Deck 14: Monetary Policy

Question 1

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

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

Answer 1

inflation and unemployment.

Question 2

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

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

Answer 2

zero percent unemployment.

Question 3

The Federal Reserve's monetary policy goals of maximum employment mean

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

Answer 3

keeping the unemployment rate close to the natural unemployment rate.

Question 4

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

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

Question 5

When the output gap is positive, it represents ________ gap, and when it is negative, it represents ________ gap.

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

Question 6

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

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

Question 7

The Federal Reserve's monetary policy goals include

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

Question 8

To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors the ________ but uses as its operational guide the ________.

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

Question 9

Achieving the goal of "moderate long-term interest rates" means that the Fed needs to keep

A) long-term nominal interest rates close to short-term nominal interest rates.
B) long-term nominal interest rates close to short-term real interest rates.
C) long-term nominal interest rates close to long-term real interest rates.
D) long-term real interest rates close to short-term real interest rates.

Question 10

The key aim of monetary policy is to

A) change government spending to spur innovation.
B) maintain price stability.
C) change tax rates to boost investment.
D) change tax rates to boost saving.

Question 11

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

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

Question 12

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

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

Question 13

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

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

Question 14

The Fed's goals include

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

Question 15

The key goal of monetary policy is to

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

Question 16

In 2012, U.S. core inflation was 2.1 percent. This inflation rate

A) is lower than the inflation rate that the Fed accepts as creating stable prices.
B) is about equal to the inflation rate that the Fed accepts as creating stable prices.
C) is more than 2 percentage points higher than the inflation rate that the Fed accepts as creating stable prices.
D) None of the above answers are correct because the Fed has never associated an inflation rate with stable prices.

Question 17

The output gap is the

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

Question 18

A former Fed Chair Ben Bernanke had been more precise than other Chairs, suggesting a core inflation rate of ________ per year as being the 'equivalent' to price stability.

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

Question 19

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

A) zero unemployment
B) exchange rate stability
C) monetary base maximization
D) price level stability

Question 20

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

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

Question 21

Open market operations by the Fed lead to

A) changes in the number of banks.
B) immediate changes in aggregate supply.
C) changes in the federal funds rate.
D) shifts in the demand curve for reserves.

Question 22

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

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

Question 23

As long as the federal funds interest rate remains within the corridor, an increase in the quantity of reserves results in a

A) rise in the equilibrium federal funds rate.
B) fall in the equilibrium federal funds rate.
C) rise in the equilibrium real wage rate.
D) fall in the equilibrium money wage rate.

Question 24

Equilibrium in the market for bank reserves determines the

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

Question 25

The Federal Open Market Committee meets ________ times per year.

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

Question 26

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

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

Question 27

The federal funds rate is the interest rate

A) banks charge each other on overnight loans.
B) on the 3-month Treasury bill.
C) on the 30-year treasury bond.
D) that the Fed charges commercial banks on loans.

Question 28

Monetary policy is controlled by

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

Question 29

Federal Reserve open market operations directly influence

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

Question 30

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

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

Question 31

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 Governors meets approximately every six months to review the state of the economy and determine monetary policy.

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

Question 32

Price level stability

A) has no relationship to growth in potential GDP.
B) is thought by most economists to be reached with a measured inflation rate of between 0 and 2 percent a year.
C) is the most important tool of the Federal Reserve.
D) was attained by the Fed for the period between 1979 and 2001.

Question 33

In the market for bank reserves, if the federal funds rate target is higher than the federal funds rate, the Fed will take action to ________ reserves.

A) decrease the supply of
B) increase the supply of
C) increase the demand for
D) decrease the demand for

Question 34

Currently the Fed targets

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

Question 35

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

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

Question 36

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

A) federal funds rate
B) government budget deficit
C) income tax rates
D) profit rates

Question 37

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

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

Question 38

If the federal funds interest rate remains within the corridor and the demand for reserves is unchanged, an increase in the quantity of reserves will

A) increase the federal funds rate.
B) lower the federal funds rate.
C) not affect the federal funds rate.
D) None of the above answers is correct.

Question 39

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic 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) III only
C) II and III
D) II only

Question 40

In 2016, the federal funds rate was 0.15 percent, which means that the opportunity cost of holding reserves was ________ and consequently banks had a ________ incentive to economize on reserves.

A) low; small
B) low; large
C) high; small
D) high; large

Question 41

If the Fed sells U.S. government securities

A) the federal funds rate rises.
B) the U.S. Treasury gains some revenue.
C) bank reserves increase.
D) None of the above answers is correct.

Question 42

By using open market operations, the Federal Reserve

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

Question 43

An open market purchase of government securities by the Federal Reserve shifts the ________ reserves curve ________.

A) supply of; leftward
B) supply of; rightward
C) demand for; rightward
D) demand for; leftward

Question 44

If the federal funds interest rate remains within the corridor, an increase in the quantity of reserves leads to a

A) fall in the federal funds rate.
B) decrease in the price level.
C) reduction in the velocity of circulation.
D) leftward shift in the demand curve for reserves.

Question 45

In 2012 the Fed announced that it would purchase $40 billion of mortgage securities per month. These purchases shifted the ________ reserves curve ________.

A) supply of; leftward
B) supply of; rightward
C) demand for; rightward
D) demand for; leftward

Question 46

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

Question 47

If the Fed carries out an open market operation and sells U.S. government securities, as long as the federal funds interest rate remains within the corridor the federal funds rate ________ and the quantity of reserves ________.

A) falls; increases
B) rises; increases
C) falls; decreases
D) rises; decreases

Question 48

Monetary policy includes adjustments in ________ so as to change ________.

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

Question 49

An open market sale of government securities by the Federal Reserve shifts the ________ reserves curve ________.

A) supply of; leftward
B) supply of; rightward
C) demand for; rightward
D) demand for; leftward

Question 50

Monetary policy affects real GDP by

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

Question 51

If the Fed increases the quantity of reserves, a new equilibrium is reached by a

A) rightward shift of the demand for reserves curve.
B) movement down the demand for reserves curve.
C) leftward shift of the demand for reserves curve.
D) movement up the demand for reserves curve.

Question 52

The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market purchase of government securities that changes the quantity of reserves by $100 billion and the federal funds rate remains within the corridor, then the federal funds rate will

A) rise to 8 percent a year.
B) remain at 6 percent a year.
C) fall to 4 percent a year.
D) None of the above answers is correct.

Question 53

The Fed engages in open market operations and sells government securities. As long as the federal funds rate stays in the corridor, the result is

A) a lower federal funds rate.
B) a higher federal funds rate.
C) an unchanged federal funds rate because other interest rates did not change.
D) More information is needed to determine what happens to the federal funds rate.

Question 54

If the Fed carries out an open market operation to buy U.S. government securities, if the federal funds rate stays in the corridor the federal funds rate ________ and the quantity of reserves ________.

A) falls; increases
B) rises; increases
C) falls; decreases
D) rises; decreases

Question 55

To lower the federal funds rate, the Federal Reserve could

A) buy government securities.
B) raise the Treasury bill rate.
C) raise the exchange rate.
D) decrease bank reserves.

Question 56

The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market sale of government securities that changes the quantity of reserves by $100 billion and the federal funds rate remains within the corridor, then the federal funds rate will

A) rise to 8 percent a year.
B) remain at 6 percent a year.
C) fall to 4 percent a year.
D) None of the above answers is correct.

Question 57

The Fed buys U.S. government securities from banks in order to

A) lower the federal funds rate.
B) reduce the government's budget deficit.
C) decrease banks' reserves.
D) None of the above answers are correct.

Question 58

If the Fed buys U.S. government securities and the federal funds rate stays in the corridor

A) the federal funds rate will fall.
B) the federal funds rate will rise.
C) bank reserves will decrease.
D) the discount rate will rise.

Question 59

If the Fed wants to lower the federal funds rate, it can

A) decrease the budget deficit.
B) sell government securities in the open market.
C) instruct banks to print more money.
D) buy government securities on the open market.

Question 60

If the federal funds rate stays in the corridor and the Fed wants to raise the federal funds rate, it needs to

A) buy government securities in order to increase the quantity of reserves.
B) sell government securities in order to decrease the quantity of reserves.
C) buy government securities in order to decrease the quantity of reserves.
D) sell government securities in order to increase the quantity of reserves.

Question 61

If the Fed wants to decrease the quantity of money, it can

A) decrease the government budget deficit.
B) purchase U.S. government securities.
C) sell U.S. government securities.
D) raise income tax rates.

Question 62

At the end of 2013, the Fed was buying about $100 billion of securities per month, a much higher amount than normal. These purchases would ________ the value of the dollar on foreign exchange markets thereby ________ U.S. exports.

A) raise; increasing
B) raise; decreasing
C) lower; increasing
D) lower; decreasing

Question 63

Open market purchases by the Fed

A) raise the federal funds rate.
B) increase bank reserves.
C) occur when the Fed wants to decrease the quantity of money.
D) All of the above answers are correct.

Question 64

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

Question 65

When the Fed raises the federal funds rate

A) net exports increase.
B) the value of the dollar falls on the foreign exchange market.
C) the value of the dollar rises on the foreign exchange market.
D) consumption increases.

Question 66

Long-term interest rates fluctuate ________ short-term interest rates.

A) less than
B) more than
C) the same as
D) depending on their level sometimes less than, sometimes more than

Question 67

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

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

Question 68

The ripple effects that occur when the Fed changes the federal funds rate do NOT include

A) a change in government spending.
B) a change in net exports.
C) a change in investment.
D) a change in consumption.

Question 69

If the Fed wants to increase the quantity of money, it can

A) lower income tax rates.
B) purchase U.S. government securities.
C) increase the government budget deficit.
D) raise the exchange rate.

Question 70

When the Fed lowers the federal funds rate, aggregate demand

A) increases.
B) decreases.
C) stays the same.
D) could increase, decrease or stay the same.

Question 71

If the Fed raises the federal funds rate so that the exchange rate rises, then imports ________ and exports ________.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 72

If the Fed lowers the federal funds rate, then

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

Question 73

When the Fed raises the federal funds rate, in the foreign exchange market people ________ dollars and the price of the dollar ________ on the foreign exchange market.

A) sell; rises
B) sell; falls
C) buy; rises
D) buy; falls

Question 74

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

A) exchange rate.
B) real GDP growth rate.
C) inflation rate.
D) monetary base.

Question 75

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? The

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

Question 76

When the Fed lowers the federal funds rate, the U.S. dollar ________ on the foreign exchange market and ________.

A) depreciates; aggregate demand decreases
B) appreciates; aggregate demand decreases
C) depreciates; the increase in imports is greater than the increase in exports
D) depreciates; aggregate demand increases

Question 77

Which of the following increases the quantity of money?

A) an individual's cash withdrawal from a bank
B) an individual's purchase of a government security from the Fed
C) the Fed's purchase of a government security
D) an increase in the government's budget deficit

Question 78

If the U.S. interest rate rises, the exchange rate ________ and net exports ________.

A) rises; increase
B) rises; decrease
C) falls; increase
D) falls; decrease

Question 79

If the Fed lowers the federal funds rate so that the exchange rate falls, then imports ________ and exports ________.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 80

To increase the quantity of money in the economy, the Federal Reserve is likely to

A) print more money and give it to the banks.
B) lower tax rates.
C) sell government securities in an open market operation.
D) buy government securities in an open market operation.