SOLVED

21) The economy suffered a mild recession in 2001. Despite the recession, home sales and durable goods sales remained high. Which of the following is a plausible explanation? A) The Fed’s pursuit of contractionary policy stimulated these markets. B) The Fed caused a reduction in the federal funds rate to its lowest level in 40 years. C) Rising inflation encouraged many to invest in the real estate market. D) Home building and consumer durable purchases are always high during a recession. 22) Which of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve A) does not try to eliminate recessions, but instead focuses on preventing inflation. B) can fine tune the economy and realistically hope to keep the economy from experiencing recessions. C) cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be. D) cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions. 23) Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply A) lowers the interest rate, and firms increase investment spending. B) causes people to spend more because they know prices will rise in the future. C) raises the interest rate and consumers decrease spending on durable goods. D) lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports. 24) If the Federal Reserve raises or lowers interest rates too late, it could result in a ________ policy that destabilizes the economy. A) fiscal B) budgetary C) procyclical D) countercylical 25) Monetary policy could be procyclical if the Federal Reserve A) is late recognizing that a recession has begun and conducts expansionary monetary policy. B) is quick to recognize that a recession has begun and conducts expansionary monetary policy. C) is late recognizing that a recession has begun and does not conduct expansionary monetary policy. D) is quick to recognize that a recession has begun and does not conduct expansionary monetary policy. 26) When calculating GDP, the Bureau of Economic Analysis revises its quarterly data A) a total of one time. B) a total of two times. C) a total of three times. D) many times over the next several years. 27) Changes in interest rates affect all four components of aggregate demand. 28) Expansionary monetary policy refers to the Fed’s increasing the money supply and increasing interest rates to increase real GDP. 29) When the Federal Reserve increases the money supply, people spend more because interest rates fall. 30) What actions should the Fed take if it believes the economy is about to fall into recession? 31) If the Fed orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: a.The money supply b.Interest rates c.Investment d.Consumption e.Net Exports a.The money supply decreases b.Interest rates rise c.Investment decreases d.Consumption decreases e.Net exports decrease 32) Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.