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Question 32

If firms and workers have rational expectations, including knowledge of the policy being used by the Federal Reserve

expansionary monetary policy is especially effective.
expansionary monetary policy is ineffective.
expansionary monetary policy is effective in the short run, but not the long run.
expansionary monetary policy is effective in the short run and the long run.

Question 33

If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see?

The Fed's policies will be deflationary.
The Fed's policies will be inflationary.
The rate of inflation will fall as the Fed tries to reduce the unemployment rate.
The Fed will reduce the natural rate of unemployment.

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Kritika Krishnakumar
Kritika KrishnakumarLv10
28 Sep 2019
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Related questions

Multiple Choice

1. Assume that the money multiplier equals 2.5 and if the Fed purchases $10 million in bonds from a bank, the monetary supply will:

  1. Increase by $10 million.
  2. Increase by $25 million.
  3. Decrease by $10 million.
  4. Decrease by $25 million.

2. The monetary base is defined as:

  1. all currency in circulation.
  2. checkable deposits at depository institutions.
  3. excess reserves in the banking system.
  4. currency plus total banking reserves.

3. Which of the following means of financing federal government spending will increase the monetary base?

  1. raising the corporate income tax.
  2. raising the personal income tax.
  3. selling bonds to the public.
  4. selling bonds to the Fed.

Short Answer

1. Assume the Federal Reserve Board is undertaking an expansionarymonetary policy. Explain the details of how the expansionary Fed impacts each of the following:

  1. Open market operations - how does the Fed use open market operations for an expansionary monetary policy?
  2. The monetary base.
  3. Money Supply.
  4. Fed funds interest rate.
  5. Long-term interest rates.
  6. Business Investment.
  7. Aggregate demand.
  8. Economic growth.
  9. Unemployment rate.

2. Under certain circumstances, expansionary Fed policy may not have much of an effect on the rate of economic growth. Give a reason why, and explain?

3. Regarding the Asian currency crisis, answer the following questions:

  1. Describe the normal reasons why a currency undergoes a significant depreciation and what were the important characteristics of the Asian countries involved in the crisis?
  2. What are some expected domestic economic consequences of the currency crisis for the countries involved? Focus on:
    • import prices of goods and services into the Asian country.
    • export prices of goods and services from the Asian country.
    • Domestic inflation rates.
  3. Assume that the countries involved undertake a tight monetary policy and raise interest rates in response to the crisis. What are the two primary reasons for raising interest rates in their case?
  4. Given high domestic interest rates, what is the economic outlook for these Asian countries in the next few years?

6. Fed Sees both unemployment and prices on the rise.

The federal reserve sees worse economic problems ahead. But even so, the Fed may be reluctant to cut interest rates any further than it already has. The Fed lowered its economic growth forecast for the year. At the same time, it raised its projections for inflation and unemployment. The Fed raised its unemployment forecast to between 5.5 percent and 5.7 percent and now expects personal consumption expenditures to rise between 3.1 percent and 3.4 percent in 2008 and expects steeper "core" inflation. In an effort to keep the country from falling into recession and to deal with the credit crisis, the Fed has cut its key federal funds rate seven times since September. This short-term interest rate is now 2 percent, down from 5.25percent at the start of the Fed's easing campaign. Some believe the Fed cuts since last September helped fuel inflation, especially the sharp run-up in oil prices because the rate cuts have led to a weakening of the dollar. Along those lines, the two Fed members who voted against the last rate cut argued during the meeting that the Fed cuts were hurting the economy more than helping it. CNN, May 21, 2008.

a. Explain the intended effect of the Fed cutting the target federal funds rate from 5.25 percent to 2 percent and illustrate your explanation with appropriate graphical analysis.

b. Explain how this monetary policy may have "helped fuel inflation, especially the sharp run-up in oil prices".

c. What is core inflation and why does the Fed tend to focus on that measurement of inflation more heavily than overall inflation?

d. Explain the dilemma that the Fed is facing when making decisions in the face of rising unemployment and rising inflation.

1. Which of the following is likely to happen if the Fed buys Treasury securities from banks?

  interest rate rises; investment falls
  interest rate rises; investment rises
  interest rate falls; investment rises
  interest rate falls; investment falls

2. The main goal of monetary policy is to shift

  AD.
  SRAS.
  LRAS.
  both AD and SRAS.
  both AD and LRAS.

3. Which of the following is true regarding the effects of an expansionary monetary policy?

  Printing more money will affect real GDP only in the short run because all prices do not adjust fully in the short run.
  Printing more money will affect real GDP both in the short and long run because inflation is a natural occurrence of expansionary monetary policy.
  Printing more money will not lower the value of money in the short run because prices are fully flexible in the short run.
  Printing more money will ultimately raise the value of money in the long run because prices are fully flexible in the long run.

4. In which of the following cases are you likely to be adversely affected by unexpected inflation?

  You, the owner of a local restaurant, charge the price of lamb lasagna as per the daily market rate of lamb.
  You purchase Mountain Dew every day from the dormitory vending machine, which keeps its prices fixed for the entire school year.
  You, the owner of an airline company, sign a two-year contract for airline fuel.
  You deposit $10,000 in a bank account for 5 years for a fixed interest rate of 1%.

5. The Phillips curve depicts the relation between

  real GDP and price level.
  price level and inflation rate.
  unemployment rate and inflation rate.
  unemployment rate and real GDP.

6. Which of the following statements is true regarding the shapes of short-run and long-run Phillips curves?

  The short-run Phillips curve is vertical and the long-run Phillips curve is downward sloping.
  The short-run Phillips curve is downward sloping and the long-run Phillips curve is vertical.
  Both the short-run and long-run Phillips curves are downward sloping.
  Both the short-run and long-run Phillips curves are vertical.

7. Suppose the table below lists the actual annual inflation rates for 2010 to 2015. What would be the most likely predictions people make about the inflation rate for 2016 based on adaptive and rational expectations theories, respectively?

Year Actual Inflation rate
2010 0%
2011 0%
2012 3%
2013 3%
2014 6%
2015 6%
   
  6% and 3%
  6% and 9%
  6% and 12%
  9% and 6%
  3% and 6%

8. Which of the following can change relatively quickly in the short-run?

  the price of a latte in a coffee shop
  the salary of a finance professor
  the rent paid for a store

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