Deck 17: Monetary Policy

Question 1

The federal funds rate is

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

Answer 1

A

Question 2

In the United States,

A) Congress must approve monetary policy changes.
B) Congress initializes changes in monetary policy and the Fed approves the changes.
C) the Federal Reserve sets monetary policy.
D) the Federal Reserve sets monetary and fiscal policies.
E) the President initializes changes in monetary policy and the Fed approves the changes.

Answer 2

C

Question 3

When real GDP is greater than potential GDP, there is ________ which leads the inflation rate to ________.

A) an inflationary gap; rise
B) a recessionary gap; remain stable
C) a recessionary gap; rise
D) an inflationary gap; fall
E) a recessionary gap; fall

Answer 3

A

Question 4

Which of the following statements are correct?
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 state of the economy and determine monetary policy.
Iii) The Federal Reserve has determined it will use the monetary base as its policy instrument.

A) i and ii
B) ii only
C) i only
D) iii only
E) None of the above answers is correct.

Question 5

The Federal Reserve monetary policy goals of maximum employment means

A) a zero percent unemployment rate.
B) a zero percent natural unemployment rate.
C) aiming for an amount of employment that exceeds full employment.
D) keeping the unemployment rate close to the natural unemployment rate.
E) cyclical unemployment should not necessarily be minimized.

Question 6

The FOMC is the

A) report the Fed gives to Congress twice a year.
B) group within the Fed that makes monetary policy.
C) report that summarizes the economy across Fed districts.
D) name of the meeting the Fed has with Congress twice a year.
E) interest rate the Fed most directly influences.

Question 7

Which of the following is a monetary policy goal?
I) keeping the inflation rate low
Ii) attaining maximum employment
Iii) keeping the long-term interest rate at a moderate level

A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii

Question 8

The main goals of monetary policy include all of the following EXCEPT

A) keeping the long term nominal interest rate equal to the real interest rate plus the inflation rate.
B) keeping the inflation rate low.
C) keeping the unemployment rate close to the natural unemployment rate.
D) attaining the maximum sustainable growth of potential GDP.
E) keeping the long-term interest rate at a moderate level.

Question 9

The output gap is the

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

Question 10

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
E) None of the above answers is correct.

Question 11

To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors the ________; to determine whether the goal of maximum employment is being achieved, the Federal Reserve monitors ________.

A) core CPI inflation rate; the natural unemployment rate
B) CPI; the gap between nominal GDP and real GDP
C) core GDP deflator inflation rate; the natural unemployment rate
D) core PCE deflator inflation rate; the output gap
E) GDP price deflator; real GDP

Question 12

Monetary policy goals include i. maximum employment.
Ii) stable prices.
Iii) moderate long-term interest rates.

A) i only
B) ii only
C) i and iii only
D) i and ii only
E) i, ii, and iii

Question 13

Which of the following is NOT a monetary policy goal?

A) keeping long-term interest rates moderate
B) keeping a high exchange rate for the dollar
C) promoting maximum employment
D) maintaining stable prices
E) All of the above are monetary policy goals.

Question 14

When real GDP is less than potential GDP, there is ________ which leads the unemployment rate to ________.

A) an inflationary gap; rise
B) a recessionary gap; decline
C) a recessionary gap; remain at the natural level
D) an inflationary gap; remain at the natural level
E) a recessionary gap; rise

Question 15

The core inflation rate 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 food and fuel.
D) prices of consumer goods except health care.
E) prices of all the "core" goods and services a typical family buys.

Question 16

Which of the following statements are correct?
I) Congress does not play a role in making monetary policy decisions
Ii) The FOMC meets eight times a year to make monetary policy decisions
Iii) The President of the United States appoints members and the Chairman of the Board of governors but has little other formal authority over monetary policy

A) i, ii, and iii
B) i and ii
C) ii only
D) i and iii
E) ii and iii

Question 17

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

A) federal funds rate
B) loanable funds
C) inflation rate
D) real interest rate
E) profit rates

Question 18

Monetary policy decisions are made by the

A) Federal Reserve Economic Committee.
B) Federal Open Market Committee.
C) Council of Economic Advisors.
D) Congress of the United States.
E) U.S.Mint.

Question 19

Control of monetary policy rests with

A) Congress.
B) the President.
C) the Federal Reserve.
D) the Comptroller of the Currency.
E) the U.S.Treasury.

Question 20

To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors

A) the core GDP deflator inflation rate.
B) the CPI.
C) the producer price index.
D) the core PCE deflator inflation rate.
E) the GDP price deflator.

Question 21

To lower the federal funds rate, the Fed conducts an open market ________ of securities which ________.

A) sale; increases the demand for reserves
B) sale; increases the supply of reserves
C) purchase; increases the demand for reserves
D) purchase; decreases the demand for reserves
E) None of the above answers are correct.

Question 22

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 current state; the previous state
C) a forecast; the current state
D) the previous state; the current state
E) a forecast; the previous state

Question 23

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 both the demand for and the supply of
D) increase the demand for
E) decrease the demand for

Question 24

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

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

Question 25

Currently the Fed targets

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

Question 26

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

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

Question 27

Maximum employment and moderate long-term interest rates are best achieved with

A) high and stable inflation rates.
B) high and variable inflation rates.
C) high real interest rates.
D) high short-term interest rates.
E) price stability.

Question 28

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals?
I) government expenditure 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) i and iii
D) ii and iii
E) ii only

Question 29

The Taylor rule is an example of

A) an instrument rule focused on the federal funds rate.
B) a targeting rule focused on the monetary base.
C) an instrument rule based on M1.
D) a targeting rule focused on the federal funds rate.
E) an instrument rule focused on the monetary base.

Question 30

The operational goals the Fed uses for its monetary policy objectives are the

A) federal funds rate and the supply of reserves.
B) the demand for reserves and the supply of reserves.
C) supply of reserves and the output gap.
D) the core inflation rate and the output gap.
E) federal funds rate and the core inflation rate.

Question 31

In the short run, if the Fed wants to raise the federal funds rate, it

A) instructs large commercial banks to sell government securities in the open market.
B) instructs the New York Fed to sell government securities in the open market.
C) tells large commercial banks to raise their interest rates.
D) instructs the New York Fed to sell government securities in the foreign exchange market.
E) instructs the New York Fed to buy government securities in the open market.

Question 32

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.
E) None of the above answers is correct.

Question 33

To change the federal funds rate, the Fed

A) tells banks how much to charge.
B) coordinates with banks on establishing the new rate.
C) increases or removes money from the stock market.
D) uses open market operations to change the quantity of money.
E) changes the income tax rate on interest income.

Question 34

Which of the following is the Fed's monetary policy instrument?

A) the output gap
B) the core inflation rate
C) the federal funds rate
D) the supply of reserves
E) the demand for reserves

Question 35

The interest rate banks charge each other on overnight loans is called the

A) federal funds rate.
B) coupon rate.
C) required reserve rate.
D) discount rate.
E) real interest rate.

Question 36

Equilibrium in the market for bank reserves determines the

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

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; does not change
E) lower; decreases

Question 38

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

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

Question 39

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.
E) None of the above answers is correct.

Question 40

The federal funds rate is ________ of the Fed.

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

Question 41

In the short run, to decrease the interest rate the Federal Reserve ________ the quantity of money by ________ government securities.

A) increases; selling
B) increases; buying
C) decreases; selling
D) decreases; buying
E) None of the above answers are correct because in the short run the Federal Reserve cannot change the interest rate.

Question 42

If the Fed buys U.S.government securities from banks, the federal funds rate ________ and banks' reserves ________.

A) falls; increase
B) rises; increase
C) does not change; increases
D) falls; decrease
E) rises; decrease

Question 43

If the Fed sells U.S.government securities,

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

Question 44

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 $25 billion, 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) change but more information is needed to determine by how much
E) None of the above answers is correct.

Question 45

If the Fed buys U.S.government securities,

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

Question 46

A hike in the federal funds rate results in ________ in the real interest rate which leads to a ________ in investment.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
E) a decrease; no change

Question 47

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

A) falls; increases
B) rises; increases
C) rises; does not change
D) falls; decreases
E) rises; decreases

Question 48

In an open market purchase, the Fed ________ government securities, which ________ bank reserves and ________ the federal funds rate.

A) buys; increases; raises
B) buys; decreases; raises
C) sells; increases; lowers
D) sells; decreases; lowers
E) buys; increases; lowers

Question 49

In order to lower the federal funds rate, the Fed ________ government securities in open market operations, so that banks' reserves ________ and the quantity of money ________.

A) buys; decrease; increases
B) sells; decrease; decreases
C) sells; increase; decreases
D) buys; increase; increases
E) buys; decrease; decreases

Question 50

If the Fed carries out an open market operation and buys U.S.government securities, the federal funds rate ________ and the quantity of reserves ________.

A) falls; increases
B) rises; increases
C) falls; decreases
D) rises; does not change
E) rises; decreases

Question 51

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 $25 billion, then the federal funds rate will ________.

A) rise to 6 percent a year
B) remain at 4 percent a year
C) fall to 4 percent a year
D) change but more information is needed to determine by how much
E) None of the above answers is correct.

Question 52

When the Fed sells government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate ________.

A) increase; increases; falls
B) decrease; decreases; rises
C) increase; decreases; rises
D) decrease; increases; falls
E) decrease; decreases; falls

Question 53

The Fed ________ influence the real interest rate in the short run and ________ influence the real interest rate in the long run.

A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) might be able to; might be able to

Question 54

The steps in the transmission of monetary policy are

A) Congress increases government expenditures on goods and services, leading to an increase in aggregate demand.
B) Congress increases the money supply, which lowers the interest rate, and leads to an increase in aggregate demand.
C) the Federal Reserve increases government expenditures on goods and services, leading to an increase in aggregate demand.
D) the Federal Reserve lowers the federal funds rate, which lowers the real interest rate, and leads to an increase in aggregate demand.
E) Congress increases the budget deficit, which increases the money supply, which increases aggregate supply.

Question 55

In order to raise the federal funds rate, the Fed ________ government securities in open market operations, so that banks' reserves ________ and the quantity of money ________.

A) buys; decrease; increases
B) sells; decrease; decreases
C) sells; increase; decreases
D) buys; increase; increases
E) buys; increase; decreases

Question 56

The figure above shows the market for bank reserves in Futureland.If the Bank of Futureland lowers the target federal funds rate by 1 percentage point, the central bank will conduct an open market ________ of government securities of ________ to ________ the supply of reserves.

A) sale; $75 billion; decrease
B) purchase; $25 billion; decrease
C) sale; $25 billion; increase
D) purchase; $75 billion; increase
E) purchase; $25 billion; increase

Question 57

If the Fed sells U.S.government securities to banks, the federal funds rate ________ and banks' reserves ________.

A) falls; increase
B) rises; do not change
C) rises; increase
D) falls; decrease
E) rises; decrease

Question 58

If the Fed sells government securities, in the short run the nominal interest rate ________ and the real interest rate ________.

A) rises; rises
B) does not change; rises
C) falls; falls
D) rises; does not change
E) rises; falls

Question 59

When the Fed buys government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate ________.

A) increase; increases; falls
B) decrease; decreases; rises
C) increase; decreases; rises
D) decrease; increases; falls
E) increase; increases; rises

Question 60

Which of the following is NOT an effect from a change in the federal funds rate?

A) change in the real interest rate
B) change in investment
C) change in government expenditures
D) change in aggregate demand
E) change in the quantity of money

Question 61

When the FOMC raises the federal funds rate, almost immediately ________ and a few weeks later the ________.

A) short-term interest rates rise; quantity of money and supply of loanable funds decrease
B) long-term interest rates rise; quantity of money and supply of loanable funds decrease
C) short-term interest rates fall; quantity of money and supply of loanable funds decrease
D) long-term interest rates rise; quantity of money and supply of loanable funds decrease
E) short-term interest rates fall; quantity of money and supply of loanable funds increase

Question 62

The Fed raises the federal funds rate.Which of the following changes takes the longest time before it occurs?

A) short-term interest rates rise
B) exchange rate rises
C) quantity of money decreases
D) supply of loanable funds decreases
E) aggregate demand decreases

Question 63

If the Federal Reserve decreases the Federal funds rate, other short-term interest rates ________ and the exchange rate ________.

A) fall; falls
B) do not change; rises
C) fall; does not change
D) fall; rises
E) do not change; falls

Question 64

If the Fed lowers the federal funds rate, which of the following will NOT happen?

A) the real interest rate falls
B) other short-term interest rates fall
C) aggregate demand increases
D) real GDP increases
E) the price level falls

Question 65

In the short run, when the Fed increases the nominal interest rate, the real interest rate

A) temporarily rises.
B) permanently rises.
C) temporarily falls.
D) permanently falls.
E) does not change.

Question 66

In the short run, when the Fed raises the federal funds rate,

A) the real interest rate is unchanged so investment and consumption expenditure are not changed.
B) the real interest rate temporarily increases, thereby decreasing investment and consumption expenditure.
C) the real interest rate temporarily falls, thereby increasing investment and consumption expenditure.
D) investment and consumption expenditure increase, thereby raising the real interest rate temporarily.
E) the real interest rate temporarily increases, thereby decreasing investment and increasing consumption expenditure.

Question 67

In the long run, the real interest rate is determined by

A) Fed actions.
B) the expected inflation rate.
C) the nominal interest rate.
D) saving supply and investment demand.
E) the multiplier effect.

Question 68

If the Fed lowers the federal funds rate, which of the following occurs?

A) Investment increases.
B) Consumption expenditure decreases.
C) The price of the dollar on the foreign exchange market increases.
D) Net exports decreases.
E) Government expenditures on goods and services increases.

Question 69

The Fed raises the federal funds rate.Which of the following changes occurs most rapidly?

A) exchange rate rises
B) consumption expenditure decreases
C) aggregate demand decreases
D) real GDP growth decreases
E) inflation rate decreases

Question 70

Suppose the Federal Reserve lowers the federal funds rate.Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to a year afterwards: i. quantity of money increases
Ii) quantity of reserves increases
Iii) aggregate demand increases
Iv) the long-term real interest rate falls

A) ii-i-iv-iii
B) i-ii-iv-iii
C) ii-i-iii-iv
D) i-ii-iii-iv
E) iii-iv-i-ii

Question 71

When the Federal Reserve raises the federal funds rate, the quantity of reserves ________, the quantity of money ________, and the quantity of loans ________.

A) decreases; decreases; decreases
B) decreases; decreases; does not change
C) decreases; does not change; does not change
D) increases; increases; decreases
E) increases; increases; increases

Question 72

If the Federal Reserve lowers the Federal funds rate,

A) other short-term interest rates fall.
B) net exports decreases.
C) other short-term interest rates rise.
D) the price level falls.
E) Both answers A and C are correct.

Question 73

Suppose the Fed raises the federal funds rate.Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards: i. short-term interest rates rise
Ii) long-term interest real interest rate rises
Iii) aggregate demand decreases
Iv) inflation rate decreases

A) i-ii-iii-iv
B) ii-i-iii-iv
C) i-ii-iv-iii
D) i-iii-ii-iv
E) ii-i-iv-iii

Question 74

When the Fed ________ the federal funds rate, the opportunity cost of firms' investment ________ and so the quantity of investment ________.

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

Question 75

A decrease in the federal funds rate

A) increases other short-term interest rates, decreases investment, and decreases aggregate demand.
B) lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand.
C) lowers other sort-term interest rate, raises the real interest rate, and increases aggregate demand.
D) decreases the supply of loanable funds, raises the real interest rate, and decreases aggregate demand.
E) decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate demand.

Question 76

The FOMC is concerned about inflation and has ________ the federal funds rate. Due to substitution effects, other ________ interest rates will ________ almost immediately.

A) increased; short-term; increase
B) decreased; long-term; decrease
C) increased; long-term; increase
D) increased; short-term; decrease
E) decreased; short-term; decrease

Question 77

A fall in the federal funds rate leads to

A) a decrease in the quantity of money.
B) a rise in the real interest rate.
C) a decrease in investment.
D) a rise in the price level.
E) a decrease in real GDP.

Question 78

If the Fed raises the federal funds rate, which of the following happens?

A) net exports increases
B) the real interest rate falls
C) aggregate demand decreases
D) real GDP increases
E) the price level rises

Question 79

In the short run, when the Fed increases the federal funds rate

A) there is no effect on investment because investment depends on the real interest rate.
B) the real interest rate falls and investment increases.
C) the real interest rate rises and investment decreases.
D) the real interest rate is unaffected but investment still decreases.
E) the real interest rate rises and investment does not change.

Question 80

Which of the following statements about the ripple effects of monetary policy is FALSE? Monetary policy can

A) raise the federal funds rate, thereby decreasing the quantity of money, raising the real interest rate, and decreasing investment.
B) lower the federal funds rate, thereby increasing the supply of loanable funds, and lowering the exchange rate.
C) lower the federal funds rate, thereby lowering the real interest rate and increasing aggregate demand.
D) raise the federal funds rate and shift the aggregate demand curve leftward.
E) raise the federal funds rate, thereby raising the real interest rate and increasing potential GDP.