Q&A Hero

Q: When the total value of final goods and services is calculated using current prices, the resulting measure is referred to as A. real GDP. B. the GDP deflator. C. nominal GDP. D. the index of leading indicators.

Q: From 1980 to 1985 the dollar appreciated relative to the British pound. Holding everything else constant, one would expect that, when compared to 1980 A. fewer Britons traveled to the United States in 1985. B. Britons imported more wine from California in 1985. C. Americans exported more wheat to England in 1985. D. more Britons traveled to the United States in 1985.

Q: If an economy has aggregate output of $20 trillion, then aggregate income is A. $10 trillion. B. $20 trillion. C. $30 trillion. D. $40 trillion.

Q: From 1980 to early 1985 the dollar ________ in value, thereby benefiting American ________. A. appreciated; consumers B. appreciated, businesses C. depreciated; consumers D. depreciated, businesses

Q: Which of the following items are NOT counted in U.S. GDP? A. your purchase of a new Ford Mustang B. your purchase of new tires for your old car C. GM's purchase of tires for new cars D. a foreign consumer's purchase of a new Ford Mustang

Q: Everything else held constant, a stronger dollar benefits ________ and hurts ________. A. American businesses; American consumers B. American businesses; foreign businesses C. American consumers; American businesses D. foreign businesses; American consumers

Q: Everything else held constant, a weaker dollar will likely hurt A. textile exporters in South Carolina. B. wheat farmers in Montana that sell domestically. C. automobile manufacturers in Michigan that use domestically produced inputs. D. furniture importers in California.

Q: Which of the following is most likely to result from a stronger dollar? A. U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them. B. U.S. goods exported aboard will cost more in foreign countries and so foreigners will buy more of them. C. U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them. D. Americans will purchase fewer foreign goods.

Q: Everything else constant, a stronger dollar will mean that A. vacationing in England becomes more expensive. B. vacationing in England becomes less expensive. C. French cheese becomes more expensive. D. Japanese cars become more expensive.

Q: The market where one currency is converted into another currency is called the ________ market. A. stock B. bond C. derivatives D. foreign exchange

Q: The price of one country's currency in terms of another country's currency is called the A. exchange rate. B. interest rate. C. Dow Jones industrial average. D. prime rate.

Q: American companies can borrow funds A. only in U.S. financial markets. B. only in foreign financial markets. C. in both U.S. and foreign financial markets. D. only from the U.S. government.

Q: What happens to economic growth and unemployment during a business cycle recession? What is the relationship between the money growth rate and a business cycle recession?

Q: Budget deficits are important because deficits A. cause bank failures. B. always cause interest rates to fall. C. can result in higher rates of monetary growth. D. always cause prices to fall.

Q: When a budget deficit occurs in the United States, the U.S. Treasury finances this deficit by A. borrowing. B. imposing a moratorium of new government spending. C. increasing the tax rate. D. printing more dollars.

Q: Budgets deficits can be a concern because they might A. ultimately lead to higher inflation. B. lead to lower interest rates. C. lead to a slower rate of money growth. D. lead to higher bond prices.

Q: A budget ________ occurs when government expenditures exceed tax revenues for a particular time period. A. deficit B. surplus C. surge D. surfeit

Q: When tax revenues are greater than government expenditures, the government has a budget A. crisis. B. deficit. C. surplus. D. revision.

Q: ________ policy involves decisions about government spending and taxation. A. Monetary B. Fiscal C. Financial D. Systemic

Q: The organization responsible for the conduct of monetary policy in the United States is the A. Comptroller of the Currency. B. U.S. Treasury. C. Federal Reserve System. D. Bureau of Monetary Affairs.

Q: The management of money and interest rates is called ________ policy and is conducted by a nation's ________ bank. A. monetary; superior B. fiscal; superior C. fiscal; central D. monetary; central

Q: Between 1950 and 1980 in the U.S., interest rates trended upward. During this same time period A. the rate of money growth declined. B. the rate of money growth increased. C. the government budget deficit (expressed as a percentage of GNP) trended downward. D. the aggregate price level declined quite dramatically.

Q: Countries that experience very high rates of inflation may also have A. balanced budgets. B. rapidly growing money supplies. C. falling money supplies. D. constant money supplies.

Q: Evidence from the United States and other foreign countries indicates that A. there is a strong positive association between inflation and growth rate of money over long periods of time. B. there is little support for the assertion that "inflation is always and everywhere a monetary phenomenon." C. countries with low monetary growth rates tend to experience higher rates of inflation, all else being constant. D. money growth is clearly unrelated to inflation.

Q: There is a ________ association between inflation and the growth rate of money ________. A. positive; demand B. positive; supply C. negative; demand D. negative; supply

Q: The upward and downward movement of aggregate output produced in the economy is referred to as the A. roller coaster. B. see saw. C. business cycle. D. shock wave.

Q: Money is defined as A. bills of exchange. B. anything that is generally accepted in payment for goods and services or in the repayment of debt. C. a risk-free repository of spending power. D. the unrecognized liability of governments.

Q: What crucial role do financial intermediaries perform in an economy?

Q: The delivery of financial services electronically is called A. e-business. B. e-commerce. C. e-finance. D. e-possible.

Q: Which of the following is NOT a financial institution? A. a life insurance company B. a pension fund C. a credit union D. a business college

Q: The financial intermediaries that the average person interacts with most frequently are A. exchanges. B. over-the-counter markets. C. finance companies. D. banks.

Q: Financial institutions that accept deposits and make loans are called A. exchanges. B. banks. C. over-the-counter markets. D. finance companies.

Q: Banks and other financial institutions engage in financial intermediation, which A. can hurt the performance of the economy. B. can benefit economic performance. C. has no effect on economic performance. D. involves borrowing from investors and lending to savers.

Q: Financial institutions search for ________ has resulted in many financial innovations. A. higher profits B. regulations C. respect D. higher risk

Q: Banks, savings and loan associations, mutual savings banks, and credit unions A. are no longer important players in financial intermediation. B. since deregulation now provide services only to small depositors. C. have been adept at innovating in response to changes in the regulatory environment. D. produce nothing of value and are therefore a drain on society's resources.

Q: Banks A. provide a channel for linking those who want to save with those who want to invest. B. produce nothing of value and are therefore a drain on society's resources. C. are the only financial institutions allowed to give loans. D. hold very little of the average American's wealth.

Q: The output gap can best be described as: A) the percentage difference between GDP and its potential B) the difference between GDP in the current year compared to the previous year C) the difference between a nation's GDP and that of the nation with the highest GDP D) the difference between GDP and its forecasted level

Q: The inflation gap can best be described as: A) the percentage difference between GDP and its potential B) the difference between inflation and its target C) the change in the inflation rate from one year to the next D) the difference between the inflation rate and the average inflation rate of that of the nations with the 3 lowest inflation rates

Q: In practice, the ECB has committed to what type of strategy for monetary policy? A) inflation targeting B) monetary targeting C) unclear as to inflation or monetary targeting D) exchange rate targeting

Q: Why are policymakers willing to use rules for monetary policy as general guides, but unlikely to follow such rules blindly?

Q: Which central bank has its exchange rate as a focus of its monetary policy? A) Bank of Canada B) Bank of England C) European Central Bank D) Federal Reserve

Q: In 2006, the Bank of Japan adopted a policy framework focusing on A) expected inflation one to two years in the future. B) current inflation. C) maintaining a fixed exchange rate. D) the growth in the money supply.

Q: What are the major advantages and disadvantages of inflation targeting?

Q: If a shock raises inflation, how fast should the central bank reduce it to its target level?

Q: All of the following arguments are made against inflation targeting EXCEPT A) rigid numerical targets would diminish the flexibility of monetary policy. B) the Fed would need to depend on future forecasts of inflation since monetary policy acts with a lag. C) the Fed has little influence on inflation. D) Holding the Fed accountable for low inflation may make it difficult for elected officials to monitor whether the Fed is supporting good overall economic policy.

Q: What challenges do policymakers and researchers face in using the Taylor rule?

Q: All of the following arguments are presented in favor of inflation targeting EXCEPT A) it would draw attention to what the central bank can achieve in practice. B) it would provide an anchor for inflationary expectations. C) it would promote accountability by providing a yardstick by which policy can be measured. D) it would reduce the lags inherent in monetary policy.

Q: In general, periods in which the Taylor rule suggested tighter monetary policy than the Fed actually put in place are periods of rising inflation. Periods in which the Taylor rule suggested that monetary policy should be easier than the Fed actually put in place are periods of declining inflation. Describe a recent exception to these results.

Q: The benchmark default-free interest rate of the financial system is generally considered to be: A) the federal funds rate B) the interest rate on the 10-year Treasury note C) the discount rate D) the 30-year fixed rate mortgage

Q: Under which chair did the Fed implement the policy of inflation targeting? A) Volcker B) Bernanke C) Greenspan D) Geithner

Q: Suppose the economy is thought to be 2 percent below potential (i.e., the output gap is −2 percent), when potential output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 3 percentover the past year. The federal funds rate is currently 3 percent. The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 5 each. The inflation target is 1 percent.a. Is thefedfundsratecurrentlytoohighortoolow?By how much?Show your work.Suppose that all the conditions are the same as described above, except that the output gap is b. +2 percent instead of −2 percent. Is the fed funds rate currently too high or too low? By how much ?Show your work.Suppose a year has gone by, output is now 3 percent above potential, and the inflation ratec. was 5 percent over the year. What federal funds rate should the Fed now set (assuming the inflation target does not change)? Show your work.

Q: Which of the following is NOT an accurate description of open market operations prior to 2008? A) It was used to affect the market for bank reserves. B) It was used to control the federal funds rate. C) It involved buying and selling of short-term Treasury securities. D) It involved buying and selling long-term securities.

Q: Which of the following describes the relationship between the actual federal funds rate and that suggested by Taylor's rule following the recovery from the 2001 recession? A) The federal funds rate was above that suggested by Taylor's rule. B) The federal funds rate was below that suggested by Taylor's rule. C) The federal funds rate was about equal to that suggested by Taylor's rule. D) There was not a clear relationship between the federal funds rate and that suggested by Taylor's rule.

Q: Suppose the economy is thought to be 2 percent above potential (i.e., the output gap is 2 percent), when potential output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 2 percentover the past year. The federal funds rate is currently 3 percent. The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 5 each. The inflation target is 1 percent.a. Is the fed funds rate currently too high or too low ? By how much ? Show your work.Suppose a year has gone by, output is now just 1 percent above potential, and inflation rateb. was 5 percent over the year. What federal funds rate should the Fed now set (assuming the inflation target does not change)?

Q: According to Taylor's rule, all of the following variables help explain the behavior of the federal funds rate EXCEPT A) output gap. B) current inflation. C) inflation gap. D) yield curve.

Q: Which of the following statements accurately describes the Fed's control of discount policy? A) It controls discount policy more completely than it controls open market operations. B) It must abide by discount rates set by Congress. C) It controls discount policy less completely than it controls open market operations. D) It controls discount policy completely, just as it controls open market operations.

Q: Why do monetarists favor the use of a nonactivist rule for monetary policy?

Q: What causes the formation of an expectations trap and how can the Fed prevent one from forming?

Q: The Fed tends not to use discount policy as its principal tool in influencing the money supply since A) discount loans do not affect the money supply. B) it does not have as much control over discount loans as it has on open market operations. C) it is prohibited from doing so by an act of Congress. D) it prefers to use reserve requirements.

Q: Which of the following best describes a policy of inflation targeting? A) It's an inflexible rule that requires the central bank to always achieve a specified inflation rate. B) It allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession. C) It allows the central bank the flexibility of setting different inflation targets each year. D) It requires central banks to target current inflation rather than inflation forecasts.

Q: Why have economists abandoned the use of money-growth rules in the United States? Explain.

Q: A benefit to policymakers of following rules rather than discretion is a. they could employ a larger staff of economists.b. they will contribute to the formation of an expectations trap. c. they would not be able to pursue time-inconsistent policies.d. they would gain flexibility in case the economy's structure changed.

Q: Which of the following statements concerning seasonal credit is true? A) It tends to have a lower interest rate than federal funds. B) It has become increasingly more important in recent years. C) Only firms receiving secondary credit are eligible to receive seasonal credit. D) Improvements in credit markets have reduced the need for a seasonal credit facility.

Q: Describe time inconsistency and explain how it can be avoided by a central bank setting monetary policy.

Q: Which of the following best describes the reason why policymakers do not generally like to commit to following a rule for monetary policy?a. Because changes to the economy's structure will prevent any rule from working well for long b. Because rules do not effectively prevent time-inconsistencyc. Because rules without credibility are worse than discretion d. Because central bankers like to feel important

Q: Primary credit is only a backup source of funds for health banks since A) the primary credit rate is set above the federal funds rate. B) restrictions as to its use limit its benefits. C) the secondary credit rate pays 0.5% more. D) banks must seek funds from other sources prior to requesting a discount loan.

Q: Which of the following happened as a result of inflation targeting in New Zealand ?a. It made the goals of the central bank explicit.b. It led to a higher expected inflation rate.c. It increased the inflation rate in the country.d. It lowered the credibility of the central bank.

Q: How does a central bank establish credibility?

Q: Which of the following statements is correct? A) The discount rate is generally above the federal funds rate. B) The discount rate is generally below the federal funds rate. C) The discount rate is generally equal to the federal funds rate. D) There is no general pattern to the relation between the discount rate and the federal funds rate.

Q: Central banks that use inflation targeting usually communicate their goals and plans in a document known as the a. directive.b. inflation report. c. target analysis. d. communique.

Q: Since 1980, discount loans have been available A) only to member banks of the Federal Reserve System. B) only to national banks. C) only to state banks. D) to all depository institutions.

Q: Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

Q: Which of the following is a disadvantage of inflation targeting?a. It reduces the flexibility of the central bank.b. It makes the goals of the central bank explicit. c. It leads to the problem of time inconsistency. d. It raises the expected inflation rate.

Q: Discount loans intended for banks that are not financially healthy are called A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

Q: Which of the following statements is NOT true? A) Each Federal Reserve bank maintains its own discount window. B) Before 1980, the Fed rarely made loans to banks which were not members of the Federal Reserve System. C) Since 1980, all depository institutions have had access to the discount window. D) Each Federal District Bank can charge a different discount rate.

Q: Usually inflation targets are set for a a. low but positive inflation rate.b. high and positive inflation rate. c. negative inflation rate.d. zero inflation rate.

Q: Discount loans available to health banks which can be used for any purpose are called A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

Q: The discount window is A) another name for the discount rate. B) the means by which the Fed makes discount loans to banks. C) the spread between the discount rate and the T-bill rate. D) the period each month during which banks are allowed to apply for discount loans.

Q: New Zealand was the first country to implement a system of a. disinflation.b. deflation.c. inflation targeting. d. expectations traps.

Q: A central bank that is explicit about its goals and plans is said to be a. obvious.b. transparent. c. translucent. d. opaque.