Deck 14: Monetary Policy

Question 1

Which of the following is one of the Fed's policy goals?

A) monetary base
B) help the President win reelection
C) exchange rate
D) price level stability

Answer 1

D

Question 2

Federal Reserve monetary policy goals include

A) zero percent unemployment in the domestic economy.
B) discount rate stability
C) price level stability
D) ensuring banks can meet their profit maximization objectives.

Answer 2

C

Question 3

Federal Reserve Chairman Ben Bernanke has defined price stability as occurring when core inflation is

A) between 1 and 2 percent.
B) exactly 0 percent.
C) less than 10 percent.
D) used in wage- setting contracts.

Answer 3

A

Question 4

In the short run, the Federal Reserve faces a tradeoff between

A) interest rates and unemployment.
B) economic growth and employment.
C) inflation and price stability.
D) inflation and real GDP.

Question 5

If core inflation is 2 percent, then most economists believe that

A) the economy will operate optimally because this inflation rate is equal to the real interest rate.
B) this inflation rate is essentially the same as price stability.
C) workers will be hurt because money wage rates are sticky.
D) inflation has to drop 2 percent to reach price stability.

Question 6

A goal of monetary policy is .

A) influencing the federal funds rate
B) using the discount rate
C) measuring M1
D) achieving price level stability

Question 7

The Federal Reserve monetary policy goals of maximum employment means

A) cyclical unemployment should not necessarily be minimized.
B) keeping the unemployment rate close to the natural unemployment rate.
C) a zero percent natural unemployment rate.
D) a zero percent unemployment rate.

Question 8

Which of the following are NOT Federal Reserve monetary policy goals?

A) maximum employment
B) price level stability
C) moderate long- term interest rates
D) zero percent unemployment.

Question 9

The output gap is the

A) difference in graduation levels between high school and college.
B) percentage deviation of real GDP from potential GDP.
C) difference between actual inflation and core inflation.
D) percentage increase in the economic growth rate of real GDP.

Question 10

The principal aim of monetary policy is to

A) change tax rates to boost saving.
B) change tax rates to boost investment.
C) keep inflation in check.
D) change government spending to spur innovation.

Question 11

The principal goal of monetary policy is to

A) keep the budget deficit small and/or the budget surplus large.
B) reverse the productivity growth slowdown
C) lower taxes
D) maintain low inflation

Question 12

The Fed's goals include

A) the monetary base.
B) the federal funds rate.
C) open market operations.
D) price level stability.

Question 13

To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors the
But pays closest attention to the .

A) core inflation rate; CPI inflation rate
B) GDP price deflator; CPI
C) CPI; core inflation rate
D) core CPI; core inflation rate

Question 14

The core inflation rate, measured by the core PCE deflator, measures changes in the

A) prices of all consumer goods except food and fuel.
B) price of only two consumer goods: food and fuel
C) prices of all consumer goods except health care.
D) prices of all consumer goods

Question 15

Which of the following is the most important Federal Reserve monetary policy goal?

A) price level stability
B) minimum unemployment.
C) moderate long- term interest rates
D) maximum employment

Question 16

When the output gap is positive, it represents gap, and when it is negative, it represents
Gap)

A) an employment;an unemployment
B) an inflationary;a recessionary
C) a recessionary; an inflationary
D) an inflationary; an employment

Question 17

Ben Bernanke has been more precise than his predecessor, suggesting a core inflation rate of
Per year is the same as price stability.

A) 0 to 1 percent
B) 0 to 2 percent
C) 1 to 2 percent
D) 1 to 4 percent

Question 18

Ben Bernanke has suggested that a core inflation rate of is the equivalent of price stability.

A) zero
B) less than zero
C) between 1 percent to 2 percent
D) less than 5 percent.

Question 19

In the short run, the Federal Reserve faces a tradeoff between

A) inflation and unemployment.
B) real GDP growth and potential GDP growth.
C) inflation and price stability.
D) economic growth and employment.

Question 20

Monetary policy goals include
I) maximum employment.
II) stable prices
III) moderate long- term interest rates.

A) I and II only.
B) I only.
C) II only.
D) I, II, and III.

Question 21

The current chairman of the Federal Reserve is

A) Alan Greenspan.
B) Paul Volcker.
C) Ben Bernanke.
D) Milton Friedman.

Question 22

Monetary policy is controlled by

A) Congress.
B) the Federal Reserve.
C) the president.
D) the Treasury Department.

Question 23

Which of the following is a potential monetary policy instrument for the Fed?

A) income tax rates
B) profit rates
C) induced tax rates
D) federal funds rate

Question 24

Usually, the Federal Reserve changes its target for the federal funds rate in units of

A) 1 percentage point.
B) 2 percentage points.
C) 1/4 of 1 percentage point.
D) 5 percentage points.

Question 25

An instrument rule is based on of the economy while a targeting rule is based on
Of the economy.

A) the current state; a forecast
B) the previous state; the current state
C) the current state; the previous state
D) a forecast; the current state

Question 26

The sole issuer of the monetary base is the

A) President.
B) Congress.
C) Federal Reserve.
D) President and Congress.

Question 27

The federal funds rate is the interest rate

A) on the 3- month Treasury bill.
B) on the 30- year treasury bond.
C) also known as the prime rate.
D) banks charge each other on overnight loans.

Question 28

The Federal Open Market Committee meets times per year.

A) 8
B) 26
C) 2
D) 52

Question 29

To conduct monetary policy the Fed can target

A) either the federal funds rate or the monetary base.
B) both the monetary base and the federal funds rate simultaneously.
C) neither the federal funds rate nor the monetary base.
D) only the interest rate.

Question 30

The federal funds rate is of the Fed.

A) an objective
B) a goal
C) a technique
D) the monetary policy instrument

Question 31

Currently the Fed targets

A) both the monetary base and the federal funds rate simultaneously.
B) the exchange rate.
C) the price level.
D) the federal funds rate.

Question 32

Price level stability

A) was attained by the Fed for the period between 1973 and 1984.
B) has no relationship to growth in potential GDP.
C) is thought by most economists to be reached with a measured inflation rate of between 0 and 3 percent a year.
D) is the most important tool of the Federal Reserve.

Question 33

The monetary policy instrument the Federal Reserve chooses to use is the

A) discount rate.
B) fixed exchange rate.
C) flexible exchange rate.
D) federal funds rate.

Question 34

The output gap can be used to estimate the extend to which the Fed misses its goal of

A) monetary policy.
B) moderate long- term interest rates.
C) maximum employment.
D) stable prices.

Question 35

Which of the following bodies are responsible for the conduct of monetary policy?

A) the Federal Reserve System
B) Congress and the President, jointly
C) Congress
D) the President

Question 36

Monetary policy could be enacted on which of the following bases?
I) Instrument rule
II) Fiscal- related rule.
III) Targeting rule.

A) I, II, and III
B) I only
C) I and II
D) I and III

Question 37

Read the following statements and determine if they are true or false.
I) The Federal Reserve's monetary policy must be approved by the President of the United States.
II) The Federal Reserve Board of Directors meets approximately every six months to review the sta the economy and determine monetary policy.

A) I is true and II is false.
B) I is false and II is true.
C) I and II are both false.
D) I and II are both true.

Question 38

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeco goals?
I) government expenditures on goods and services and taxes
II) the government budget deficit or surplus
III) changes in the federal funds rate

A) I and II
B) II only
C) II and III
D) III only

Question 39

By targeting the _ _ the Federal Reserve allows the _ _ to find it's own equilibrium value.

A) federal funds rate; quantity of money
B) exchange rate; federal funds rate
C) quantity of money; exchange rate
D) exchange rate; quantity of money

Question 40

The monetary policy instrument the Federal Reserve choose to use is the

A) exchange rate.
B) federal funds rate.
C) required reserves rate.
D) quantity of money.

Question 41

Given the federal funds rate (FFR), the equilibrium real interest rate (RIR), inflation (INF) and the output gap (GAP) which equation defines the Taylor rule?

A) FFR = RIR + INF + 0.5(INF - RIR) + 0.5GAP
B) FFR = RIR + INF + (RIR - INF) + (RIR - GAP)
C) RIR = FFR + INF + (FFR - INF) + (FFR - GAP)
D) INF = RIR + FFR + (RIR - FFR) + (RIR - GAP)

Question 42

When the Fed buys U.S. government securities from a bank, the Fed

A) decreases the monetary base and raises the federal funds rate.
B) obtains the money for the purchase from the U.S. Treasury.
C) increases the bank's reserves at the Fed.
D) loans the money needed to buy the securities to the bank.

Question 43

While the sets U.S. monetary policy, it is the that enacts open market operations on the behalf of that policy.

A) Federal Open Market Committee; New York Federal Reserve
B) Federal Reserve; New York Stock Exchange
C) Federal Reserve; U.S. Treasury
D) Congress; Federal Reserve

Question 44

In an open market purchase, the Fed government securities, which bank reserves.

A) buys, increases
B) buys, decreases
C) sells, decreases
D) sells, increases

Question 45

If the Fed sells government securities,

A) there will be no effect on the quantity of money.
B) commercial bank reserves will decrease.
C) commercial bank reserves will increase.
D) the government's debt will be decreased.

Question 46

Federal Reserve open market operations directly influence

A) firms.
B) banks.
C) Congress.
D) consumers.

Question 47

The Fed buys government securities and gives the bank a check for the amount. After the check has cleared,

A) reserves remain unchanged because the increase of reserves at the bank are offset by an increase in reserves at the Fed.
B) reserves have increased by the amount of the check because the Fed pays for the check by increasing the amount of the bank's deposits with the Fed.
C) reserves have decreased by the amount of the check because the Fed pays for the check by decreasing the bank's deposits at the Fed.
D) reserves have increased by the amount of the reserves multiplied by the required reserve ratio, and the quantity of money increases by the difference between the amount of the check and the increase in the reserves.

Question 48

The Taylor rule

A) ignores price level stability to focus on responding to fluctuations in real GDP.
B) focuses on only fluctuations in real GDP.
C) shows how the Fed could set the federal funds rate.
D) is the rule actually followed by the Fed.

Question 49

If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would

A) reduce tax rates.
B) increase government expenditures.
C) lower the federal funds rate.
D) None of the above answers are correct.

Question 50

The initial impact of the Fed's open market sale of government securities to banks is

A) an increase in the quantity of money by some multiple of the dollar volume of the sale.
B) a decrease of the banking system's reserve deposits at the Fed.
C) a decrease in the quantity of money by some multiple of the dollar volume of the sale.
D) an increase in bank deposits at the Fed.

Question 51

Suppose the equilibrium real interest rate is 2 percent per year, inflation is 2.5 percent and the output gap is 1 percent. Using the Taylor rule, what is the federal funds rate?

A) 3.5 percent
B) 5.25 percent
C) 3 percent
D) 5.5 percent

Question 52

If the Fed buys $100 in securities from a commercial bank, the

A) Fed's assets will decrease.
B) quantity of money will decrease.
C) amount of reserves will not change.
D) quantity of reserves will increase.

Question 53

When the Fed sells government securities to a bank, how are the Fed's assets affected?

A) The amount of the Fed's government securities increases.
B) The amount of reserves held at the Fed decreases.
C) The amount of the Fed's government securities decreases.
D) The amount of reserves held at the Fed increases.

Question 54

When the Fed sells U.S. government securities to a bank, the Fed

A) increases the bank's reserves at the Fed.
B) decreases the monetary base and raises the federal funds rate.
C) gives the money from the sale to the U.S. Treasury.
D) loans the money needed to buy the securities to the bank.

Question 55

The Taylor rule

A) is the rule actually followed by the Fed.
B) focuses on only fluctuations in real GDP.
C) ignores price level stability to focus on responding to fluctuations in real GDP.
D) shows how the Fed could set the federal funds rate.

Question 56

If the Federal Reserve purchases government securities,

A) the discount rate will be forced higher.
B) the federal funds rate will rise.
C) banks' reserves will increase.
D) None of the above answers is correct because none of the effects occur.

Question 57

Suppose the inflation rate is 3 percent and the output gap is - 1 percent. Assuming the equilibrium real interest rate is 2 percent, using the Taylor rule, what target should the Fed set for the federal funds rate?

A) 5 percent
B) 1 percent
C) 6 percent
D) 4 percent

Question 58

The Taylor rule uses three variables to determine the target for the federal funds rate. Which of the following is NOT one of those variables?

A) output gap
B) inflation rate
C) equilibrium real interest rate
D) monetary base

Question 59

The Taylor Rule states that the

A) Fed should target the monetary base and not the federal funds rate.
B) Fed should adjust the federal funds rate to take account of deviations of inflation from its target and real GDP from potential GDP.
C) use of an exchange rate target, although costly, is economically efficient.
D) None of the above is correct.

Question 60

The Taylor rule is an example of

A) an instrument rule focused on the monetary base.
B) an instrument rule focused on the federal funds rate.
C) a targeting rule focused on the monetary base.
D) a targeting rule focused on the federal funds rate.

Question 61

Using the data in the above table, an open market operation in which the Fed purchased $100,000 of government securities from a bank would

A) lead to a rise in the federal funds rate.
B) cause demand deposits to fall by $100,000.
C) increase the banking system's reserves by $100,000.
D) create a reserve deficiency for the banking system.

Question 62

Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following takes the longest to change?

A) exchange rate
B) monetary base
C) federal funds rate
D) inflation rate

Question 63

By using open market operations, the Federal Reserve

A) adjusts the supply and demand of reserves to keep the Federal funds interest rate equal to its target.
B) controls banks' demand for reserves, thereby keeping the Federal funds rate equal to its target.
C) adjusts the demand of reserves to keep bank rates in line with the Federal funds rate target.
D) adjusts the supply of reserves to keep the Federal funds interest rate equal to its target.

Question 64

Which of the following will occur if the Fed buys $10 million of securities from the University National Bank?

A) The Fed will pay by increasing the University National Bank's deposit account with the Fed by $10 million.
B) The Fed will pay by decreasing the University National Bank's deposit account with the Fed by $10 million.
C) The University National Bank has $10 million more in securities.
D) The University National Bank has $10 million less in excess reserves.

Question 65

Monetary policy includes adjustments in _ so as to change .

A) the federal funds rate; short- run aggregate supply
B) the quantity of money; short- run aggregate supply
C) open market operations; long- run aggregate supply
D) the federal funds rate; aggregate demand

Question 66

When the Fed sells one million dollars in government securities to a commercial bank,

A) the Fed's total assets increase by one million dollars.
B) there is no change in the total assets of the Fed or the commercial bank.
C) the commercial bank's total assets decrease by one million dollars.
D) None of the above answers is correct.

Question 67

If the Fed lowers the federal funds rate, then

A) investment and consumption expenditure decrease.
B) a multiplier process that affects aggregate demand occurs.
C) the price of the dollar rises on the foreign exchange market and so net exports decrease.
D) All of the above answers are correct.

Question 68

If the Federal funds rate is greater than the Federal funds rate target, there is a of reserves and the Federal funds rate .

A) shortage; falls
B) surplus; rises
C) surplus; falls
D) shortage; rises

Question 69

If the Fed buys $100,000 in U.S. government securities from a commercial bank, the bank now has an additional $100,000 of

A) actual reserves.
B) total assets.
C) net worth.
D) excess reserves.

Question 70

Monetary policy affects real GDP by

A) creating budget deficits.
B) changing aggregate supply.
C) creating budget surpluses.
D) changing aggregate demand.

Question 71

The Fed buys $100 million of government securities from Bank A. What is the effect on Bank A's balance sheet?

A) Securities decrease by $100 million and deposits decrease by $100 million.
B) Securities increase by $100 million and reserves increase by $100 million.
C) Securities increase by $100 million and reserves decrease by $100 million.
D) Securities decrease by $100 million and reserves increase by $100 million.

Question 72

Which of the following is true concerning the operation of monetary policy?

A) When the Federal Reserve sells a government security it withdraws reserves from the commercial banking system.
B) The Federal Reserve may only sell government securities to fund government deficits that have been approved by the President of the United States.
C) When the Federal Reserve purchases a government security it withdraws reserves from commercial banks.
D) When the Federal Reserve purchases a government security the debt of the U.S. government is decreased.

Question 73

A decrease in the quantity of reserves supplied to commercial banks could be the result of

A) a decision by U.S. households to hold less currency.
B) an increase in the exchange rate.
C) the sale of government securities by the Federal Reserve.
D) a decrease in the government's budget deficit.

Question 74

When the federal funds interest rate is 6 percent, the quantity of reserves demanded is $100 billion. If the quantity of reserves is actually $110 billion, then the

A) federal funds rate rises.
B) demand for reserves decreases and the demand for reserves curve shifts leftward.
C) demand for reserves increases and the demand for reserves curve shifts rightward.
D) federal funds rate falls.

Question 75

The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet?

A) Securities decrease by $100 million and reserves of Bank A increase by $100 million.
B) Securities increase by $100 million and Federal Reserve notes (currency) decrease by $100 million.
C) Securities increase by $100 million and reserves of Bank A decrease by $100 million.
D) Securities increase by $100 million and reserves of Bank A increase by $100 million.

Question 76

The higher the federal funds rate, the the opportunity cost of holding reserves, which
The incentive to economize on reserves.

A) lower; increases
B) lower; decreases
C) higher; increases
D) higher; decreases

Question 77

Long- term interest rates are _ than short- term because long- term loans are _ than short- term loans.

A) higher; safer
B) lower; safer
C) lower; riskier
D) higher; riskier

Question 78

If the interest rate on Treasury bills is higher than the federal funds rate, the quantity of overnight loans supplied and the for Treasury bills increases.

A) increases; supply
B) decreases; supply
C) decreases; demand
D) increases; demand

Question 79

Equilibrium in the market for bank reserves determines the

A) federal funds rate.
B) 30- year Treasury bond rate.
C) exchange rate.
D) inflation rate.

Question 80

When the Fed buys one million dollars in government securities from a commercial bank,

A) the commercial bank's total assets increase by one million dollars.
B) the Fed's total assets decrease by one million dollars.
C) there is a change in the composition of the commercial bank's assets: reserves increase and government securities decrease.
D) All of the above answers are correct.