IHSS 1200 Chapter 17 Combined Exam Questions And Complete Answers Graded A+.

Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)? - correct answer Low prices 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. - correct answer buys; sells As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target? - correct answer The federal funds rate The federal funds rate - correct answer is the rate that banks charge each other for short-term loans of excess reserves. In the figure to the right, when the money supply increased from MS 1MS1 , the equilibrium interest rate fell from 4% to 3%. Why? - correct answer All of the above. Increased demand for Treasury securities drives up their prices. Increased demand for Treasury securities drives down their interest rate. Initially, firms hold more money than they want relative to other financial assets. The ___ is considered the most relevant interest rate when conducting monetary policy. - correct answer short-term nominal interest rate In the figure to the right, the opportunity cost of holding money _______ when moving from Point A to Point B on the money demand curve. - correct answer decreases In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD1 to MD2 (Point A to Point C)? - correct answer Increase in real GDP or increase in the price level The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions? - correct answer The Fed can only soften the magnitude of recessions, not eliminate them. Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.) - correct answer The value of the dollar Consumption of durable goods Business investment projects Consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2. - correct answer Both A and B Example A (Point A is higher than point B) shows a contractionary monetary policy. The price level and real GDP both fall. Example B (Point A is lower than point B) shows an expansionary monetary policy. The price level and real GDP both rise. 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?) - correct answer Open market purchase of government securities If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy? - correct answer Procyclical policy The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06LRAS06, we would expect the Federal Reserve Bank to pursue _____ monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP Potential real GDP Price level unemployment - correct answer a contractionary decreases does not change decreases increases The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD to AD2 policy, and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: Potential real GDP Price level unemployment - correct answer Expansionary monetary policy increase does not change increase decrease The figure to the right illustrates a dynamic AD-AS model 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? - correct answer Open market purchase of government securities. Consider the following table: 2012 $14.9 tril $14.9 tril 110 2013 $15.3 tril $15.2 tril 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? - correct answer The Fed will pursue an expansionary monetary policy. I DNC I D