes from columns (1) and (3) to columns (1) and (2) the Fed raises the interest rate from 5 to 6 percent, then investment demand changes from columns (1) and (3) to columns (1) and (2) the Fed lowers the interest rate from 7 to 6 percent, then investment demand changes from columns (1) and (2) to columns (1) and (3) Correct the Fed raises the interest rate from 7 to 8 percent, then investment demand changes from columns (1) and (2) to columns (1) and (3) Explanation

the Fed lowers the interest rate from 7 to 6 percent, then investment demand changes from columns (1) and (2) to columns (1) and (3)

Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling. If aggregate supply increases in the economy, the Fed Multiple Choice will have to increase interest rates to keep the price level from falling. will have to reduce the money supply to keep the price level from rising. will have to increase the money supply to keep the price level from falling. Correct can keep the price level stable without altering the money supply or interest rate.

will have to increase the money supply to keep the price level from falling.

Money SupplyMoney DemandInterest RateInvestment (at Interest Rate Shown)$ 400$ 6002%$ 700$ 4005003600$ 4004004500$ 4003005300$ 4002006200 Answer the question based on the information in the table. If the Fed wished to reduce the interest rate by 1 percentage point, in the open market it could Multiple Choice sell enough bonds to increase the money supply by $200. buy enough bonds to decrease the money supply by $200. sell enough bonds to decrease the money supply by $100. Incorrect buy enough bonds to increase the money supply by $100. Correct

buy enough bonds to increase the money supply by $100.

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output Qf in the economy, the Fed should Multiple Choice decrease the interest rate from 10 to 8 percent. decrease the interest rate from 8 to 6 percent. Correct decrease the interest rate from 6 to 4 percent. increase investment spending from $30 to $60 billion.

decrease the interest rate from 8 to 6 percent.

Which of the following actions by the Fed would cause the money supply to increase? Multiple Choice optimistic forward guidance Correct an increase in the interest paid on reserve balances an increase in the discount rate sales of government bonds in the open market Incorrect

optimistic forward guidance

If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy? Multiple Choice recall Federal Reserve Notes from circulation increase the IORB and the ON RRP buy bonds in the open market Correct raise the discount rate

buy bonds in the open market

The purpose of expansionary monetary policy is to increase Multiple Choice the GDP gap. the inflation rate. real GDP. Correct interest rates.

real GDP.

Which of the following best describes the cause-effect chain of a restrictive monetary policy? Multiple Choice A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. Incorrect A decrease in the money supply will raise the interest rate, decrease investment spending, decrease aggregate demand, and decrease inflation. Correct An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand, and increase inflation. An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.

A decrease in the money supply will raise the interest rate, decrease investment spending, decrease aggregate demand, and decrease inflation.

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to _________blank, which will _________blank investment spending. Multiple Choice decrease; decrease decrease; increase Correct increase; increase increase; decrease

decrease; increase

Money SupplyMoney DemandInterest RateInvestment (at Interest Rate Shown)$ 400$ 6002%$ 700$ 4005003600$ 4004004500$ 4003005300$ 4002006200 Answer the question based on the information in the table. The amount of investment that will be forthcoming in this economy at equilibrium is Multiple Choice $700. $600. $500. Correct $300.

$500.

Which of the following is not a reason why during the COVID-19 crisis, when monetary policy appeared to be "maxed out," economic policy in the U.S. had to turn aggressively toward fiscal policy? Multiple Choice Monetary policy suffered from cyclical asymmetry. The banking system fell into a liquidity trap. Interest rates had already been cut to very low levels. There was a time lag implementing monetary policy.

There was a time lag implementing monetary policy.

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 6 percent and the goal of the Fed is full-employment output of Qf, it should Multiple Choice increase the interest rate from 6 percent to 8 percent. decrease the interest rate from 6 percent to 4 percent. decrease the interest rate from 6 percent to 2 percent. maintain the interest rate at 6 percent. Correct

maintain the interest rate at 6 percent

The three main tools of monetary policy are Multiple Choice interest on reserve balances, open-market operations, and changing the federal funds rate. Incorrect tax-rate changes, changes in government expenditures, and open-market operations. open-market operations, forward guidance, and changing the administered interest rates. Correct changes in government expenditures, changing the discount rate, and forward guidance.

open-market operations, forward guidance, and changing the administered interest rates.

Interest Rate (1)Investment (2)Investment(3)4%$ 100$ Refer to the table, in which investment is in billions. Suppose the Fed reduces the interest rate from 6 to 5 percent at a time when the investment demand declines from that shown by columns (1) and (2) to that shown by columns (1) and (3). As a result of these two occurrences, investment will Multiple Choice increase by $10 billion. Incorrect decrease by $10 billion. Correct increase by $20 billion. decrease by $20 billion.

decrease by $10 billion.

If consumers and businesses are especially pessimistic, as in the Great Recession of 2007-2009, and do not want to borrow money from banks, then the use of an expansionary monetary policy is likened to Multiple Choice completing the circle. pushing on a string. Correct filling in the blanks. checking the list.

pushing on a string.

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate? Multiple Choice buy government securities in the open market, do reverse repos, and increase taxes buy government securities in the open market, do reverse repos, and decrease taxes sell government securities in the open market, do reverse repos, and increase government spending sell government securities in the open market, do reverse repos, and cut government spending

sell government securities in the open market, do reverse repos, and cut government spending

If the Fed sells government securities in the open market, Multiple Choice the Fed gives the securities to the buyer and distributes the money payments among banks. the Fed gives the securities to the buyer, and puts their money payments into the Fed vault. the buyers give their securities to the Fed in exchange for a check from the Fed. Incorrect the buyers give their securities to the Fed in exchange for newly printed money

the Fed gives the securities to the buyer, and puts their money payments into the Fed vault.