chapter 16.3

Question 1

Which of the following would cause the Fed to raise interest rates even if inflation is at the target rate?

a reduction in government purchases

an increase in household wealth

a reduction in business confidence

an increase in imports

an increase in potential GDP

Answer 1

an increase in household wealth

Question 1

If the Fed believes that real GDP is below potential GDP, it will

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

None of the above are correct.

lower interest rates to shift the IA line downward.

lower interest rates to shift the AD curve to the right and the IA line downward.

lower interest rates to shift the AD curve to the right.

Answer 1

lower interest rates to shift the AD curve to the right.

Question 2

When the actual and target rate of inflation are equal, the Fed will change interest rates only if it wants to change the target rate of inflation.

true
false

Answer 2

false

Question 3

The Fed’s interest rate decisions depend on the level of

investment and the level of inflation.

potential GDP and the level of inflation.

inflation and the output gap.

investment and the level of potential GDP.

real GDP and the level of potential GDP.

Answer 3

inflation and the output gap.

Question 4

An increase in the output gap will shift the monetary policy rule line to the right.

true
false

Answer 4

true