Question 1

When the FOMC decides to pursue a contraction policy which of the following will happen?

The Fed Funds Rate will increase through a sale of government securities in the secondary market.
The Discount Rate will fall as government securities are purchased in the primary market.
Interest rates will increase as the government borrowing crowds out private borrowers.
Nominal interest rates will rise as real interest rates fall due to the sale of government bonds in the primary market.

Question 2

Economists have long recognized the importance of controlling inflationary expectations. As described in the assigned readings, in the past two decades how have monetary policy authorities attempted to control inflationary expectations?

Explicit inflation targets.
Balanced budget amendments to state constitutions.
Maintaining the gold standard.
Imposition of the monetary rule.

Question 3

If the Fed wants to fight inflation, in a Keynesian approach, what should it do in terms of Open Market Operations, Aggregate Supply/Aggregate Demand, and Phillips Curve?

Sell bonds, shift AD back, and slide down the Phillips Curve
Sell bonds, shift AD outward, and slide up the Phillips Curve
Buy bonds, shift AD back, and slide up the Phillips Curve
Buy bonds, shift AD back, and slide down the Phillips Curve
Sell bonds, shift AD outward, and slide down the Phillips Curve

Question 4

Henry is ill informed about the structure of the US economy and US financial markets. He states, "The Federal Reserve is a secret government controlled by one world government." To help Henry out, you might want to point out to him that is the Federal Reserve is:

owned by member banks who in turn are owned by stockholders.
a division of the US Treasury and is thus part of the United States Federal government.
controlled by the White House since it appoints the Fed Chair and all of the Governors.
answerable to the House of Representatives since the Chair must be approved by a majority of the members of the House.

Question 5

The European Central bank is concerned about the possibility of deflation. What should it do to stop deflation?

Buy bonds thus increasing the money supply.
Increase the level of government spending by increasing the money supply.
Sell bonds thus decreasing the money supply.
Decrease the level of government spending by increasing the money supply.

Question 6

What was the main purpose of the Fedâ€™s Term Auction Facility?

Increase the amount of liquidity in financial markets.
Reduce the rate of inflation.
Increase market interest rates.
Reduce the size of bank borrowing at the Fed.

Question 7

If the Fedâ€™s open market committee is worried about "weak labor market conditions", which actions can you expect?

A lower Fed Funds target.
An increase in the discount rate.
An increase in the required reserve ratio.
An increase in the size of the government budget deficit.

Question 8

According to the simple deposit multiplier, what should the European Central Bank do if it wishes to increase the money supply by â‚¬100m, if the required reserve ratio is 20%?

Buy â‚¬20m of bonds
Sell â‚¬20m of bonds
Buy â‚¬5m of bonds
Sell â‚¬5m of bonds
Sell â‚¬500m of bonds

Question 9

How would you properly explain, to a subordinate who has no training in economics, why there is a difference between money and currency?

Explain that currency issued by the government need not be money especially if people donâ€™t accept it in exchange for goods and services.
Point out that the value of a currency is determined in the foreign exchange market, while the value of money is determined by market interest rates.
Demonstrate to them that money is a financial asset, while currency is something issued by the government.
Explain that for money to be currency it must be accepted by the government in payment of taxes.

Question 10

The fiscal policy followed by the Reagan Administration and the Thatcher Administration in the UK were so radical because they sought to:

Shift the short run and long run aggregate supply curves instead of the aggregate demand curve.
Enrich the very wealthy at the cost of the poor by decreasing the supply of loanable funds.
Control inflation by shifting the short run aggregate supply curve back or to the left.
Create negative intergenerational transfers by decreasing the value of their country's currency through higher interest rates.

Question 1 When the FOMC decides to pursue a contraction policy...