296 Chapter 5 Monetary Policy Chapter 5 Monetary Policy 1 The Fed can the level of spending as a means of stimulating the economy by the money supply A increase decreasing B decrease increasing C decrease decreasing D increase increasing ANSWER D 2 A credit crunch can occur in periods A when a stimulative monetary policy is implemented B when a restrictive monetary policy is implemented C when both of these occur D when neither of these occur ANSWER C 3 In general there is a n A positive relationship between unemployment and inflation B inverse relationship between unemployment and inflation C inverse relationship between GNP and inflation D positive relationship between GNP and unemployment ANSWER B 4 A money policy can reduce unemployment and a money policy can reduce inflation A tight loose B loose tight C tight tight D loose loose ANSWER B 5 A loose money policy tends to economic growth and place pressure on the inflation rate A stimulate downward B stimulate upward C dampen upward D dampen downward ANSWER B 297 Chapter 5 Monetary Policy 6 serves as the most direct indicator of economic growth in the United States A GDP B National income C The unemployment rate D The industrial production index ANSWER A 7 Which of the following is not an indicator of inflation A housing price indexes B wage rates C oil prices D consumer confidence surveys ANSWER D 8 The M2 money supply is a economic indicator A leading B lagging C coincident D none of these ANSWER A 9 Manufacturing and trade sales are a economic indicator A leading B lagging C coincident D none of these ANSWER C 10 The average prime rate is a economic indicator A leading B lagging C coincident D none of these ANSWER B 11 The time lag between when an economic problem arises and when it is reported in economic statistics is the lag A recognition B implementation C impact D open market ANSWER A Chapter 5 Monetary Policy 298 12 The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the lag A recognition B implementation C impact D open market ANSWER B 13 The time between when the Fed adjusts the money supply and when interest rates change reflects the lag A recognition B implementation C impact D open market ANSWER C 14 Which of the following best describes the relationship between the Fed and the Administration A The Fed must receive approval by the Administration before conducting monetary policy B The Fed must implement a monetary policy specifically to the support the Administration s policy C The Administration must receive approval from the Fed before implementing fiscal policy D None of these statements describe the relationship between the Fed and the Administration ANSWER D 15 When the Fed attempts to counter rising rates caused by an increase in the budget deficit by loosening the money supply this is known as A monetizing the debt B the crowding out effect C both monetizing the debt and the crowding out effect D neither of these ANSWER A 16 International flows of funds can affect the Fed s monetary policy For example if there is downward pressure on U S interest rates that can be offset by foreign of funds the Fed may not feel compelled to use a monetary policy A inflows loose B inflows tight C outflows loose D outflows tight E none of these ANSWER D 299 Chapter 5 Monetary Policy 17 Costner National a commercial bank operates primarily in the money market Which of the following is not a way in which Costner is affected by the Fed s monetary policy A a change in interest rates that affects the risk free interest rate B a change in interest rates that affects the secondary market values of existing money market securities C a change in interest rates that affects the yields on newly issued money market securities D a change in economic growth that affects the risk premium on money market securities E All of these are correct ANSWER E 18 The lag represents the time from when an economic problem exists until it is recognized A recognition B adjustment C implementation D none of these ANSWER A 19 A dollar tends to exert inflationary pressure in the U S A stable B strong C weak D strong and stable ANSWER C 20 According to the theory of rational expectations inflationary expectations encourage businesses and households to their demand for loanable funds in order to borrow and make planned expenditures increase A higher reduce B higher increase C lower reduce D lower increase ANSWER B 21 Historical evidence has shown that when the Fed significantly increases the money supply U S inflation tends to shortly thereafter which in turn places pressure on U S interest rates A increase upward B increase downward C decrease downward D decrease upward ANSWER A Chapter 5 Monetary Policy 300 22 Under a passive monetary policy A the economy cannot be expected to correct itself without participation by the Fed B interest rates should ultimately increase in a weak economy because the demand for loanable funds should decline as economic growth weakens C the level of business investment should ultimately increase which should lead to a stronger economy and more jobs However the adjustment could take as long as years D the Fed would purchase Treasury securities in order to increase the supply of loanable funds in a weak economy ANSWER C 23 Which of the following is true A Federal deficits require that the Fed purchase government securities B Federal deficits will always result in an increase in the money supply C The Federal Reserve monetizes debt by selling securities which ultimately increases the money supply D An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases E None of these statements are true ANSWER E 24 Inflation is commonly the result of a A large budget deficit B high level of interest rates C high level of unemployment D high level of aggregate demand ANSWER D 25 According to the theory of rational expectations if the Fed uses open market operations in order to increase the supply of loanable funds what is the ultimate effect on interest rates A There will be a reduction in interest rates B There will be an increase in interest rates C There will be no effect on the interest rates D The impact on interest rates cannot be determined ANSWER D 26 The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are A low and steady B