Fed Goals

5-2 MyEconLab Homework Module Five

  1. Concept: Fed Goals

The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except:

  1. Price stability.
  2. High unemployment.
  3. Economic growth.
  4. Stability of financial markets and institutions
  1. Concept: Fed Manages Money Supply 1

When the Federal Reserve sells bonds as a part of a contractionary monetary policy, there is:

  1. An increase in the money supply and a decrease in the interest rate.
  2. An increase in the money supply and an increase in the interest rate.
  3. A decrease in the money supply and a decrease in the interest rate.
  4. A decrease in the money supply and an increase in the interest rate.
  1. Concept: Fed Policy Target 1

The Federal Reserve cannot affect real GDP directly; therefore, the Fed typically uses the following as its policy target:

  1. Taxes.
  2. Inflation.
  3. Government expenditures.
  4. Interest rates.
  1. Concept: Contractionary Policy 1

Suppose the economy is initially in long-run equilibrium. The Fed decides to sell bonds. In the short-run, this contractionary monetary policy will cause:

  1. A shift from SRAS2 to SRAS1 and a movement to point B, with a lower price level and higher output.
  2. A shift from AD2 to AD1 and a movement to point D, with a lower price level and lower output.
  3. A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.
  4. A shift from SRAS1 to SRAS2 and a movement to point A, with a higher price level and the same output.
  1. Concept: Contractionary Policy 1

Suppose the economy is initially in long-run equilibrium. The Fed decides to increase the required reserve ratio. In the short-run, this contractionary monetary policy will cause:

  1. A shift from AD2 to AD1 and a movement to point D, with a lower price level and lower output.
  2. A shift from SRAS2 to SRAS1 and a movement to point B, with a lower price level and higher output.
  3. A shift from SRAS1 to SRAS2 and a movement to point A, with a higher price level and the same output.
  4. A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.
  1. Concept: Expansionary Monetary Policy 1

Suppose the economy is initially in long-run equilibrium. The Fed enacts a policy to decrease the discount rate. In the short-run, this expansionary monetary policy will cause:

  1. A shift from SRAS1 to SRAS2 and a movement to point B, with a lower price level and higher output.
  2. A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.
  3. A shift from AD2 to AD1 and a movement to point C, with a lower price level and the same output.
  4. A shift from SRAS2 to SRAS1 and a movement to point D, with a higher price level and lower output.
  1. Concept: Monetary Policy Data Table

Consider the following table:

Year

Potential GDP

Real GDP

Price Level

2012

$14.914.9

trillion

$14.914.9

trillion

110

2013

$15.3 trillion

$15.215.2

trillion

112112

What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium?

  1. The Fed will pursue a contractionary fiscal policy.
  2. The Fed will pursue an expansionary monetary policy.
  3. The Fed will pursue an expansionary fiscal policy.
  4. The Fed will pursue a contractionary monetary policy.

If the Fed's policy is successful, what is the effect on the followingindicators?

Actual real GDP: increases

Potential real GDP: does not change

Price level: increases

Unemployment: decreases

  1. Concept: Phillips Curve Shape

The long - run Phillips curve is:

  1. positively sloped.
  2. vertical at the natural rate of unemployment.
  3. the same as the short-run aggregate supply curve.
  4. horizontal
  1. Concept: Rational Expectations 1

According to Lucas and Sargent, workers and firms have rational expectations, and therefore if the Fed pursues a contractionary

Monetary policy:

  1. agents will immediately adjust their expectations of inflation down.
  2. agents will cause an increase in the natural rate of unemployment.
  3. agents will not change their expectations.
  4. agents will cause an decrease in the natural rate of unemployment.
  1. Concept: Fed Flights Inflation

Suppose the inflation rate has been at 5 percent for several years. The Fed decides to increase the discount rate which will reduce aggregate demand and reduce the expected inflation rate.

Using the line tool, draw the new short-run Phillips curve on the graph. Label this line 'SRPC2'.

Note: if you are not prompted for a label, you have used the wrong drawing tool.

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