Question 1

Which of the following best describes the sequence of events following an expansionary monetary policy by the FOMC?

Accepted Answer

The money supply increases, interest rates fall, investment and consumption rise, and the AD curve shifts right.

Question 2

Suppose the Federal Reserve implements a contractionary monetary policy. What is the most likely short-run effect on real GDP and the price level?

Accepted Answer

Real GDP falls and the price level falls.

Question 3

If the Federal Reserve increases the money supply, which of the following is most likely to occur according to the money market model?

Accepted Answer

Short-term nominal interest rates will fall.

Question 4

Which of the following components of aggregate demand is NOT directly affected by changes in interest rates?

Accepted Answer

Government purchases

Question 5

According to the quantity theory of money, what is the long-run effect of a doubling of the money supply?

Accepted Answer

The aggregate price level doubles.

Question 6

Which of the following best explains why the Fed cannot simultaneously target both the money supply and the interest rate?

Accepted Answer

Because only combinations of the interest rate and money supply that represent equilibrium in the money market can be achieved.

Question 7

During the 2007-2009 recession, which of the following contributed to the financial crisis?

Accepted Answer

A bubble in the housing market and relaxed mortgage lending standards.

Question 8

What is the main risk of buying a house during a recession, according to the study materials?

Accepted Answer

Rising unemployment and the risk of losing your job.

Question 9

Which of the following statements about quantitative easing (QE) is correct?

Accepted Answer

QE involves the central bank purchasing financial assets to increase the money supply and lower interest rates.

Question 10

Suppose the Fed lowers the federal funds rate target from 4% to 3%. What is the most likely effect on aggregate demand?

Accepted Answer

Aggregate demand will shift to the right.

Question 11

Which of the following best describes the monetarist view on monetary policy?

Accepted Answer

The Fed should follow a monetary growth rule and target the money supply.

Question 12

If the velocity of money ($$V) $$and real output ($$Y) $$are constant, what does the quantity equation $$M 	imes V = P 	imes Y$$ imply about the relationship between the money supply ($$M) $$and the price level ($$P$$)?

Accepted Answer

An increase in $$M$$ leads to a proportional increase in $$P.$$

Question 13

Which of the following was a direct result of the collapse of the housing market during the financial crisis of 2008-2009?

Accepted Answer

A freeze in lending and a loss of confidence in financial markets.

Question 14

What was the purpose of the Troubled Asset Relief Program (TARP) enacted in 2008?

Accepted Answer

To shore up the capital of commercial banks and stabilize the financial system.

Question 15

If the Fed implements a poorly timed expansionary monetary policy after a recession has already ended, what is the most likely outcome?

Accepted Answer

It may cause inflation by increasing aggregate demand above potential GDP.

Question 16

Which of the following best explains the relationship between the loanable funds model and the money market model?

Accepted Answer

The loanable funds model is concerned with long-term real rates, while the money market model is concerned with short-term nominal rates.

Question 17

Which of the following was a major factor in the formation of the housing bubble prior to the 2008 financial crisis?

Accepted Answer

Relaxed lending standards and the widespread use of subprime mortgages.

Question 18

If the Fed wants to achieve price stability when real GDP is above potential GDP, which policy should it implement?

Accepted Answer

Contractionary monetary policy.

Question 19

Which of the following is a likely effect of negative nominal interest rates, as seen in some European countries after quantitative easing?

Accepted Answer

Lower borrowing costs and increased spending.

Question 20

Suppose the Fed's balance sheet expands rapidly due to the purchase of mortgage-backed securities. What is the most likely effect on the money supply and interest rates?

Accepted Answer

The money supply increases and interest rates fall.

Monetary Policy: Mechanisms, Effects, and the Financial Crisis

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