Question

Question 1

If the Fed decreased the discount rate,

	a.	the earnings of the Fed would increase.
	b.	commercial banks probably would reduce their excess reserves and be more willing to extend additional loans.
	c.	the prime interest rate would automatically decline.
	d.	in incentive of commercial banks to borrow from the Fed would be reduced.

Question 2

Monetary neutrality implies that in the long run:

	a.	monetary policy does not affect the level of economic activity
	b.	aggregate supply is independent of monetary policy
	c.	changing the money supply does not have any effect on the aggregate price level
	d.	aggregate demand is independent from monetary policy

Question 3

1. To close a recessionary gap using monetary policy, the Federal Reserve should ________ the money supply to ________ investment and consumer spending and shift the aggregate demand curve to the ________.

   	a.	increase; increase; left
   	b.	decrease; decrease; left
   	c.	increase; increase; right
   	d.	decrease; decrease; right

Question 4

The Taylor rule for monetary policy:

	a.	provides guidance for setting a federal funds rate target.
	b.	says that interest rates often should be negative.
	c.	provides guidance on timing of monetary policy with fiscal policy
	d.	refers to the monetary rule

Question 5

According to the Classical Model:

	a.	the aggregate supply curve is horizontal.
	b.	increases in the money supply lead to proportional increases in the price level but no change in real output
	c.	increases in the money supply lead to proportional changes in output, but no change in the price level.
	d.	we are all dead in the long run

Question 6

Macroeconomic policy activism:

	a.	involves the use of political activism made popular by liberal economists
	b.	mandates a balanced government budget.
	c.	involves the use of monetary and fiscal policy to smooth out the business cycle.
	d.	was the tool used by classical economists.

Answer 1

Question 1: (c) the prime interest rate would automatically decline.

If Fed decreased the discount rate, it does not directly affect the stock market. The only true direct effect is that borrowing money from the Fed is less expensive now for banks. Because it costs them less to borrow money, financial institutions often decreases the interests rates they charge.

Question 2: (a) monetary policy does not affect the level of economic activity.

This is because due to monetary neutrality, changes in money supply increases the price level in the long run but the overall it has no real affect on the economy.

Question 3: (c) increase; increase; right

This is because during recession, the aggregate demand falls and in order to rise this Fed increases the money supply in the economy to increase the disposable income of the consumers. So Fed increases the money to increase the investment and consumer spending and shift the aggregate demand curve to the right.

Question 4: (d) refers to monetary rule.

The taylor rule for monetary policy suggests that Fed should raise the rates when inflation is above target or when GDP growth is too high and above potential and should lower the rates when inflation is below the target level or when GDP growth is too slow or below potential.