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Exploring Macroeconomics 5th Edition Robert L. Sexton - Solutions
12. The __________ hypothesis states that the economy will self-correct to the natural rate of unemployment.
11. In the long run when the expected inflation rate falls, the short-run Phillips curve shifts __________.
10. The data from the 1970s indicated that the Phillips curve __________ remain in place.
9. According to Milton Friedman, a trade-off occurs between inflation and unemployment in the __________ run but not in the __________ run; the trade-off comes from __________ inflation.
8. Economists who questioned the long-term validity of the Phillips curve were largely __________ in the 1960s.
7. When moving up along a Phillips curve, employment rates tend to __________.
6. An increase in aggregate demand would cause the economy to move __________ along a Phillips curve, causing the inflation rate to __________ and the rate of unemployment to __________.
5. The Phillips curve is __________ at higher rates of inflation and lower rates of unemployment.
4. The Phillips curve suggests that at lower rates of inflation, the rate of unemployment will be __________.
3. If output prices rise but money wages do not go up as quickly, real wages will __________, tending to __________ unemployment.
2. The Phillips curve describes a short-run trade-off between __________ and __________.
1. The recession in early 2001 was set off by a serious drop in __________.
15. Given that the Fed currently imposes reserve requirements on checking deposits, but not on savings deposits, why would banks prefer to hold deposits as savings accounts rather than checking accounts, other things equal?
14. Why have ATMs and online banking made savings accounts more liquid than they used to be?
13. Answer questions a–e.a. What is the equation of exchange?b. In the equation of exchange, if V doubled, what would happen to nominal GDP as a result?c. In the equation of exchange, if V doubled and Q remained unchanged, what would happen to the price level as a result?d. In the equation of
12. Why can’t the Fed target both the money supply and the interest rate at the same time?
11. How does a higher price level affect the money market? How does it affect aggregate demand?
10. In the move from a below equilibrium interest rate to the equilibrium interest rate, what happens in the bond market and the loan market? In the move from an above equilibrium interest rate to the equilibrium interest rate, what happens in the bond market and the loan market?
9. Why would the transactions motive and the precautionary motive for holding money both tend to vary directly with the price level? Why would the quantity of money people desire to hold for both motives tend to vary inversely with interest rates?
8. In which direction would the money supply change ifa. the Fed raised the reserve requirement?b. the Fed conducted an open market sale of government bonds?c. the Fed raised the discount rate?d. the Fed conducted an open market sale of government bonds and raised the discount rate?e. the Fed
7. Why would a reduction in the required reserve ratio not be a powerful tool when banks choose to hold substantial quantities of excess reserves?
6. Why is a reduction in the required reserve ratio such a powerful monetary policy tool? Why is it so seldom used?
5. Why would the Fed seldom do an open market purchase of government securities at the same time that it raises the discount rate or the required reserve ratio?
4. How does an open market purchase by the Fed increase bank reserves? How does it increase the money supply?
3. Why does the fact that the Fed finances its operations out of interest earned on its portfolio, with the excess returned to the U.S. Treasury, make it more independent of congressional pressure?
2. How is central bank independence related to average inflation rates across countries? How is the Fed insulated from executive branch pressures?
1. Why is the private ownership of the Federal Reserve System essentially meaningless?
44. An important limitation of monetary policy is thata. it is conducted by people in Congress who are under pressure to get reelected every two years.b. when the Fed tries to buy bonds, it is often unable to find a seller.c. when the Fed tries to sell bonds, it is often unable to find a buyer.d.
43. Compared to fiscal policy, which of the following is an advantage of using monetary policy to attain macroeconomic goals?a. It takes a long time for fiscal policy to have an effect on the economy, but the effects of monetary policy are immediate.b. The effects of monetary policy are certain and
42. If the velocity of money (V) and real output (Q) were increasing at approximately the same rate, thena. it would be impossible for monetary authorities to control inflation.b. monetary acceleration would not lead to inflation.c. inflation would be closely related to the long-run rate of
41. If M increases and V increases,a. nominal GDP increases.b. nominal GDP decreases.c. nominal GDP stays the same.d. the effect on nominal GDP is indeterminate.
40. If people expect increasing inflation, what would be the expected reaction of velocity in the equation of exchange?a. Velocity would be expected to remain the same.b. Velocity would be expected to decrease.c. Velocity would be expected to increase.d. none of the above
39. According to the simple quantity theory of money, a change in the money supply of 6.5 percent would, holding velocity constant, lead toa. a 6.5 percent change in real GDP.b. a 6.5 percent change in nominal GDP.c. a 6.5 percent change in velocity.d. a 6.5 percent change in aggregate supply.
38. If nominal GDP is $3,200 billion and M1 is $800 billion, then velocity isa. 0.5.b. 2.c. 4.d. 8.e. 400.
37. If an economist divides the level of nominal GDP by the number of dollars in the money supply, she has computeda. the velocity of money.b. the price level.c. the level of real GDP.d. the economic growth rate.
36. The equation of exchange can be written as
35. The P in the equation of exchange represents thea. profit earned in the economy.b. average level of prices of final goods and services in the economy.c. marginal level of prices.d. marginal propensity to spend.
34. Which of the following would tend to reduce the price level?a. a commercial bank using excess reserves to extend a loan to a customerb. a commercial bank purchasing U.S. bonds from an individual as an investmentc. an increase in reserve requirementsd. an increase in the discount ratee. a
33. Which of the following would cause the U.S. money supply to expand?a. a commercial bank calling in a loan to build up more excess reservesb. a commercial bank purchasing U.S. bonds from the Fed as an investmentc. a decrease in reserve requirementsd. an increase in the discount rate
32. Which of the following is true?a. An unanticipated shift to a more expansionary monetary policy will temporarily stimulate real output and employment.b. Once decision makers come to anticipate the inflationary side effects, expansionary monetary policy will fail to stimulate either real output
31. In the long run, a sustained increase in growth of the money supply relative to the growth rate of potential real output will most likelya. cause the nominal interest rate to fall.b. cause the real interest rate to fall.c. reduce the natural rate of unemployment.d. increase real output
30. Which one of the following would be the most appropriate stabilization policy if the economy is operating beyond its long-run potential capacity?a. an increase in the discount rateb. an increase in government purchases, holding taxes constantc. a reduction in reserve requirementsd. a reduction
29. The Fed unexpectedly increasing the money supply will cause an increase in aggregate demand becausea. real interest rates will fall, stimulating business investment and consumer purchases.b. the dollar will depreciate on the foreign exchange market, leading to an increase in net exports.c.
28. Starting from an initial long-run equilibrium, an unanticipated shift to more expansionary monetary policy would tend to increasea. prices and unemployment in the long run.b. real output in the short run, but not in the long run.c. real output in the long run, but not the short run.d. real
17. What will happen to the demand for money if real GDP rises?a. It will decrease.b. It will be unchanged.c. It will increase.d. It depends on what happens to interest rates.
15. When the money supply increases, other things being equal,a. real interest rates fall, and investment spending rises.b. real interest rates fall, and investment spending falls.c. real interest rates rise, and investment spending falls.d. real interest rates rise, and investment spending rises.
14. The combination of a decrease in the required reserve ratio and a decrease in the discount rate woulda. increase the money supply.b. decrease the money supply.c. leave the money supply unchanged.d. have an indeterminate effect on the money supply.
13. Reducing reserve requirements, other things being equal, would tend toa. increase the dollar volume of loans made by the banking system.b. increase the money supply.c. increase aggregate demand.d. do all of the above.e. do a andb, but not c.
12. When the Fed sells a U.S. government bond,a. the volume of loans issued by the banking system increases, and investment will tend to increase.b. the volume of loans issued by the banking system increases, and investment will tend to decrease.c. the volume of loans issued by the banking system
11. If the Fed lowers the discount rate, what will be the effect on the money supply?a. The money supply will tend to increase.b. The money supply will tend to decrease.c. The money supply will not change nor influence an expansion or contraction process.d. Not enough data are given to answer.
10. An open market purchase of government bonds by the Fed would tend to causea. the money supply to fall and bond prices to go up.b. the money supply to rise and bond prices to go up.c. the money supply to rise and bond prices to go down.d. the money supply to fall and bond prices to go down.
9. If the Fed sells a U.S. government bond from a member of the public,a. the banking system has more reserves, and the money supply tends to grow.b. the banking system has fewer reserves, and the money supply tends to grow.c. the banking system has more reserves, and the money supply tends to
8. If the Fed wishes to expand the money supply, ita. buys stocks.b. sells stocks.c. buys government bonds.d. sells government bonds.
7. When the Fed purchases government bonds from a commercial bank, the banka. automatically becomes poorer.b. loses equity in the Fed.c. receives reserves that can be used to make additional loans.d. loses its ability to make loans.
6. If the Fed buys a bond from an individual instead of a bank, what is the effect on the money supply?a. There will be no effect at all.b. The money supply will shrink.c. The money supply will grow by smaller amounts than if the Fed bought from a bank.d. The money supply will grow by larger
5. The monetary policies generated by the Federal Reserve Systema. must be consistent with fiscal policies that are formatted in Congress.b. are sometimes inconsistent with fiscal policies.c. must be ratified by Congress.d. must be approved by the president.
4. In order to increase the rate of growth of the money supply, the Fed cana. raise the discount rate.b. raise the reserve requirement.c. buy government bonds on the open market.d. sell government bonds on the open market.
3. The Fed is institutionally independent. A major advantage of this is thata. monetary policy is subject to regular ratification by congressional votes.b. monetary policy is not subject to control by politicians.c. monetary policy cannot be changed once it has been determined.d. monetary policy
2. Which of the following is not a function of the Federal Reserve System?a. being a lender of last resortb. being concerned with the stability of the banking systemc. serving as a major bank for the central governmentd. setting currency exchange rates
1. The most important role of the Federal Reserve System isa. raising or lowering taxes.b. regulating the supply of money.c. increasing or reducing government spending.d. none of the above.
64. If the “new” economy increases productivity, the Fed, in trying to allow for greater economic growth without creating inflationary pressures, must estimate how much faster productivity is increasing and whether those increases are temporary or permanent. True or False.
63. Most of the effects of a given monetary policy will be on prices rather than RGDP in the short run, if the SRAS is relatively steep over the relevant range. True or False.
62. Given the difficulties of timing stabilization policy, an expansionary monetary policy intended to reduce the severity of a recession may instead add inflationary pressures to an economy that is already overheating. True or False.
61. Even if economists could provide completely accurate economic forecasts of what will happen if macroeconomic policies are unchanged, they could not be certain of how to best promote stable economic growth. True or False.
60. Economic advisers, using sophisticated econometric models, can forecast what the economy will do in the future with reasonable accuracy. True or False.
59. For government policymakers to be sure of doing more good than harm, they need far more accurate and timely information than experts can give them. True or False.
58. The Fed occasionally works to partly offset or even neutralize the effects of fiscal policies that it views as inappropriate. True or False.
57. A macroeconomic problem arises if the federal government’s fiscal decision makers differ with the Fed’s monetary decision makers on policy objectives or targets. True or False.
56. The Fed can precisely control the short-run real interest rates through its monetary policy instruments. True or False.
55. The Fed may be able to predict the impact of its monetary policies on loans by member banks, but the actions of global and nonbanking institutions can serve to offset, at least in part, the impact of monetary policies adopted by the Fed on the money and loanable funds markets. True or False.
54. Banks maintaining excess reserves hinder attempts by the Fed to induce monetary expansion. True or False.
53. When the Federal Reserve wants to induce monetary expansion, it can provide banks with excess reserves; but it cannot force the banks to make loans, thereby creating new money. True or False.
52. When the Fed is trying to constrain monetary expansion, it often has difficulty in getting banks to make appropriate responses. True or False.
51. If the Fed raises bank reserve requirements, sells bonds, and/or raises the discount rate, banks will call in loans that are due for collection, sell secondary reserves, and so on, to obtain the necessary reserves; and in the process of contracting loans, they decrease the supply of money. True
50. The Fed can change the environment in which banks act, but the banks themselves must take the steps necessary to increase or decrease the supply of money. True or False.
49. The length and variability of the impact lag before the effects of monetary policy on output and employment are felt longer and are more variable than for fiscal policy. True or False.
48. The FOMC of the Federal Reserve is unable to act quickly in emergencies. True or False.
47. The cause of hyperinflation is excessive money growth. True or False.
46. If velocity changes but moves in a fairly predictable pattern, the connection between money supply and GDP is still fairly predictable. True or False.
45. The velocity of money is a constant. True or False.
44. Reducing the money supply, other things being equal, will have a contractionary impact on aggregate demand. True or False.
43. Expanding the money supply, unless counteracted by increased hoarding of currency (leading to a decline in V), will have the same type of impact on aggregate demand as an expansionary fiscal policy. True or False.
42. If the money supply increases and the velocity of money does not change, the result will be higher prices (inflation), greater real output of goods and services, or a combination of both. True or False.
41. The magnitude of velocity does not depend on the definition of money that is used. True or False.
40. Velocity equals nominal GDP divided by the money supply. True or False.
39. If individuals are writing lots of checks on their checking accounts and spending currency as fast as they receive it, velocity will tend to be low. True or False.
38. The money supply times velocity equals the price level times real GDP. True or False.
37. The Fed buying bonds on the open market will lead to an appreciation of the dollar, an increase in net exports, and an increase in RGDP in the short run. True or False.
36. If the Fed pursues a contractionary monetary policy when the economy is at full employment, the Fed could cause a recession. True or False.
35. An increase in AD brought about through monetary policy can lead to only a temporary, short-run increase in real GDP if the economy is initially operating at or above full employment, with no long-run effect on output or employment. True or False.
34. A change in the nominal interest rate tends to change the real interest rate by the same amount in the short run because the expected inflation rate is slow to change in the short run. True or False.
33. An expansionary policy can be thought of as an increase in the money supply or an increase in the interest rate. True or False.
32. Focusing on growth in the money supply when the demand for money is changing unpredictably will lead to large fluctuations in the interest rate. True or False.
31. If the demand for money increases, and the Fed wants to keep the interest rate stable, it will have to increase the money supply. True or False.
30. The Fed cannot control both the money supply and the interest rate at the same time. True or False.
29. When the price of bonds rises, the interest rate rises. True or False.
28. The Fed buying bonds on the open market is an example of an expansionary monetary policy. True or False.
27. An increase in the money supply raises the equilibrium nominal interest rate. True or False.
26. At lower interest rates, the quantity of money demanded, but not the demand for money, is greater. True or False.
25. The demand for money, particularly for transactions purposes, is highly dependent on income levels because the transaction volume varies directly with income. True or False.
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