Question 1

A reduction in interest rates by the Fed with the intention of reducing a recessionary gap is called:

Accepted Answer

A)  expansionary monetary policy.
B)  contractionary monetary policy.
C)  monetary tightening.
D)  autonomous monetary policy.E) None of the above
F) A) and B)

Question 2

Stock prices tend to ________ when the Federal Reserve raises interest rates because higher interest rates ________ dividends.

Accepted Answer

A)  fall; reduce
B)  fall; increase
C)  rise; reduce
D)  rise; increaseE) B) and C)
F) A) and D)

Question 3

Which of the following would be expected to increase the demand for money in the U.S.?

Accepted Answer

A)  Financial investors become concerned about increasing riskiness of stocks.
B)  The economy enters a recession.
C)  Political instability decreases dramatically in developing nations.
D)  On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.E) All of the above
F) A) and B)

Question 4

The money demand curve will shift to the left if:

Accepted Answer

A)  the nominal interest rate increases.
B)  the nominal interest rate decreases.
C)  ATM machines are introduced.
D)  the price level increases.E) A) and B)
F) C) and D)

Question 5

According to the Taylor rule, if inflation equals 4 percent and there is a recessionary gap equal to 4 percent of potential output, the Fed will set a real interest rate of ________ percent and a nominal interest rate of ________ percent.

Accepted Answer

A)  4; 4
B)  1; 5
C)  1; 4
D)  2; 4E) C) and D)
F) A) and B)

Question 6

The benefit of holding money is ________, while the opportunity cost of holding money is ________.

Accepted Answer

A)  the nominal interest rate; the fees charged by banks
B)  the nominal interest rate; its usefulness in carrying out transactions
C)  increased income; lost purchasing power
D)  its usefulness in carrying out transactions; the nominal interest rateE) A) and D)
F) A) and C)

Question 7

During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must ________ the money supply, which will put ________ pressure on nominal interest rates.

Accepted Answer

A)  increase; downward
B)  increase; upward
C)  decrease; downward
D)  decrease; upwardE) B) and C)
F) None of the above

Question 8

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ________ than the quantity supplied of money, bond prices will ________, and the nominal interest rate will ________.

Accepted Answer

A)  greater; fall; increase
B)  greater; fall; decrease
C)  greater; rise; increase
D)  less; fall; increaseE) A) and D)
F) B) and C)

Question 9

Which of the following would be expected to increase the demand for U.S. currency?

Accepted Answer

A)  Competition among brokers forces down the commission charge for selling bonds or stocks.
B)  The economy enters a recession.
C)  Political instability rises dramatically in developing nations.
D)  Online banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.E) None of the above
F) B) and D)

Question 10

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600.  If the Federal Reserve wants to lower the interest rate to 4 percent, it must ________ the money supply to ________.

Accepted Answer

A)  increase; 800
B)  decrease; 800
C)  increase; 1,000
D)  decrease; 400E) All of the above
F) A) and C)

Question 11

In an economy where planned aggregate spending is given by PAE = 3,000 + .75Y − 10,000r, the central bank is currently setting the interest rate at 0.05 (5 percent) . If potential output equals 10,800, the central bank must ________ the interest rate to close the ________ gap.

Accepted Answer

A)  lower; recessionary
B)  raise; recessionary
C)  lower; expansionary
D)  raise; expansionaryE) All of the above
F) C) and D)

Question 12

Based on the diagram, if potential output equals 5,000 and the real interest rate is 3 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.

Accepted Answer

A)  a recessionary; raise
B)  a recessionary; reduce
C)  no output; not change
D)  an expansionary; raiseE) None of the above
F) C) and D)

Question 13

Financial markets pay close attention to changes in the federal funds rate because these changes:

Accepted Answer

A)  directly affect a large volume of loans.
B)  indicate the Fed's plans for monetary policy.
C)  indicate commercial bank lending policies.
D)  directly affect the interest payments on the national debt.E) B) and D)
F) A) and C)

Question 14

A lower real interest rate ________ investment spending and ________ consumption spending.

Accepted Answer

A)  increases; increases
B)  increases; decreases
C)  decreases; decreases
D)  decreases; increasesE) All of the above
F) A) and C)

Question 15

When Argentines increase their savings in U.S. dollars, the U.S. money:

Accepted Answer

A)  supply curve shifts left.
B)  supply curve shifts right.
C)  demand curve shifts right.
D)  demand curve shifts left.E) None of the above
F) All of the above

Question 16

Higher real income ________ the demand for money and a higher price level ________ the demand for money.

Accepted Answer

A)  increases; increases
B)  increases; decreases
C)  decreases; increases
D)  decreases; decreasesE) A) and D)
F) A) and C)

Question 17

If the Fed's policy reaction function equals r = .02 + π, where r is the real interest rate and π is the inflation rate. If the real rate of interest is set at 5 percent, then the rate of inflation must be:

Accepted Answer

A)  2 percent.
B)  3 percent.
C)  1 percent.
D)  4 percent.E) B) and C)
F) A) and D)

Question 18

Developments in the United States, such as credit cards, debit cards, ATMs, and online banking have:

Accepted Answer

A)  increased the demand for money.
B)  decreased the demand for money.
C)  had no impact on the supply or demand for money.
D)  increased the supply of money.E) All of the above
F) None of the above

Question 19

For the past half century, the Federal Reserve has expressed policy in terms of a target value for:

Accepted Answer

A)  bank reserves.
B)  open market operations.
C)  the Federal Reserve discount rate.
D)  the federal funds rate.E) A) and B)
F) A) and C)

Question 20

In an economy where planned aggregate spending is given by PAE = 3,000 + .75Y − 10,000r, the central bank is currently setting the interest rate at 0.06 (6 percent) . If potential output equals 9,500, the central bank must ________ the interest rate to close the ________ gap.

Accepted Answer

A)  lower; expansionary
B)  raise; expansionary
C)  lower; recessionary
D)  raise; recessionaryE) A) and D)
F) B) and C)

Exam 26: Stabilizing the Economy: The Role of the Fed

In an economy where planned aggregate spending is given by PAE = 3,000 + .75Y − 10,000r, the central bank is currently setting the interest rate at 0.05 (5 percent) . If potential output equals 10,800, the central bank must ________ the interest rate to close the ________ gap.

Correct AnswerverifiedShow Answer

The benefit of holding money is ________, while the opportunity cost of holding money is ________.

Correct AnswerverifiedShow Answer

Which of the following would be expected to increase the demand for money in the U.S.?

Correct AnswerverifiedShow Answer

Developments in the United States, such as credit cards, debit cards, ATMs, and online banking have:

Correct AnswerverifiedShow Answer

The money demand curve will shift to the left if:

Correct AnswerverifiedShow Answer

If the Fed's policy reaction function equals r = .02 + π, where r is the real interest rate and π is the inflation rate. If the real rate of interest is set at 5 percent, then the rate of inflation must be:

Correct AnswerverifiedShow Answer

In an economy where planned aggregate spending is given by PAE = 3,000 + .75Y − 10,000r, the central bank is currently setting the interest rate at 0.06 (6 percent) . If potential output equals 9,500, the central bank must ________ the interest rate to close the ________ gap.

Correct AnswerverifiedShow Answer

Stock prices tend to ________ when the Federal Reserve raises interest rates because higher interest rates ________ dividends.

Correct AnswerverifiedShow Answer

Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to lower the interest rate to 4 percent, it must ________ the money supply to ________.

Correct AnswerverifiedShow Answer

According to the Taylor rule, if inflation equals 4 percent and there is a recessionary gap equal to 4 percent of potential output, the Fed will set a real interest rate of ________ percent and a nominal interest rate of ________ percent.

Correct AnswerverifiedShow Answer

A lower real interest rate ________ investment spending and ________ consumption spending.

Correct AnswerverifiedShow Answer

Which of the following would be expected to increase the demand for U.S. currency?

Correct AnswerverifiedShow Answer

When Argentines increase their savings in U.S. dollars, the U.S. money:

Correct AnswerverifiedShow Answer

Financial markets pay close attention to changes in the federal funds rate because these changes:

Correct AnswerverifiedShow Answer

For the past half century, the Federal Reserve has expressed policy in terms of a target value for:

Correct AnswerverifiedShow Answer

During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must ________ the money supply, which will put ________ pressure on nominal interest rates.

Correct AnswerverifiedShow Answer

Higher real income ________ the demand for money and a higher price level ________ the demand for money.

Correct AnswerverifiedShow Answer

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ________ than the quantity supplied of money, bond prices will ________, and the nominal interest rate will ________.

Correct AnswerverifiedShow Answer

A reduction in interest rates by the Fed with the intention of reducing a recessionary gap is called:

Correct AnswerverifiedShow Answer

Based on the diagram, if potential output equals 5,000 and the real interest rate is 3 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.

Correct AnswerverifiedShow Answer

In an economy where planned aggregate spending is given by PAE = 3,000 + .75Y − 10,000r, the central bank is currently setting the interest rate at 0.05 (5 percent) . If potential output equals 10,800, the central bank must the interest rate to close the gap.

Correct Answer
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The benefit of holding money is , while the opportunity cost of holding money is .

Correct Answer
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In an economy where planned aggregate spending is given by PAE = 3,000 + .75Y − 10,000r, the central bank is currently setting the interest rate at 0.06 (6 percent) . If potential output equals 9,500, the central bank must the interest rate to close the gap.

Correct Answer
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Stock prices tend to when the Federal Reserve raises interest rates because higher interest rates dividends.

Correct Answer
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Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to lower the interest rate to 4 percent, it must the money supply to .

Correct Answer
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According to the Taylor rule, if inflation equals 4 percent and there is a recessionary gap equal to 4 percent of potential output, the Fed will set a real interest rate of percent and a nominal interest rate of percent.

Correct Answer
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A lower real interest rate investment spending and consumption spending.

Correct Answer
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Correct Answer
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During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must the money supply, which will put pressure on nominal interest rates.

Correct Answer
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Higher real income the demand for money and a higher price level the demand for money.

Correct Answer
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If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is than the quantity supplied of money, bond prices will , and the nominal interest rate will .

Correct Answer
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Correct Answer
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Based on the diagram, if potential output equals 5,000 and the real interest rate is 3 percent, then there is gap and the Fed must the real interest rate so that output will equal potential output.

Correct Answer
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