Principles of Econ - PREPARE Ch. 17 Questions

The interest rate that banks charge each other for overnight loans is called the A. federal funds rate. B. Treasury bill rate. C. discount rate. D. prime lending rate.

A. federal funds rate.

When the central bank commits to conducting policy in a manner that achieves the goal of holding inflation to a publicly announced​ level, it is using A. inflation targeting. B. the Taylor rule. C. monetary policy independence. D. contractionary monetary policy.

A. inflation targeting.

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to​ recover, then A. inflation will be higher than if the Fed had not acted. B. the real GDP will be lower than if the Fed had not acted. C. the unemployment rate will be higher than if the Fed had not acted. D. the economy will be more stable than if the Fed had not acted.

A. inflation will be higher than if the Fed had not acted.

A countercyclical policy is one that A. is used to attempt to stabilize the economy. B. occurs automatically during recessions. C. increases the benefits of economic expansions. D. inadvertently increases the severity of the business cycle.

A. is used to attempt to stabilize the economy.

Which of the following events was an important cause of the 2007-2009 ​recession? A. the collapse of a housing bubble B. a federal budget crisis C. monetary policy that was contractionary D. a financial crisis in Europe

A. the collapse of a housing bubble

The Taylor rule for federal funds rate targeting does which of the​ following? A. It multiplies the inflation gap by the output gap to obtain a target of the federal funds rate. B. It links the​ Fed's target for the federal funds rate to economic variables. C. 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. D. The Taylor rule does all of the above.

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

Why would the Fed intentionally use contractionary monetary policy to reduce real​ GDP? A. The Fed intends to raise interest rates to make buying new houses less expensive. B. The Fed intends to reduce​ inflation, which occurs if real GDP is greater than potential GDP. C. The Fed intends to reduce real GDP so that real GDP will grow again but at a faster pace. D. The Fed intends to reduce​ unemployment, which occurs if real GDP is greater than potential GDP.

B. The Fed intends to reduce​ inflation, which occurs if real GDP is greater than potential GDP.

To affect economic variables such as real GDP or the price​ level, the monetary policy target the Federal Reserve has generally focused on is the A. money supply. B. federal funds rate. C. prime lending rate. D. discount rate.

B. federal funds rate.

If the economy moves into​ recession, monetarists argue that the Fed should A. keep the money supply fixed. B. keep the money supply growing at a constant rate. C. decrease the money supply. D. increase the federal funds rate.

B. keep the money supply growing at a constant rate.

Which of these variables are the main monetary policy targets of the​ Fed? A. economic growth and productivity B. the money supply and the interest rate C. the inflation rate and the unemployment rate D. real GDP and the price level

B. the money supply and the interest rate

If the FOMC orders the trading desk to sell Treasury​ securities, A. the money supply curve will shift to the​ right, and the equilibrium interest rate will rise. 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​ left, and the equilibrium interest rate will fall. 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.

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. ​high; high B. ​low; high C. ​high; low D. ​low; low

B. ​low; high

As interest rates​ decline, stocks become a​ __________ attractive investment relative to​ bonds, which causes the demand for stocks and their prices to​ __________. A. ​more; fall B. ​more; rise C. ​less; fall D. ​less; rise

B. ​more; rise

According to the Taylor​ Rule, if the Fed reduces its target for the inflation​ rate, the result will be A. no change in the target federal funds rate. B. a lower target federal funds rate. C. a higher target federal funds rate. D. a higher target real GDP growth rate.

C. a higher target federal funds rate.

If the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it orders the trading desk at the Federal Reserve Bank of New York to A. sell U.S. Treasury securities. B. buy stocks. C. buy U.S. Treasury securities. D. sell stocks.

C. buy U.S. Treasury securities.

If the price level​ decreases, A. the money demand curve shifts to the right. B. there is a movement down along a stationary money demand curve. C. the money demand curve shifts to the left. D. there is a movement up along a stationary money demand curve.

C. the money demand curve shifts to the left.

With an expansionary monetary​ policy, investment,​ consumption, and net exports all​ ________, which results in the aggregate demand curve shifting to the​ ________, increasing real GDP and the price level. A. ​decrease; right B. ​decrease; left C. ​increase; right D. ​increase; left

C. ​increase; right

When the Fed conducts monetary​ policy, the most relevant interest rate is the A. ​short-term real interest rate. B. ​long-term real interest rate. C. ​short-term nominal interest rate. D. ​long-term nominal interest rate.

C. ​short-term nominal interest rate.

Which of the following statements is​ correct? A. 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. B. Changes in the federal funds rate usually will result in changes in both​ short-term and​ long-term interest rates on financial assets. 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 are true.

D. All of the above are true.

Which of the following is a monetary policy response to the economic recession of 2007-2009 and the accompanying financial​ crisis? A. The Fed provided loans directly to corporations by purchasing commercial paper. B. The Fed purchased large amounts of​ mortgage-backed securities. C. The Fed expanded the eligibility for discount loans to firms other than commercial banks. D. All of the above were responses.

D. All of the above were responses.

The decline in housing prices that began in 2006 led to rising defaults among which​ borrowers? A. borrowers who had made only small down payments B. ​alt-A and subprime borrowers C. borrowers with​ adjustable-rate mortgages D. All of the above.

D. All of the above.

Which of the following statements is true about the​ Fed's monetary policy​ targets? A. The only monetary policy target the Fed can choose is the interest rate. B. The only monetary policy target the Fed can choose is the money supply. C. The Fed could simultaneously choose the 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.

Which of the following is not one of the monetary policy goals of the Federal Reserve​ ("the Fed")? A. price stability B. high employment C. stability of financial markets D. a high foreign exchange rate of the U.S. dollar relative to other currencies

D. a high foreign exchange rate of the U.S. dollar relative to other currencies

The​ Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called A. expansionary fiscal policy. B. contractionary monetary policy. C. contractionary fiscal policy. D. expansionary monetary policy.

D. expansionary monetary policy.

If real GDP​ increases, A. there is a movement down along a stationary money demand curve. B. there is a movement up along a stationary money demand curve. C. the money demand curve shifts to the left. D. the money demand curve shifts to the right.

D. the money demand curve shifts to the right.

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. As a​ result, households and firms will​ _________ Treasury bills and other financial​ assets, thereby​ _________ their​ prices, and​ _________ their interest rates. A. ​sell; increasing; decreasing B. ​buy; decreasing; decreasing C. ​buy; increasing; decreasing D. ​sell; decreasing; increasing

D. ​sell; decreasing; increasing

(T/F) During​ 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the continued boom in the housing​ market, so the Fed started decreasing the target for the federal funds rate.

False

(T/F) For the Fed to succeed in reducing the severity of business​ cycles, it must act precisely when a recession or an acceleration of inflation can be seen in the economic data.

False

(T/F) If the Fed decides to carry out an expansionary monetary policy because it believes aggregate demand will not increase enough to keep the economy at potential​ GDP, the inflation rate will most likely be lower than it would have been without the policy.

False

(T/F) Two ​government-sponsored enterprises that stand between investors and banks that grant mortgages are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

True