Question

1.The Fed prefers to focus on the interest rate rather than growth in the money supply because

a.it does not like to conduct open market operations.

b.the money supply is too unpredictable.

c.it makes inflation more predictable.

d.money demand is too volatile.

e.it is easier to fix the interest rate than maintain growth in the money supply.

2. Assume the Fed has complete control over the money supply. If the demand for money were greater than the supply of money, we would expect

a.a decrease in the quantity of money demanded and a decrease in the rate of interest.

b.a decrease in the quantity of money demanded and an increase in the rate of interest.

c.an increase in the quantity of money supplied, a decrease in the quantity of money demanded, and an increase in the rate of interest.

d.an increase in the quantity of money demanded and a decline in the rate of interest.

e.a decrease in the quantity of money supplied, a decrease in the quantity of money demanded, and an increase in the rate of interest.

3.If the Fed believes that real GDP is above potential GDP, it will

a. raise interest rates to shift the AD curve to the left and the IA line downward.

b. raise interest rates to shift the IA line downward.

c.raise interest rates to shift the AD curve to the left.

d.lower interest rates to shift the IA line downward.

e.lower interest rates to shift the AD curve to the left.

4. If the inflation rate is equal to the target inflation rate, then the Fed

a.does not have to change monetary policy as long as the rate of inflation remains constant.

b.will only change monetary policy if it wants to change the target inflation rate.

c.will change monetary policy if it feels that aggregate demand is too high or low.

d.does not have to worry about changing monetary policy.

e.will change monetary policy only if it believes that potential GDP is changing.

5.

Answer 1

1) OPTION B IS CORRECT.

2) IF MONEY DEMAND IS GREATER THAN MONEY SUPPLY WE WOULD EXPECT A RISE IN INTEREST RATE AND A DECREASE IN MONEY DEMANDED TO MAINTAIN EQUILIBRIUM. SO OPTION B IS CORRECT.

3) IF REAL GDP IS ABOVE POTENTIAL GDP THERE IS INFLATIONARY GAP. FED WILL RAISE INTEREST RATE TO SHIFT AD TO THE LEFT. SO OPTION C IS CORRECT.

4) IF INFLATION RATE=TARGETED INFLATION RATE, FED WILL NOT CHANGE MONETORY POLICY AS LONG AS THE RATE OF INFLATION REMAINS CONSTANT. OPTION A IS CORRECT.