Question 1

Disinflation is a decrease in prices.

Accepted Answer

A) True 
 B)False

Question 2

When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence?

Accepted Answer

A)   Inflation remains high.
B)   Growth stays positive.
C)   Interest rates continue to rise.
D)   Unemployment is high.E) B) and C)
F) None of the above

Question 3

In the AD-AS model, an increase in money growth will cause the growth rate of real GDP to increase in:

Accepted Answer

A)   the short run only.
B)   the long run only.
C)   both the short run and the long run.
D)   neither the short run nor the long run.E) A) and C)
F) A) and B)

Question 4

Use the following to answer questions: Figure: Monetary Policy 
-(Figure: Monetary Policy)  Refer to the figure. Assume that the economy is initially at point Y in the graph. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend, then:

Accepted Answer

A)   the Fed action would be magnified and the economy would move to point X.
B)   the Fed action would be nullified and the economy would remain at point Y.
C)   the Fed action would be partially effective and the economy would move to point Z.
D)   the LRAS curve would shift to the left.E) None of the above
F) C) and D)

Question 5

If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be:

Accepted Answer

A)   an increase in government spending growth.
B)   a tax cut.
C)   an increase in money supply growth.
D)   a lower goal for inflation.E) A) and B)
F) B) and C)

Question 6

Monetary policy is more effective at combating real shocks than AD shocks.

Accepted Answer

A) True 
 B)False

Question 7

In the short run, a monetary contraction leads to increased unemployment because:

Accepted Answer

A)   wages and prices are sticky.
B)   wages and prices are flexible.
C)   wages are sticky, while prices are flexible.
D)   wages are flexible, while prices are sticky.E) All of the above
F) B) and C)

Question 8

If a central bank wishes to reduce inflation, it should announce its intentions and follow through with them, thereby using _____ monetary policy.

Accepted Answer

A)   visible
B)   integral
C)   credible
D)   authoritativeE) All of the above
F) B) and D)

Question 9

Which would be an example of running monetary policy by rules?

Accepted Answer

A)   A 5% increase in money supply automatically leads to a 2% increase in real GDP.
B)   An increase in money supply growth automatically leads to an increase in inflation.
C)   The Fed will increase money growth to different levels, depending on the severity of the recession.
D)   A 1% drop in real GDP growth will automatically elicit a 2% increase in money growth.E) All of the above
F) C) and D)

Question 10

A problem with a monetary rule that requires the Fed to keep money growth constant is:

Accepted Answer

A)   the Fed has no control over money growth.
B)   constant money growth implies more volatility in inflation.
C)   constant money growth implies more volatility in real output growth.
D)   the Fed must ignore changes in money velocity.E) None of the above
F) B) and D)

Question 11

The Fed's power to influence aggregate demand is constrained by:

Accepted Answer

A)   the President and Congress.
B)   contracting fiscal policy.
C)   uncertainty and an inability for everyone to fully understand the complexity of the economy.
D)   the significant amount of U.S. dollars held in foreign reserves.E) B) and D)
F) A) and C)

Question 12

Under Paul Volcker, the Fed reduced the inflation rate in the early 1980s by more than10 percentage points, causing:

Accepted Answer

A)   unemployment to decrease.
B)   housing prices to soar and interest rates to remain high.
C)   GDP growth rise to 6% and consumer confidence to grow.
D)   a severe recession to take place.E) All of the above
F) B) and D)

Question 13

The Fed has been unable to offset the effects of negative real shocks with monetary policy.

Accepted Answer

A) True 
 B)False

Question 14

In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of:

Accepted Answer

A)   the real shock only.
B)   the increase in money growth only.
C)   both the real shock and the increase in money growth.
D)   some reason other than the real shock and the increase in money growth.E) A) and D)
F) B) and C)

Question 15

Economists who think that the Fed is likely to make a lot of mistakes believe that the Fed is best advised to:

Accepted Answer

A)   adjust to every aggregate supply shock.
B)   adjust to every aggregate demand shock.
C)   follow a consistent policy.
D)   follow a discretionary policy.E) All of the above
F) B) and D)

Question 16

The Federal Reserve must operate in real time even though a lot of the data about the state of the economy are unknown.

Accepted Answer

A) True 
 B)False

Question 17

One of the Federal Reserve's most powerful tools is its influence over expectations, not its influence over the money supply.

Accepted Answer

A) True 
 B)False

Question 18

Use the following to answer questions: Figure: Negative Supply Shock 
-(Figure: Negative Supply Shock)  Refer to the figure. This economy initially begins at point A and a negative supply shock takes it to point Y. Taking the economy back to the LRAS curve would require:

Accepted Answer

A)   a monetary expansion of 21%.
B)   an inflation rate much greater than 16%.
C)   an inflation rate of 16%.
D)   an unemployment rate of -2%.E) A) and C)
F) A) and B)

Question 19

The collapse of a financial bubble in 2008 is best regarded as a:

Accepted Answer

A)   negative shock to aggregate demand.
B)   positive shock to aggregate demand.
C)   negative shock to long-run aggregate supply.
D)   positive shock to long-run aggregate supply.E) None of the above
F) B) and D)

Question 20

Monetary policy can deal with a spending shock more effectively than a real shock.

Accepted Answer

A) True 
 B)False

Exam 16: Monetary Policy

The Fed has been unable to offset the effects of negative real shocks with monetary policy.

Correct AnswerverifiedShow Answer

In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of:

Correct AnswerverifiedShow Answer

Use the following to answer questions: Figure: Monetary Policy -(Figure: Monetary Policy) Refer to the figure. Assume that the economy is initially at point Y in the graph. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend, then:

Correct AnswerverifiedShow Answer

One of the Federal Reserve's most powerful tools is its influence over expectations, not its influence over the money supply.

Correct AnswerverifiedShow Answer

The collapse of a financial bubble in 2008 is best regarded as a:

Correct AnswerverifiedShow Answer

In the short run, a monetary contraction leads to increased unemployment because:

Correct AnswerverifiedShow Answer

Economists who think that the Fed is likely to make a lot of mistakes believe that the Fed is best advised to:

Correct AnswerverifiedShow Answer

A problem with a monetary rule that requires the Fed to keep money growth constant is:

Correct AnswerverifiedShow Answer

If a central bank wishes to reduce inflation, it should announce its intentions and follow through with them, thereby using _____ monetary policy.

Correct AnswerverifiedShow Answer

If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be:

Correct AnswerverifiedShow Answer

Under Paul Volcker, the Fed reduced the inflation rate in the early 1980s by more than10 percentage points, causing:

Correct AnswerverifiedShow Answer

In the AD-AS model, an increase in money growth will cause the growth rate of real GDP to increase in:

Correct AnswerverifiedShow Answer

Monetary policy can deal with a spending shock more effectively than a real shock.

Correct AnswerverifiedShow Answer

The Federal Reserve must operate in real time even though a lot of the data about the state of the economy are unknown.

Correct AnswerverifiedShow Answer

When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence?

Correct AnswerverifiedShow Answer

Which would be an example of running monetary policy by rules?

Correct AnswerverifiedShow Answer

Use the following to answer questions: Figure: Negative Supply Shock -(Figure: Negative Supply Shock) Refer to the figure. This economy initially begins at point A and a negative supply shock takes it to point Y. Taking the economy back to the LRAS curve would require:

Correct AnswerverifiedShow Answer

Disinflation is a decrease in prices.

Correct AnswerverifiedShow Answer

The Fed's power to influence aggregate demand is constrained by:

Correct AnswerverifiedShow Answer

Monetary policy is more effective at combating real shocks than AD shocks.

Correct AnswerverifiedShow Answer

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