Question 1

Everything else held constant,an autonomous tightening of monetary policy will cause
A)the quantity of aggregate demand to increase.
B)the quantity of aggregate demand to decrease.
C)aggregate demand to increase.
D)aggregate demand to decrease.

Accepted Answer

An autonomous tightening of monetary policy involves increasing interest rates, which in turn reduces investment and consumption spending. This leads to a decrease in aggregate demand. Therefore, the correct answer is D.

Question 2

An autonomous easing of monetary policy
A)causes an upward movement along the monetary policy curve.
B)causes a downward movement along the monetary policy curve.
C)shifts the monetary policy curve upward.
D)shifts the monetary policy curve downward.

Accepted Answer

An autonomous easing of monetary policy, such as lowering interest rates or increasing the money supply, shifts the monetary policy curve downward. This is because the policy makes monetary conditions more accommodative, effectively lowering the interest rate at any given level of income or inflation, which is represented by a downward shift in the curve.

Question 3

When the financial crisis started in August 2007,inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate,which indicated that
A)the Fed pursued an autonomous monetary policy tightening.
B)the Fed pursued an autonomous monetary policy easing.
C)the Fed had an automatic negative response to inflation based on the Taylor rule.
D)the Fed had an automatic positive response to inflation based on the Taylor rule.

Accepted Answer

The Fed began an aggressive easing of the federal funds rate in response to the rising inflation and the looming financial crisis. This indicates that the Fed pursued an autonomous monetary policy easing. It was not an automatic response based on the Taylor rule.

Question 4

Everything else held constant,an autonomous easing of monetary policy will cause
A)the quantity of aggregate demand to increase.
B)the quantity of aggregate demand to decrease.
C)aggregate demand to decrease.
D)aggregate demand to increase.

Accepted Answer

Autonomous easing of monetary policy means reducing interest rates or increasing the money supply through open market operations, which will lead to a decrease in borrowing costs and an increase in consumption and investment. As a result, the aggregate demand will increase due to increased consumer and investment spending.

Question 5

The Taylor Principle states that central banks raise nominal rates by ________ than any rise in expected inflation so that real interest rates ________ when there is a rise in inflation.
A)less;rise
B)more;fall
C)less;fall
D)more;rise

Accepted Answer

The Taylor Principle states that central banks raise nominal rates by more than any rise in expected inflation so that real interest rates rise when there is a rise in inflation. This is because higher real interest rates reduce inflationary pressures and encourage saving and investment. Therefore, the best choice is (D) more; rise.

Question 6

When the financial crisis started in August 2007,inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate,which indicated that
A)there was an upward movement along the monetary policy curve.
B)there was a downward movement along the monetary policy curve.
C)the monetary policy curve shifted upward.
D)the monetary policy curve shifted downward.

Accepted Answer

The answer of When the financial crisis started in August...

Question 7

Inflationary pressures caused the FOMC to increase the federal funds rate by ¼ of a percentage point in June 2004,and by exactly the same amount at every subsequent FOMC meeting through June of 2006.Theses actions
A)caused an upward movement along the monetary policy curve.
B)caused a downward movement along the monetary policy curve.
C)shifted the monetary policy curve upward.
D)shifted the monetary policy curve downward.

Accepted Answer

The answer of Inflationary pressures caused the FOMC to increase...

Question 8

The monetary policy (MP)curve indicates the relationship between
A)the Federal Funds Rate and the real interest rate.
B)the Federal Funds Rate and the inflation rate.
C)the inflation rate and the expected inflation rate.
D)the real interest rate the central bank sets and the inflation rate.

Accepted Answer

The monetary policy curve illustrates the relationship between the real interest rate that the central bank sets and the inflation rate, showing how policy adjustments are made in response to changes in inflation.

Question 9

The Fed's policy actions of reacting to higher inflation by raising the real interest rate during 2004-2006 were
A)upward movements along the monetary policy curve.
B)downward movement along the monetary policy curve.
C)upward shifts of the monetary policy curve.
D)downward shifts of the monetary policy curve.

Accepted Answer

When the Fed raised the real interest rate in response to higher inflation during 2004-2006, it resulted in upward movements along the monetary policy curve. This is because the Fed's actions were based on the same monetary policy curve, but with different real interest rates.

Question 10

The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to ________ real interest rates,thereby ________ the level of equilibrium aggregate output. ,everything else held constant.
A)raise;lowering
B)raise;raising
C)reduce;lowering
D)reduce;raising

Accepted Answer

A higher inflation rate typically leads the central bank to raise real interest rates as a measure to control inflation. Higher real interest rates make borrowing more expensive, which tends to reduce consumption and investment, thereby lowering the level of equilibrium aggregate output.

Question 11

The upward slope of the MP curve indicates that
A)the central bank lowers real interest rates when inflation rises.
B)the central bank raises real interest rates when inflation falls.
C)the central bank raises nominal interest rates when inflation rises.
D)the central bank raises real interest rates when inflation rises.

Accepted Answer

The upward slope of the MP (monetary policy) curve indicates that the central bank raises real interest rates when inflation rises. This is because higher interest rates help to curb inflation by reducing borrowing and spending, which in turn lowers aggregate demand and puts downward pressure on prices. Therefore, the central bank will typically raise interest rates in response to higher inflation, and this is reflected in the upward slope of the MP curve.

Question 12

The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise ________ interest rates,thereby ________ the level of equilibrium aggregate output. ,everything else held constant.
A)real;lowering
B)real;raising
C)nominal;lowering
D)nominal;raising

Accepted Answer

The answer of The aggregate demand curve is downward sloping...

Question 13

Everything else held constant,an increase in government spending will cause
A)aggregate demand to increase.
B)aggregate demand to decrease.
C)the quantity of aggregate demand to increase.
D)the quantity of aggregate demand to decrease.

Accepted Answer

An increase in government spending directly increases the government expenditures component of aggregate demand. This will cause an increase in overall aggregate demand, assuming everything else is held constant.

Question 14

An autonomous tightening of monetary policy
A)causes an upward movement along the monetary policy curve.
B)causes a downward movement along the monetary policy curve.
C)shifts the monetary policy curve upward.
D)shifts the monetary policy curve downward.

Accepted Answer

An autonomous tightening of monetary policy shifts the monetary policy curve upward, reflecting a higher interest rate at any given level of income or inflation, indicating a more restrictive policy stance.

Question 15

Because prices are slow to move in the short-run,when the Federal Reserve lowers the federal funds rate
A)nominal interest rates rise.
B)real interest rates fall.
C)inflation falls.
D)real interest rates rise.

Accepted Answer

When the Federal Reserve lowers the federal funds rate, nominal interest rates may fall in the short-run, but prices are slow to adjust, leading to a decrease in real interest rates.

Question 16

Because prices are sticky in the short-run,when the Federal Reserve raises the federal funds rate
A)nominal interest rates fall.
B)real interest rates rise.
C)inflation falls.
D)real interest rates fall.

Accepted Answer

When the Federal Reserve raises the federal funds rate, nominal interest rates also rise. However, because prices are sticky in the short-run, real interest rates (which take into account inflation) also rise, as the increase in nominal interest rates outpaces any increase in inflation. Therefore, the correct answer is B, real interest rates rise.

Question 17

In deriving the aggregate demand curve a ________ inflation rate leads the central bank to ________ real interest rates,thereby ________ the level of equilibrium aggregate output.
A)higher;raise;lowering
B)lower;raise;lowering
C)higher;lower;lowering
D)higher;lower;raising

Accepted Answer

A higher inflation rate typically leads the central bank to raise real interest rates to control inflation, which in turn lowers the level of equilibrium aggregate output by reducing spending and investment.

Question 18

Based on the Taylor Principle,a central bank's endogenous response of raising interest rates when inflation rises
A)causes an upward movement along the monetary policy curve.
B)causes a downward movement along the monetary policy curve.
C)shifts the monetary policy curve upward.
D)shifts the monetary policy curve downward.

Accepted Answer

The Taylor Principle implies that when inflation rises, the central bank should raise interest rates more than one-for-one with the increase in inflation. This means that for each percentage increase in inflation, the central bank should raise interest rates by more than one percentage point. As a result, this causes an upward movement along the monetary policy curve, as higher interest rates lead to tighter monetary conditions and lower inflation. This is consistent with the conventional view of monetary policy, where higher interest rates reduce aggregate demand and inflationary pressures.

Question 19

Based on the Taylor Principle,a central bank's endogenous response of decreasing interest rates when inflation falls
A)causes an upward movement along the monetary policy curve.
B)causes a downward movement along the monetary policy curve.
C)shifts the monetary policy curve upward.
D)shifts the monetary policy curve downward.

Accepted Answer

According to the Taylor Principle, a central bank should increase interest rates more than one-for-one with an increase in inflation, and decrease interest rates less than one-for-one with a decrease in inflation. This means that when inflation falls, the central bank will endogenously respond by decreasing interest rates, but by a smaller magnitude than if inflation had increased. Therefore, this will cause a downward movement along the monetary policy curve, as the central bank is lowering interest rates but not as aggressively as it would in a scenario where inflation was rising.

Question 20

Everything else held constant,an autonomous easing of monetary policy will cause
A)aggregate demand to increase.
B)aggregate demand to decrease.
C)the quantity of aggregate demand to increase.
D)the quantity of aggregate demand to decrease.

Accepted Answer

An autonomous easing of monetary policy will reduce interest rates, making borrowing cheaper, increasing investment and consumption expenditure, which will lead to an increase in aggregate demand.

Quiz 28: The Monetary Policy and Aggregate Demand Curves

Everything else held constant,an autonomous tightening of monetary policy will cause

An autonomous easing of monetary policy

When the financial crisis started in August 2007,inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate,which indicated that

Everything else held constant,an autonomous easing of monetary policy will cause

The Taylor Principle states that central banks raise nominal rates by than any rise in expected inflation so that real interest rates when there is a rise in inflation.

When the financial crisis started in August 2007,inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate,which indicated that

Inflationary pressures caused the FOMC to increase the federal funds rate by ¼ of a percentage point in June 2004,and by exactly the same amount at every subsequent FOMC meeting through June of 2006.Theses actions

The monetary policy (MP) curve indicates the relationship between

The Fed's policy actions of reacting to higher inflation by raising the real interest rate during 2004-2006 were

The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to real interest rates,thereby the level of equilibrium aggregate output. ,everything else held constant.

The upward slope of the MP curve indicates that

The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise interest rates,thereby the level of equilibrium aggregate output. ,everything else held constant.

Everything else held constant,an increase in government spending will cause

An autonomous tightening of monetary policy

Because prices are slow to move in the short-run,when the Federal Reserve lowers the federal funds rate

Because prices are sticky in the short-run,when the Federal Reserve raises the federal funds rate

In deriving the aggregate demand curve a inflation rate leads the central bank to real interest rates,thereby the level of equilibrium aggregate output.

Based on the Taylor Principle,a central bank's endogenous response of raising interest rates when inflation rises

Based on the Taylor Principle,a central bank's endogenous response of decreasing interest rates when inflation falls

Everything else held constant,an autonomous easing of monetary policy will cause