Monetary Policy (Chapter 15 quiz)

If the​ Fed's policy is​ successful, what is the effect on the following​ indicators? 1) Actual real​ GDP: 2) Potential real​ GDP: 3) Price​ level: ​4) Unemployment:

1) increases 2) does not change 3) increases 4) decreases

When the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it (---) U.S. Treasury securities. If the FOMC wishes to decrease the money​ supply, it (---) U.S. Treasury securities.

buys sells

This policy change would​ "free up​ cash" because

reserves that were required are now excess reserves available for lending.

Which of the following is NOT a monetary policyLOADING... goal of the Federal Reserve bank​ (the Fed)? A. Low prices B. Higher living standards C. Low unemployment D. Stable financial markets

A. Low prices

Suppose the economy is in equilibrium in the first period at point A. In the second​ period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD2 to AD2, policy and reach equilibrium​ (point C) in the second​ period? ​ (What policy will increase the price level and increase actual real​ GDP?) A. Open market purchase of government securities B. Increase the reserve requirement C. Increase the discount rate D. Decrease taxes

A. Open market purchase of government securities

​"Price stability" means A. prices do not change. B. a low and stable inflation rate. C. prices are set by the Fed. D. a zero percent inflation rate.

B. a low and stable inflation rate.

n the summer of​ 2015, many economists and policymakers expected that the Federal Reserve would increase its target for the federal funds rate by the end of the year. Some economists​ argued, though, that it would be better for the Fed to leave its target unchanged. At the​ time, the unemployment rate was 5.3​ percent, close to full​ employment, but the inflation rate was below the​ Fed's target of 2 percent. ​Source: Min​ Zeng,"Inflation Expectations​ Fall, Making Rate Hike​ 'More Difficult to​ Justify,'" Wall Street Journal​, August​ 6, 2015. If it did not increase its target for the federal funds​ rate, the policy goal the Fed would be promoting is

B. economic​ growth, because maintaining lower interest rates would stimulate the economy and raise the price level.

​Additionally, the federal funds rate is A. very important for the​ Fed's monetary policy because it is administratively set by the Fed. B. very important for the​ Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations. C. not important for the​ Fed's monetary policy since households and firms are not directly affected by any adjustment of this rate. D. very important for the​ Fed's monetary policy because individual borrowers pay this interest rate for mortgage loans.

B. very important for the​ Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.

A student says the​ following: ​"I understand why the Fed uses expansionary policy but I​ don't understand why it would ever use contractionary policy. Why would the government ever want the economy to​ contract?" The government would want the economy to contract when real GDP is

C. above potential GDP and the price level is rising.

An increase in the money supply in the U.S. will not A. cause the amount of net exports from the U.S. to​ increase, as exports rise and imports fall. B. cause the U.S. interest rate to decline relative to interest rates in other countries. C. cause the value of investing in U.S. financial assets to become more desirable to foreign investors. D. cause the value of the dollar to decrease relative to other assets.

C. cause the value of investing in U.S. financial assets to become more desirable to foreign investors.

By increasing U.S. interest​ rates, the Fed would cause the value of the currency to increase because A. U.S. investors will demand more dollars so they can buy more international bonds. B. there will be more exports resulting in a larger demand for U.S. dollars. C. international investors will demand more U.S. dollars to buy U.S. financial assets that now pay higher interest rates. D. there will be more imports resulting in a larger demand for U.S. dollars.

C. international investors will demand more U.S. dollars to buy U.S. financial assets that now pay higher interest rates.

The federal funds rate is A. the required reserve ratio that the Federal Reserve requires banks to maintain. B. the interest rate that the banks charge for loans to its important commercial borrowers. C. the interest rate that banks charge each other for overnight loans. D. the interest rate that the Federal Reserve charges for its loans to banks.

C. the interest rate that banks charge each other for overnight loans.

Which of the following is not a policy tool the Federal Reserve uses to manage the money​ supply? A. Open market operations. B. Discount policy. C. Reserve requirements. D. Changing Income tax rates.

D. Changing Income tax rates.

Which one of the following is not one of the monetary policy goals of the​ Fed? A. Maintain stability of financial markets and institutions. B. Maintain high employment. C. Maintain price stability. D. Reduce income inequality.

D. Reduce income inequality.

Consider the following​ table: Year 2012, Potential GDP= $14.914.9 trillion Real GD= ​$14.914.9 trillion Price Level = 110 Year 2013, Potential GDP= ​$15.3 trillion Real GD= ​​$15.215.2 trillion Price Level = 112 What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of​ long-run macroeconomic​ equilibrium?

D. The Fed will pursue an expansionaryan expansionary monetary policy.

An increase in the value of the currency would contribute to a slowdown in the growth of the U.S. economy because A. U.S. exports will fall and imports from other countries will​ rise, increasing net​ exports, but reducing aggregate demand. B. U.S. exports will rise and imports from other countries will​ fall, reducing net exports and aggregate demand. C. U.S. exports will rise and imports from other countries will​ fall, increasing net​ exports, but reducing aggregate demand. D. U.S. exports will fall and imports from other countries will​ rise, reducing net exports and aggregate demand.

D. U.S. exports will fall and imports from other countries will​ rise, reducing net exports and aggregate demand.

An article in the Wall Street Journal discussing the Federal​ Reserve's monetary policy included the following​ observation: "Fed officials have been signaling since last year that they expected to raise rates in 2015 ... pushing up the value of the currency and contributing to the economic slowdown officials now​ confront." ​Source: Jon​ Hilsenrath, "Fed's Rate Decisions Hang on​ Dollar, Growth​ Concerns," Wall Street Journal​, April​ 22, 2015. ​ "Pushing up the value of the​ currency" means

D. increasing the exchange rate between the dollar and other currencies

An increase in interest rates affects aggregate demand by A. shifting the aggregate supply curve to the​ left, decreasing real GDP and increasing the price level. B. shifting the aggregate supply curve to the​ right, increasing real GDP and lowering the price level. C. shifting the aggregate demand curve to the​ right, increasing real GDP and lowering the price level. D. shifting the aggregate demand curve to the​ left, reducing real GDP and lowering the price level.

D. shifting the aggregate demand curve to the​ left, reducing real GDP and lowering the price level.

An article in the Wall Street Journal quoted a Federal Reserve economist as referring to​ "the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price​ stability." ​Source: Pedro Nicolaci Da​ Costa, "Fed Should Make Bond Buys a Regular Policy​ Tool, A Boston Fed Paper​ Finds," Wall Street Journal​, April​ 23, 2015. ​"Maximum sustainable​ employment" means the economy is producing at its potential where

D. unemployment includes frictional and structural unemployment.

As the interest rate​ increases, A. ​consumption, investment, and net exports​ increase, and aggregate demand increases. B. consumption increases but investment and net exports​ decrease; aggregate demand remains unchanged. C. ​consumption, investment, and net exports fall but government spending​ increases, and aggregate demand increases. D. ​consumption, investment, and net exports​ decrease; aggregate demand decreases.

D. ​consumption, investment, and net exports​ decrease; aggregate demand decreases.

Consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2. A. Example A shows a contractionary monetary policy. The price level and real GDP both fall. B. Example B shows an expansionary monetary policy. The price level and real GDP both rise. C. Both examples show expansionary monetary policy. The price level and real GDP both rise. D. Example A shows an expansionary monetary policy. The price level rises and real GDP falls. E. Both A and B.

E. Both A and B.

An article in the Wall Street Journal reported in 2015 that the​ People's Bank of​ China, which is the central bank of​ China, "is freeing up cash by reducing the amount that banks must keep in​ reserve." ​Source: Lingling​ Wei,​ "China Central Bank Checks Europe Playbook on​ Credit," Wall Street Journal​, April​ 19, 2015. The monetary policy tool that the​ People's Bank of China was using was changes to the

required reserve ratio

The​ People's Bank of China was hoping this policy action would

stimulate economic growth