When the Federal Reserve purchases Treasury securities in the open market,
  • the sellers of such securities deposit the funds in their banks and bank serves increase.
  • that workers, firms, consumers, and the government will all take the inflation rate into account when making decisions.
  • increase
  • buys securities from banks; increases; decrease
Which policy tool (used to control the money supply) is the most important?
  • Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives.
  • use an expansionary monetary policy to lower the interest rate and shift AD to the right.
  • use a contractionary monetary policy to increase the interest rate and shift AD to the left.
  • The Fed conducts monetary policy principally through open market operations.
The current inflation rate and then expected inflation rate are both 4%. The current unemployment rate and the natural rate of unemployment are both 5%. What is the effect on the economy of a severe (adverse) supply shock?If the Federal Reserve keeps monetary policy unchanged, eventually the unemployment rate will be:
  • To decrease the federal funds rate, the Fed must increase the money supply.To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.
  • As a result of the supply shock, the inflation rate has increased.back to the 5% natural rate of unemployment.
  • You would have to reduce loans to make up for the necessary increase in reserves.decreasing
  • that workers, firms, consumers, and the government will all take the inflation rate into account when making decisions.
The federal funds rate
  • is the rate that banks charge each other for short-term loans of excess reserves.
  • the buyers of these securities pay for them with checks and bank reserves fall.
  • selling Treasury bonds, which decreases bank reserves.
  • the sellers of such securities deposit the funds in their banks and bank serves increase.
If the Fed believes the economy is about to fall into recession, it should
  • use a contractionary monetary policy to increase the interest rate and shift AD to the left.
  • The Fed conducts monetary policy principally through open market operations.
  • use an expansionary monetary policy to lower the interest rate and shift AD to the right.
  • Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives.
The opportunity cost of holding money ________ when moving down along the money demand curve.
  • All of the above.
  • Moral suasion.
  • decreases
  • increase
"The challenge of monetary policy is to interpret data on the economy and financial markets with an eye to anticipating future inflationary forces and to countering them by taking action in advance." Why should the Fed take action in anticipation of inflation? Why not just wait until the increase in the inflation rate has occurred?The answer is that the Fed does not want a higher inflation rate to persist because, if it does, the short-run Phillips curve may shift ________.This would mean that for any given rate of unemployment, the associated inflation rate would be ________, and for any given inflation rate, the associated rate of unemployment would be ________.
  • All of the above.
  • Changing Income tax rates.
  • uphigher; higher
  • The federal funds rate
When the Fed conducts an open market purchase, the Fed ________, the money supply ________, and the interest rate should ________.
  • the sellers of such securities deposit the funds in their banks and bank serves increase.
  • the buyers of these securities pay for them with checks and bank reserves fall.
  • buys securities from banks; increases; decrease
  • increase
"The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008."What is the relationship between the federal funds rate falling and the money supply increasing?How does lowering the target for the federal funds rate "pour money" into the banking system?
  • As a result of the supply shock, the inflation rate has increased.back to the 5% natural rate of unemployment.
  • that workers, firms, consumers, and the government will all take the inflation rate into account when making decisions.
  • To decrease the federal funds rate, the Fed must increase the money supply.To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.
  • is the rate that banks charge each other for short-term loans of excess reserves.
Expansionary monetary policy: The price level and real GDP both ________.
  • fall (leftward shift from AD1 to AD2 to reach equilibrium at LRAS and SRAS)
  • rise (rightward shift from AD1 to AD2 to reach equilibrium at LRAS and SRAS)
  • the buyers of these securities pay for them with checks and bank reserves fall.
  • shifting the AD curve to the left, reducing real GDP and lowering the price level.
Suppose the economy is initially in long-run equilibrium. The Fed decides to increase the required serve ratio. In the short-run, this contractionary monetary policy will cause:
  • You would have to reduce loans to make up for the necessary increase in reserves.decreasing
  • A leftward shift from AD2 to AD1 and a movement to point D (where AD1 and SRAS2 intersect), with a lower price level and lower output.
  • AD to shift leftward, with a lower price level and lower output (point is left of LRAS)
  • that workers, firms, consumers, and the government will all take the inflation rate into account when making decisions.
The Fed can increase the federal funds rate by
  • selling Treasury bonds, which decreases bank reserves.
  • is the rate that banks charge each other for short-term loans of excess reserves.
  • rise (rightward shift from AD1 to AD2 to reach equilibrium at LRAS and SRAS)
  • buys securities from banks; increases; decrease
William McChesney Martin (FR chairman from 1951-70) said, "The role of the Federal Reserve is to remove the punchbowl just as the party gets going."By "to remove the punchbowl," he meant to engage in ________ policy.In terms of the economy, "just as the part gets going" refers to a situation in which real GDP ________ potential GDP, which will result in ________ the inflation rate.
  • buys securities from banks; increases; decrease
  • contractionaryis greater than; an increase in
  • contractionary greater than; down5%; 5%
  • consumption, investment, and net exports decrease; aggregate demand decreases.
Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ratio from 10% to 12%. What actions would you need to take?As your actions and those of other bank managers reduced the amount of loans made, we would expect that the money supply would end up ________.
  • You would have to reduce loans to make up for the necessary increase in reserves.decreasing
  • As a result of the supply shock, the inflation rate has increased.back to the 5% natural rate of unemployment.
  • A leftward shift from AD2 to AD1 and a movement to point D (where AD1 and SRAS2 intersect), with a lower price level and lower output.
  • AD to shift leftward, with a lower price level and lower output (point is left of LRAS)
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
  • Changing Income tax rates.
  • Changes in monetary policy.
  • shift up and to the right
  • Households, firms, and banks.
Suppose the economy is initially in long-run equilibrium. The Fed decides to sell bonds. In the short-run, this contractionary monetary policy will cause:
  • that workers, firms, consumers, and the government will all take the inflation rate into account when making decisions.
  • A leftward shift from AD2 to AD1 and a movement to point D (where AD1 and SRAS2 intersect), with a lower price level and lower output.
  • AD to shift leftward, with a lower price level and lower output (point is left of LRAS)
  • You would have to reduce loans to make up for the necessary increase in reserves.decreasing
Suppose the inflation rate has been 15% for the past four years. The unemployment rate is currently at the natural rate of unemployment of 5%. The Federal Reserve decides that it wants to permanently reduce the inflation rate to 5%. To do this, the Fed would use a ________ policy.As a result of this policy, the unemployment rate will be ________ the natural rate of 5% and the inflation rate will be edging ________ slowly.If the Fed's policy is successful, the inflation rate will be ________ and the unemployment rate will be ________.
  • You would have to reduce loans to make up for the necessary increase in reserves.decreasing
  • contractionary greater than; down5%; 5%
  • consumption, investment, and net exports decrease; aggregate demand decreases.
  • AD to shift leftward, with a lower price level and lower output (point is left of LRAS)
As the interest rate increases,
  • consumption, investment, and net exports decrease; aggregate demand decreases.
  • the buyers of these securities pay for them with checks and bank reserves fall.
  • shifting the AD curve to the left, reducing real GDP and lowering the price level.
  • is the rate that banks charge each other for short-term loans of excess reserves.
As the public starts expecting a higher inflation rate, the short-run Phillips curve will ________.
  • shift up and to the right
  • Changes in monetary policy.
  • The value of the dollar
  • Changing Income tax rates.
When the Federal Reserve sells Treasury securities in the open market,
  • the sellers of such securities deposit the funds in their banks and bank serves increase.
  • the money supply will increase.
  • the buyers of these securities pay for them with checks and bank reserves fall.
  • increase
Which interest rate does the Fed target?
  • Changes in monetary policy.
  • All of the above.
  • the money supply will increase.
  • The federal funds rate
If the Fed believes the inflation rate is about to increase, it should
  • the sellers of such securities deposit the funds in their banks and bank serves increase.
  • use a contractionary monetary policy to increase the interest rate and shift AD to the left.
  • Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives.
  • use an expansionary monetary policy to lower the interest rate and shift AD to the right.
When the Federal Reserve decreases the required reserve ratio,
  • the buyers of these securities pay for them with checks and bank reserves fall.
  • increase
  • the sellers of such securities deposit the funds in their banks and bank serves increase.
  • the money supply will increase.
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