Chapter 9 - Policy Preview

Question 1

Who is the who of stabilization policy?

Answer 1

Central bank which is the Federal Reserve in the US

Question 2

True or False: policy is set by vote of the Fed’s Open Market Committee

Answer 2

True

Question 3

What does the Fed Reserve do?

Answer 3

set a key interest rate in the economy - the federal funds rate

Question 4

True or False: Raising interest rates tend to cool off the economy and lowering rates warms it up

Answer 4

True

Question 5

True or False: Lowering interest rates encourage greater investment spending and greater spending on some types of consumption, thereby increasing aggregate demand

Answer 5

True

Question 6

True or False: Monetary policy works through moving aggregate demand with little or no influence on aggregate supply

Answer 6

True

Question 7

Why do central banks choose short-run policy?

Answer 7

keep economic activity high and inflation low

Question 8

What are the conflicts of the short-run policy goals

Answer 8

increasing aggregate demand increases economic activity but also leads to higher inflation

Question 9

True or False: tge Fed can very effectively limit inflation but can do relatively little to increase GDP

Answer 9

True

Question 10

True or False: central bank policies slide the aggregate demand curve up and down along the aggregate supply curve, changing price but not output.

Answer 10

True

Question 11

How is the aggregate supply curve in the short run? and what does this mean for central banks

Answer 11

relatively flat and central banks can easily stimulate economic activity

Question 12

True or False: Central banks focus on stabilizing economic activity around sustainable goal, rather than increasing economic activity AND many central banks have moved toward inflation targeting, in which almost all the weight is put on hitting a low and consistent inflation target and very little weight is place on output

Answer 12

True

Question 13

What does FOMC stand for?

Answer 13

Federal reserve open market committee

Question 14

When does FOMC meet and what do they meet for?

Answer 14

every 6 weeks and sets the federal funds rate

Question 15

True or False: FOMC likes to surprise markets so they do not send advance signals of the likely future path of interest rates

Answer 15

False

Question 16

How is the interest rate set by Fed?

Answer 16

buying or selling treasury bills to lower or raise the interest rates.

Question 17

True or False: lowering interest rates means increasing money supply

Answer 17

true

Question 18

What does the increase in money supply lead to?

Answer 18

Higher prices

Question 19

True or False: higher interest rates raise the opportunity cost of purchasing durable goods for investment and consumption; thereby reducing aggregate demand

Answer 19

True

Question 20

True or False: if Fed raises interest rates through restrictive monetary policy, the AD-curve shifts to the left

Answer 20

True

Question 21

True or False: When the Fed wants to stimulate the economy, it increases interest rates

Answer 21

False