Question 1

Which of the following best describes the effect of expansionary monetary policy in the short run?

Accepted Answer

It increases the money supply, lowers interest rates, and increases aggregate demand, leading to higher real GDP and lower unemployment.

Question 2

Suppose the Federal Reserve lowers the interest on reserve balances (IORB) rate. What is the most likely immediate effect on the loanable funds market?

Accepted Answer

The supply of loanable funds increases, causing the equilibrium interest rate to decrease.

Question 3

In the context of the AD-AS model, what is the effect of expansionary monetary policy on aggregate demand?

Accepted Answer

Expansionary monetary policy shifts the aggregate demand curve to the right.

Question 4

Which equation best represents the relationship between the money supply and the price level in the long run?

Accepted Answer

$$MV = PY$$

Question 5

During the Great Depression, what was the primary monetary policy error made by the Federal Reserve?

Accepted Answer

The Fed failed to offset the decline in the money supply, which contributed to a decrease in aggregate demand.

Question 6

Which of the following groups is most harmed by unexpected inflation?

Accepted Answer

Lenders who made loans with fixed interest rates.

Question 7

What is the main goal of contractionary monetary policy?

Accepted Answer

To decrease aggregate demand and slow the economy, often to reduce inflation.

Question 8

Why doesn’t monetary policy always work to stimulate real GDP and reduce unemployment?

Accepted Answer

Because in the long run, all prices adjust, expectations may change, and supply-side shocks can limit its effectiveness.

Question 9

What does the term 'monetary neutrality' mean?

Accepted Answer

The money supply doesn’t affect real economic variables such as real GDP and unemployment.

Question 10

Which of the following best describes the Phillips curve in the short run?

Accepted Answer

It shows an inverse relationship between the unemployment rate and the inflation rate.

Question 11

According to adaptive expectations theory, how do people form expectations about future inflation?

Accepted Answer

They base their expectations on their most recent experience with inflation.

Question 12

Which of the following is a weakness of adaptive expectations theory?

Accepted Answer

People may make systematic errors if actual inflation is accelerating or decelerating.

Question 13

How does rational expectations theory differ from adaptive expectations theory?

Accepted Answer

Rational expectations theory assumes people use all available information and are forward-looking, while adaptive expectations theory considers only past experience.

Question 14

If monetary policy is completely expected, what is the effect on the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS immediately shifts, and monetary policy has no real effects even in the short run.

Question 15

Which of the following best describes the long-run Phillips curve?

Accepted Answer

It is vertical, indicating no relationship between inflation and unemployment in the long run.

Question 16

Which of the following is a limitation of expansionary monetary policy?

Accepted Answer

It is ineffective in the long run, when it’s expected, and when economic downturns are at least partially due to declines in aggregate supply.

Question 17

Which of the following assets is recommended to protect yourself from inflation?

Accepted Answer

Treasury Inflation Protected Securities (TIPS)

Question 18

If the central bank increases the money supply at time $$t_0$$, what happens to the real value of money in the short run and long run?

Accepted Answer

In the short run, the real value of money declines; in the long run, it reaches a new lower level.

Question 19

Which of the following best describes passive monetary policy?

Accepted Answer

It stabilizes the money supply and price levels without seeking to use inflation to affect real GDP and unemployment.

Lecture 12: Monetary Policy

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