Core Economics 3e

Monetary Policy

Multiple Choice Questions

After watching the Monetary Policy video lecture, consider the question(s) below. Then “submit” your response.

Question

1. The goals of the Federal Reserve’s monetary policy are to keep:

unemployment low and the inflation rate stable.

unemployment low and the inflation rate at zero percent.

money supply stable and the unemployment rate at zero percent.

money supply low and the unemployment rate at zero percent.

Question

2. Three tools of monetary policy that are available to the Federal Reserve are:

setting the money supply, setting the unemployment rate, and insuring bank deposits.

maintaining a healthy banking system, printing currency, and minting coins.

setting the reserve requirements, setting the discount rate, and setting the federal funds rate.

increasing federal debt, setting the unemployment rate, and moral persuasion.

Question

3. The Federal Reserve is most likely to deploy contractionary economic policy if:

the economy was encountering high levels of inflation.

banks had become too large to be managed successfully.

the economy was poised to enter a recession.

it wanted to increase the money supply in the economy.

Question

4. High levels of inflation negatively impact the economy by:

decreasing the revenue of firms.

increasing the unemployment rate.

reducing the money supply and reducing the growth rate of real GDP.

reducing the purchasing power of savings.

Question

5. Quantitative easing involves the Federal Reserve:

selling risky assets to banks.

increasing bank reserve requirements.

requiring banks to make more loans.

buying risky assets from banks.

Question

6. Classical economists believe that monetary policy is:

only effective in recessions.

only effective in expansions.

effective in almost all economic situations.

is completely ineffective.

Question

7. Keynesians believe that monetary policy can be effective:

in the short run.

in almost every economic situation.

in situations of liquidity traps.

when banks become too aggressive in terms of lending.

True/False Questions

After watching the Monetary Policy video lecture, consider the question(s) below. Then “submit” your response.

Question

1. The Federal Reserve functions under the U.S. Congress, and consults it before taking decisions regarding to the monetary policy.

True

False

Question

2. The Federal Reserve’s quantitative easing programs over the 2007-2014 period lead to higher rates of inflation because consumer and business confidence was very high.

True

False

Question

3. Monetarists believe that in the long run the greater consumption stimulated by an expansionary monetary policy (low interest rates) leads to high levels of inflation.

True

False

Short Answer/Discussion Questions

After watching the Monetary Policy video lecture, consider the question(s) below. Then “submit” your response.

Question

1. According to the quantity theory of money promoted by classical economists, what will be the impact on prices of an increase in the money supply in an economy?

Suggested solution: The quantity theory of money suggests that if money supply increases in an economy, more money will chase the same amount of goods and services. This will force prices to increase. (Answers may vary.)

Question

2. How would lowering interest rates during a period of weak aggregate demand affect the level of economic activity?

Suggested solution: Lowering interest rates in a period of weak aggregate demand stimulates higher levels of economic activity, and hence, a higher demand. Lower interest rates translate into lower borrowing costs and increased incentives for businesses to invest. Lower interest rates also make financing of consumer purchases easier which also increases demand. Lastly, by reducing savings returns, lower interest rates incent consumers to save less and purchase more. (Answers may vary.)

Question

3. Why is monetary policy less effective in dealing with supply shocks such as an oil embargo?

Suggested solution: A supply shock is a reduction in resources available to an economy caused by external events such as an oil embargo. Such a shock will lead to increased prices for a key resource (oil price inflation), and declining amounts of the commodity, which will reduce output, leading to fewer jobs. The typical monetary policy response to increased inflation is higher interest rates. This action will lead to a further reduction in the level of economic activity and will increase unemployment. Hence, in situations of such shocks, trying to fix one problem (inflation) by using monetary policy makes an already bad situation (jobs) worse. (Answers may vary.)