ECO 4223 - MONEY AND BANKING EXAM
QUESTIONS WITH CORRECT ANSWERS
A surprise cut in the target federal funds rates lowers other interest rates by more than the
direct effect of the cut in the 1-day interest rate because - CORRECT ANSWERSthe cut in the
federal funds rate reduces expected future interest rates
The investment multiplier is the - CORRECT ANSWERSthe effect of firms' earnings on
investment.
An increase in the target federal funds rate reduces investment for all of the following reasons
except the fact that the increased federal funds rates causes - CORRECT ANSWERSan
appreciated exchange rate.
A tightening of monetary policy by the Fed reduces investment because - CORRECT
ANSWERSbanks reduce lending.
A countercyclical policy response to a positive expenditure shock when there are time lags -
CORRECT ANSWERSwill reduce output in a future year.
If a surprise increase in the target federal funds rate causes market participants to expect
additional increases in the target rate, the effect of the increase of the target rate on short-term
interest rates will be - CORRECT ANSWERSan increase greater than the announced increase in
the target rate.
A countercyclical policy that offsets an adverse expenditure shock is - CORRECT ANSWERSa
reduction of real interest rates. (An adverse expenditure shock shifts the AE curve to the left. A
cut in the real interest rate offsets this type of shock, while all other listed policy actions offset a
positive expenditure shock.)
, If Federal Reserve officials give speeches signaling that they intend to increase the target federal
funds rate at their next meeting - CORRECT ANSWERSmarket interest rates will increase before
the meeting.
A stock market crash - CORRECT ANSWERSreduces wealth and shifts the AE curve to the left.
Investment will increase when - CORRECT ANSWERSasset prices increase firms' net worth.
The Federal Reserve's goals include - CORRECT ANSWERSstable prices. ( stable prices, moderate
longterm interest rates, maximum employment (natural unemployment) and maximum
sustainable growth.)
A policy based on Taylor's rule can be described as - CORRECT ANSWERSleaning against the
wind.
If monetary policy in an AE/PC model with time lags is made using Taylor's rule, an adverse
supply shock results is - CORRECT ANSWERSan immediate increase in the real interest rate, with
output falling one year later and inflation falling two years later.
A argument favoring zero inflation is that - CORRECT ANSWERSinflation's interaction with the
tax system discourages saving
The current policy of the Federal Reserve System is to have - CORRECT ANSWERSan implicit
inflation target.
The Fed's goal of maximum sustainable output growth is most consistent with its goal of -
CORRECT ANSWERSmaximum employment. (natural employment)
QUESTIONS WITH CORRECT ANSWERS
A surprise cut in the target federal funds rates lowers other interest rates by more than the
direct effect of the cut in the 1-day interest rate because - CORRECT ANSWERSthe cut in the
federal funds rate reduces expected future interest rates
The investment multiplier is the - CORRECT ANSWERSthe effect of firms' earnings on
investment.
An increase in the target federal funds rate reduces investment for all of the following reasons
except the fact that the increased federal funds rates causes - CORRECT ANSWERSan
appreciated exchange rate.
A tightening of monetary policy by the Fed reduces investment because - CORRECT
ANSWERSbanks reduce lending.
A countercyclical policy response to a positive expenditure shock when there are time lags -
CORRECT ANSWERSwill reduce output in a future year.
If a surprise increase in the target federal funds rate causes market participants to expect
additional increases in the target rate, the effect of the increase of the target rate on short-term
interest rates will be - CORRECT ANSWERSan increase greater than the announced increase in
the target rate.
A countercyclical policy that offsets an adverse expenditure shock is - CORRECT ANSWERSa
reduction of real interest rates. (An adverse expenditure shock shifts the AE curve to the left. A
cut in the real interest rate offsets this type of shock, while all other listed policy actions offset a
positive expenditure shock.)
, If Federal Reserve officials give speeches signaling that they intend to increase the target federal
funds rate at their next meeting - CORRECT ANSWERSmarket interest rates will increase before
the meeting.
A stock market crash - CORRECT ANSWERSreduces wealth and shifts the AE curve to the left.
Investment will increase when - CORRECT ANSWERSasset prices increase firms' net worth.
The Federal Reserve's goals include - CORRECT ANSWERSstable prices. ( stable prices, moderate
longterm interest rates, maximum employment (natural unemployment) and maximum
sustainable growth.)
A policy based on Taylor's rule can be described as - CORRECT ANSWERSleaning against the
wind.
If monetary policy in an AE/PC model with time lags is made using Taylor's rule, an adverse
supply shock results is - CORRECT ANSWERSan immediate increase in the real interest rate, with
output falling one year later and inflation falling two years later.
A argument favoring zero inflation is that - CORRECT ANSWERSinflation's interaction with the
tax system discourages saving
The current policy of the Federal Reserve System is to have - CORRECT ANSWERSan implicit
inflation target.
The Fed's goal of maximum sustainable output growth is most consistent with its goal of -
CORRECT ANSWERSmaximum employment. (natural employment)
