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CHAPTER 25
The Challenges of Monetary Policy
1. When policymakers increase aggregate demand in response to an adverse supply shock, it is
referred to as
a. accommodation.
b. full employment policy.
c. stagflation policy.
d. supply shock policy.
ANSWER: a
2. A condition of concurrent high unemployment and high inflation is called
a. accommodation.
b. stop-go policy cycle.
c. stagflation.
d. a supply shock.
ANSWER: c
3. Any event that shifts the short-run aggregate supply curve is called
a. accommodation.
b. stop-go policy cycle.
c. stagflation.
d. a supply shock.
ANSWER: d
4. How often does the Humphrey-Hawkins Act of 1978 require the Fed to report to Congress?
a. Reporting to Congress is not a requirement of the act.
b. At the end of every quarter (March, June, September, and December)
c. Two times a year (February and July)
d. Annually (in June)
ANSWER: c
5. Which of the following choices best explains why full employment is an important goal of
monetary policy?
a. For a nation to reach its economic potential, individuals must be given an opportunity to
become productive (employed) members of society.
b. For a nation to maintain price stability, full employment must be attained first.
c. Full employment ensures that a nation’s external balance will be satisfactory.
d. Full employment is mandated by the Employment Act of 1946 and the Humphrey-Hawkins
Act.
ANSWER: a
6. During the Great Depression of the 1930s, unemployment averaged more than
a. 5 percent
b. 10 percent
c. 15 percent
d. 20 percent
ANSWER: d
7. During the Great Depression of the 1930s, prices fell on the average by more than
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a. 5 percent.
b. 10 percent.
c. 50 percent.
d. 25 percent.
ANSWER: d
8. The school of thought that was born during the Great Depression of the 1930s, which said the
level of aggregate demand determined the level of output, was led by
a. Milton Friedman.
b. John Maynard Keynes.
c. John Kenneth Galbraith.
d. Paul Samuelson.
ANSWER: b
9. The buildup of the economy associated with World War II
a. seemed to validate Keynesian theory.
b. put a stop to Keynesian theory.
c. found the lack of inflation to be a surprise.
d. continued the unemployment problem through World War II (1941- 1946).
ANSWER: a
10. The problem, according to Keynes, was that
a. aggregate demand was not as important as aggregate supply.
b. the level of aggregate demand was rarely an amount that would achieve full employment and
stable prices.
c. inflation was everywhere and always a monetary phenomena.
d. supply was always too great.
ANSWER: b
11. In the 1970s, the economy was plagued with both high unemployment and high inflation. This
was known as which of the following?
a. Inflation
b. Deflation
c. Stagflation
d. Recession
ANSWER: c
12. A fall in the overall price level is which of the following?
a. Inflation
b. Deflation
c. Stagflation
d. Recession
ANSWER: b
13. From the early 1970s on, the world economy experienced which of the following?
a. A new isolationism
b. Decreased trade
c. A breakdown of trade barriers and an increase in international trade
d. A fixed exchange rate
ANSWER: c
14. Since the early 1970s, the United States has experienced increased volatility of which of the
following?
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a. Exchange rates
b. deflation
c. stagflation
d. All of the above
ANSWER: a
15. In looking at the cyclical pattern of the recessions and expansions since the Great Depression,
researchers are in general agreement that the biggest cause of the ups and downs was which of
the following?
a. Shocks to the aggregate supply curve
b. Policy errors by the Federal government
c. Too much illiteracy
d. Fluctuations in aggregate demand
ANSWER: d
16. Which of the following is not a tool of monetary policy controlled by the Fed?
a. Open market operations
b. Setting the required reserve ratio
c. The power to tax
d. Setting the discount rate
ANSWER: c
17. Which of the following in not a goal of monetary policy?
a. Economic growth
b. Full employment
c. Stable prices
d. Raising enough tax revenue to prevent a government deficit
ANSWER: d
18. The average piece of economic pie per person is computed by dividing __________ by the
population.
a. per capita nominal GDP
b. per capita real GDP
c. real GDP
d. nominal GDP
ANSWER: c
19. The growth of aggregate supply is determined by all the following except
a. national defense.
b. the growth of capital.
c. the growth of the labor force.
d. the growth of productivity.
ANSWER: a
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20. Which of the following is not a goal of monetary policy?
a. Sustainable economic growth with price stability
b. Lower taxes so as not to distort business decision-making
c. Full employment with price stability
d. A satisfactory external balance consistent with domestic policy objectives
ANSWER: b
21. Anti-inflationary policies include
a. lowering taxes.
b. cutting government spending.
c. lowering interest rates.
d. cutting the discount rate.
ANSWER: b
22. The productivity of capital is thought to depend on which of the following?
a. The amount of support for research and development
b. The size of the labor force
c. Natural resources
d. Personal income
ANSWER: a
23. From the economic perspective, the willingness of firms to invest and the willingness of
households to work or save depends largely on which of the following?
a. What philosophies are taught in school
b. The nature of the people in a particular geographic area
c. The government’s tax policy and the economic outlook
d. The availability of government subsides
ANSWER: c
24. An unstable economic environment will likely cause which of the following?
a. Inflationary booms and deflationary recessions
b. Aggregate demand and supply in steady equilibrium
c. Secular trends easy to predict
d. Long-run growth due to the excitement of change
ANSWER: a
25. Full employment and a noninflationary environment help to
a. promote sporadic spurts in growth.
b. achieve maximum sustainable growth.
c. cause stagnation.
d. cause inflation.
ANSWER: b
26. Unemployment is a concern to the nation because
a. all individuals should be given the opportunity to work.
b. the government budget should be balanced and the more workers that work, the greater the
taxes collected.
c. unemployment will cause a trade deficit.
d. riot control costs money.
ANSWER: a
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27. Output that could have been produced last year by those resources that were unemployed
a. has to be made up by producing more this year.
b. demands a sense of trust that a recovery cycle will double output in the following year.
c. adds to long-run cost because of the need for retraining.
d. is lost forever and can never be made up.
ANSWER: d
28. How do adverse supply shocks affect economic performance?
a. They increase both real prices and real output.
b. They increase prices and decrease real output.
c. They increase real output and decrease prices.
d. None of the above
ANSWER: b
29. If the expected inflation rate is 4 percent for next year, then
a. a return of 4 percent will give a real return of 1 percent.
b. a return of 8 percent will give a real return of 4 percent.
c. a return of 3 percent will give a return of negative 2 percent.
d. None of the above
ANSWER: b
30. Which of the following equations best explains the relationships among inflation, taxes, interest,
and real after-tax returns?
a. Nominal interest rate – Expected inflation rate – Taxes = Real after-tax return
b. Expected inflation rate – Nominal interest rate – Taxes = Real after-tax return
c. Nominal interest rate – Expected inflation rate = Real after-tax return – Taxes
d. Real after-tax return – Expected inflation rate – Taxes = Nominal interest rate
ANSWER: a
31. Firms using standard accounting procedures base depreciation allowance on historical cost of
equipment rather than replacement cost. Inflation then causes which of the following?
a. Depreciation allowances to be too small to replace capital goods that are wearing out
b. Lower taxes, which partially compensates the firms
c. Easier decision-making
d. Firms replacing machinery more easily from their surplus funds
ANSWER: a
32. Research has shown that as inflation rises,
a. the overall economic environment becomes more steady.
b. exports will rise as foreign countries draw on inflated U.S. bank holdings.
c. relative prices become more volatile and difficult to predict.
d. relative prices tend to become easier to predict.
ANSWER: c
33. Relative to the rest of the world, inflation in the United States will cause which of the following?
a. Prices of U.S. goods will become relatively lower than prices of similar goods in other
countries.
b. Foreign demand for U.S. goods will be less than without inflation.
c. U.S. firms will get a larger share of the world markets.
d. The Fed will likely lower interest rates.
ANSWER: b
34. If the Fed starts on a program of monetary restraint to control inflation, then
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a. the growth rate of the United States economy will increase.
b. the dollar could depreciate.
c. prices will rise.
d. real interest rates could rise relative to foreign interest rates.
ANSWER: d
35. If the Fed establishes goals for inflation and growth that are very different from other countries,
a. flexible exchange rates will return to fixed rates.
b. there will be substantial fluctuations in exchange rates.
c. much of the risk of international trading will be eliminated.
d. the action by the Fed will be investigated by Congress.
ANSWER: b
36. In the early 2000s, most professional estimates of sustainable employment levels suggest an
unemployment rate of around
a. 3 percent.
b. 4-4.5 percent.
c. 10 percent.
d. 2-3 percent.
ANSWER: b
37. One of the key objectives of many monetary policymakers is which of the following?
a. Price stability
b. High unemployment
c. The speed with which the economy comes out of a recession
d. A balanced federal budget
ANSWER: a
38. The potential long-run growth rate for real GDP per year is estimated to be which of the
following?
a. Less than 2 percent
b. 2.5 to 3 percent
c. 5 percent
d. One of the areas where there is little consensus
ANSWER: b
39. The initial effect of an unexpected fall in aggregate demand is an unanticipated rise in which of
the following?
a. Cash flow
b. Borrowing
c. The sale of corporate bonds
d. Inventories
ANSWER: d
40. A recession is often defined as a
a. production period where output is declining for three consecutive months.
b. year in which output in any two quarters is lower than the previous year.
c. year of low prices.
d. fall in real GDP lasting at least two consecutive quarters.
ANSWER: d
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41. Because the focus of monetary and fiscal policy tends on the average to be on the short run, it has
most often been which of the following?
a. Expansionary
b. Contractionary
c. Steady, actually almost stagnant
d. Up and down like a smooth wave
ANSWER: a
42. Anti-inflationary fiscal policies include which of the following?
a. Cutting government spending
b. Raising taxes
c. Raising interest rates
d. Both a and b
ANSWER: d
43. What could the Fed do to offset an unexpected increase in aggregate demand?
a. It could lower the discount rate.
b. It could raise interest rates.
c. It could lower reserve requirements.
d. It could reduce aggregate demand by buying securities in the open market.
ANSWER: b
44. What will happen in the long run if there is an unexpected increase in aggregate demand and the
Fed does nothing?
a. Both output and prices will be higher.
b. Only the price level will increase; real output will return to its natural level.
c. A recession will occur and the aggregate demand curve will shift back to its starting position.
d. The aggregate supply curve will shift rightward; this will return price to its initial level and
further increase real output.
ANSWER: b
45. Which of the following is a true statement regarding price patterns over the last 30 years?
a. The inflation rate has accelerated in recessions.
b. The inflation rate has decelerated in expansions.
c. The inflation rate was very high throughout the 1990s.
d. Prices have risen more or less continuously.
ANSWER: d
46. Which of the following would not cause an adverse-supply shock?
a. A decrease in the price of oil
b. Major crop failures
c. Earthquakes
d. Floods
ANSWER: a
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47. If input prices are higher than firms expect,
a. output prices will have to go lower to get the firms to produce.
b. demand will likely increase.
c. the aggregate supply curve will shift to the left.
d. the supply curve will shift the right.
ANSWER: c
48. Ceteris paribus, an increase in input prices may cause which of the following?
a. Cost-push inflation
b. Demand-pull inflation
c. An increase in production
d. Employment to grow
ANSWER: a
49. When an input price of an item such as crude petroleum decreases, the effect may lead to which
of the following?
a. Cost-push inflation
b. Demand-pull deflation
c. An adverse shock
d. A beneficial shock
ANSWER: d
50. What causes the long-run aggregate supply curve to shift?
a. Changes in the amount of labor
b. Changes in the amount of capital
c. Changes in technology
d. All of the above
ANSWER: d
51. Steady-non-inflationary growth can be achieved by which of the following?
a. when aggregate demand increases by the same relative amount as long run-aggregate supply
increases
b. when the increase in long run aggregate supply equals the increase in aggregate demand at
the current price level
c. when the long run aggregate supply curve shifts rightward by the same percent as the
aggregate demand curve
d. All of the above
ANSWER: d
52. Which of the following was the first act that mandated the federal government pursue policies to
achieve full employment, stable prices, and adequate growth?
a. the Employment Act of 1946
b. the Federal Reserve Act of 1913
c. the Humphrey-Hawkins Act of 1978
d. the McFadden Act of 1927
ANSWER: a
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53. Which of the following acts followed the Employment Act of 1946 in mandating that the
government pursue policies to achieve full employment and stable prices?
a. the Financial Institutions Recovery, Reform , and Enforcement Act of 1989
b. the Garn-St. Germain Act of 1982
c. the Humphrey-Hawkins Act of 1978
d. Gramm-Leach-Bliley Act of 1999
ANSWER: c
54. To be unemployed, an individual must be
a. in the labor force
b. at least 16 years old and not working
c. actively seeking a job
d. all of the above
ANSWER: d
55. In the long run, the growth in real GDP is determined by
a. Fiscal policy
b. Monetary policy
c. Both fiscal and monetary policy
d. The growth of labor, capital, and productivity.
ANSWER: d
56. Which of the following causes the capital stock to grow?
a. The growth in the productivity of labor
b. The amount of investment spending undertaken by firms
c. Increase in aggregate demand
d. Increase in the interest rate
ANSWER: b
57. The goals of monetary policy include all of the following except:
a. sustainable economic growth
b. full employment
c. stable prices
d. a balanced federal budget
ANSWER: d
58. The short run goals of monetary policy include all of the following except:
a. sustainable economic growth
b. full employment
c. stable prices
d. a satisfactory external balance
ANSWER: a
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59. Which of the following is true?
a. Achieving full employment, stable prices and a satisfactory external balance in the short run
facilitates the achievement of sustainable economic growth in the long run.
b. Sustainable economic growth is determined by the growth and productivity of the labor force
only.
c. Inflation increases the real value of money balances held.
d. Increases in inflation increase real after-tax returns.
ANSWER: a
60. If the real interest rate rises relative to foreign rates, then
a. appreciation of the dollar is likely.
b. capital flows could increase.
c. net exports could fall.
d. All of the above.
ANSWER: d
61. Which of the following is false?
a. As the U.S. economy becomes more globalized, monetary policymakers must be aware of the
international effects of policy.
b. If monetary policymakers establish policy goals for inflation and growth that are widely
divergent from other countries, substantial fluctuations in exchange rates can result.
c. U.S. policymakers have always been more concerned about inflation while German
policymakers are more concerned about unemployment.
d. Fluctuations in exchange rates greatly increase the exchange rate risks of international trade
and finance.
ANSWER: c
62. Which of the following is false?
a. To be unemployed, one must be in the labor force.
b. A retired person is unemployed.
c. The labor force is the employed plus the unemployed.
d. The unemployment rate is the number unemployed divided by the labor force.
ANSWER: b
63. If the nominal interest rate is 6 percent, the inflation rate is 4 percent and if the tax rate is 20
percent, what is the real after tax return?
a. 1.8 percent
b. .8 percent
c. 2 percent
d. the real after-tax return is impossible to calculate from the information given.
ANSWER: b
64. If the nominal interest rate is 6 percent, the inflation rate is 5 percent and if the tax rate is 30
percent, what is the real after tax return?
a. 1.8 percent
b. -.8 percent
c. 2 percent
d. .8 percent
ANSWER: b
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65. If market participants expect the Fed to increase aggregate demand in response to a drop in
aggregate demand, then,
a. the job of policymakers will be much easier.
b. input prices will respond much more quickly than otherwise.
c. if the Fed does nothing, the decrease in input prices that cause short run aggregate supply to
shift rightward will take longer.
d. markets will automatically move to equilibrium.
ANSWER: c
66. Which of the following is false?
a. Starting from full employment, an unexpected drop in aggregate demand causes a demandinduced recession.
b. If policymakers do nothing in response to an unexpected drop in aggregate demand, the
short-run aggregate supply curve eventually shifts to the right as firms and workers adjust
their price expectations downward.
c. If policymakers do nothing in response to an unexpected drop in aggregate demand, the
economy eventually returns to full employment at a higher price level.
d. In response to a drop in aggregate demand, if policymakers choose to boost demand through
fiscal or monetary policy, then the economy returns to full employment at the original price
level.
ANSWER: c
67. Which of the following is true?
a. The banking system’s share of intermediation is declining.
b. Control over banks is less stringent as banks find new ways to attract deposits that are not
subject to reserve requirements.
c. Global forces are generally more important today than ever before.
d. All of the above
ANSWER: d
68. Which of the following does not cause the long-run aggregate supply curve to shift?
a. Changes in the amount of labor
b. Changes in the amount of capital
c. Changes in technology
d. fiscal and monetary policies
ANSWER: d
69. Which of the following causes the aggregate demand curve to shift?
a. Changes in the amount of labor
b. Changes in the amount of capital
c. Changes in technology
d. fiscal and monetary policies
ANSWER: d
70. Which of the following is false?
a. Inflation causes a redistribution of income in arbitrary and unpredictable ways.
b. Expected inflation is much worse than unexpected inflation.
c. Borrowers benefit from unanticipated inflation while lenders are hurt by it.
d. Inflation can hurt our international competitiveness.
ANSWER: b
71. Which of the following shifts the short-run aggregate supply curve to the right?
The Challenges of Monetary Policy
a. increases in aggregate demand
b. increases in input prices
c. an adverse supply shock
d. decreases in input prices
ANSWER: d
72. Which of the following shifts the short-run aggregate supply curve to the left?
a. increases in aggregate demand
b. a drop in the price of oil
c. an adverse supply shock
d. decreases in input prices
ANSWER: c
73. If the Fed increases demand in response to an adverse supply shock, then
a. the unemployment will get worse but the inflation better.
b. the unemployment and inflation rates will both fall.
c. the unemployment rate will go down but the inflation rate will go up.
d. nothing will happen because an adverse shock shifts the supply curve.
ANSWER: c
74. If the Fed does nothing in response to an adverse supply shock, then
a. the unemployment will get worse but the inflation better.
b. the unemployment and inflation rates will both eventually fall.
c. the unemployment rate will go down but the inflation rate will go up.
d. nothing will happen unless the Fed shifts the aggregate demand curve.
ANSWER: b
75. Who among the following is unemployed?
a. a worker who has given up looking for a job
b. a truant 14 year old who is looking for a job
c. a college student
d. a recent college graduate who is seeking a job
ANSWER: d
76. Sustainable economic growth is determined by growth in which of the following?
a. income, labor, and capital
b. labor, capital, and productivity
c. aggregate demand and aggregate supply
d. labor, income, and resources
ANSWER: b
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