Deck 34: Monetary Policy

Question 1

Who runs the Federal Reserve of the United States?

A)the speaker of the House of Representatives
B)the chief of the Armed Forces
C)the president of the United States
D)the chair of the Federal Reserve

Answer 1

D

Question 2

How is monetary policy different from fiscal policy?

A)Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes.
B)Monetary policy focuses on correcting inflation, whereas fiscal policy focuses on unemployment.
C)Monetary policy is determined by the president, whereas fiscal policy is determined by the chair of the Federal Reserve.
D)There is no difference between the two policies.

Answer 2

A

Question 3

Monetary policy is defined as the:

A)change of the tax code to achieve economic changes.
B)adjustment of interest rates to influence economic conditions.
C)change in government spending to change economic conditions.
D)implementation of ceilings on the federal funds rate in the economy.

Answer 3

B

Question 4

Which of the following does the Federal Reserve control directly?
(i) inflation
(ii) unemployment
(iii) output
(iv) real GDP

A)(i) and (ii)
B)(ii) and (iii)
C)(i), (ii), (iii), and (iv)
D)None of the above.

Question 5

What is the Federal Reserve's mandate?

A)to print as many dollars as possible without causing inflation
B)to encourage inflation and raise unemployment
C)to ensure maximum employment while maintaining stable prices
D)to ensure that interest rates remain low all the time

Question 6

When was the Federal Reserve created?

A)after the Great Depression
B)1776
C)1918
D)1913

Question 7

The Federal Reserve was created to:

A)increase employment in the United States.
B)provide stability in the banking sector and the economy.
C)correct deflation in the United States.
D)establish a banking system in the United States.

Question 8

The Federal Reserve was created after:

A)a series of bank runs and bankruptcies.
B)a period of very high unemployment.
C)an extended period of economic stagnation.
D)an increase in the inflation rate.

Question 9

The Federal Reserve System is made up of the:

A)Board of Governors and 12 Federal Reserve district banks.
B)president of the United States and 12 Federal Reserve district banks.
C)chair of the Federal Reserve and 12 Federal Reserve district banks.
D)chair of the Federal Reserve, the president of the New York Federal Reserve district bank, and four other Federal Reserve district bank presidents.

Question 10

The Board of Governors of the Federal Reserve:
(i) guides the operations of the Federal Reserve.
(ii) ensures that interest rate ceilings are maintained.
(iii) ensures that monetary policy follows the guidelines from Congress.
(iv) oversees all the Federal Reserve district banks.

A)(iv) only
B)(i) and (iv)
C)(i), (ii), and (iv)
D)(i), (ii), (iii), and (iv)

Question 11

Commercial banks:

A)are equivalent to Federal Reserve district banks.
B)offer services, such as checking accounts, to the general public.
C)are banks that sell stock in the Federal Reserve.
D)serve only commercial businesses and not the general public.

Question 12

You have saved $747. Where should you go if you want to open a checking account?

A)the New York Federal Reserve district bank
B)a commercial bank
C)the Federal Reserve in Washington,
D)your local federal reserve district bank

Question 13

The Federal Open Market Committee (FOMC) is made up of:

A)the Fed governors and the Fed district bank presidents.
B)the chair of the Fed and the New York Fed bank president.
C)the Fed governors, the New York Fed president, and a rotating group of four other district bank presidents.
D)12 members of Congress.

Question 14

The members of the Federal Open Market Committee (FOMC) who can actually vote on policy decisions are:

A)the Fed governors and the Fed district bank presidents.
B)the chair of the Fed and the New York Fed bank president.
C)the Fed governors, the New York Fed president, and a rotating group of four other district bank presidents.
D)12 members of Congress.

Question 15

In order to prepare for each meeting, the Federal Open Market Committee (FOMC) members prepare their responses to queries regarding their:

A)data on historical policy choices.
B)preferences about their choice of Federal Reserve chair.
C)fiscal policy responses and their preferences between taxes and government spending.
D)forecasts of economic growth, their suggested policy choices, and their ideas on effective communication regarding Fed plans.

Question 16

The purpose of "Fedspeak" was to:

A)encourage debate between Federal Open Market Committee (FOMC) members.
B)ensure that the Federal Reserve's inflation target was never understood by the general public.
C)establish the Federal Reserve's dual mandate.
D)minimize market reactions from Federal Reserve statements.

Question 17

Why is it important for the central bank of a country to be independent?
(i) The central bank needs to be free from political pressures.
(ii) Research has shown that inflation tends to be lower where central banks have greater independence.
(iii) The central bank needs to ensure that it has the freedom to set the federal funds rate at one fixed level.
(iv) The central bank needs to ensure that the Federal Reserve governor never has to testify before Congress.

A)(i) and (ii)
B)(ii) and (iii)
C)(ii) and (iv)
D)(i), (iii), and (iv)

Question 18

On the border between Venezuela and Colombia, vendors make art with Venezuelan bolivars (the currency of Venezuela). This scenario shows the:

A)rise in the value of the currency.
B)loss in the value of the currency.
C)deflation in the country.
D)lack of monetary policy decisions.

Question 19

In Venezuela, the bolivar, the domestic currency, lost value because the government printed excess amounts of money to fund its budget deficit. This situation can happen if the:

A)inflation in the country is well controlled.
B)bond markets in the country are very strong.
C)central bank is very powerful and independent of the political process.
D)central bank is not independent of the political process.

Question 20

Bowing to political pressures, a central bank decides to print money. What can this scenario lead to?

A)inflation
B)deflation
C)high economic growth
D)higher credit ratings for the country's bonds

Question 21

In an inflationary situation, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

A)lower; reduce
B)lower; induce
C)raise; reduce
D)raise; induce

Question 22

In a recessionary situation, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

A)lower; reduce
B)lower; induce
C)raise; reduce
D)raise; induce

Question 23

If the problem in the economy is very high cyclical unemployment, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

A)lower; reduce
B)lower; induce
C)raise; reduce
D)raise; induce

Question 24

If the problem in the economy is continuous higher-than-expected increases in the consumer price index, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

A)lower; reduce
B)lower; induce
C)raise; reduce
D)raise; induce

Question 25

Which Federal Reserve district bank president always votes on monetary policy changes?

A)the Richmond Federal Reserve district bank president
B)the New York Federal Reserve district bank president
C)the San Francisco Federal Reserve district bank president
D)All district bank presidents vote on every monetary policy decision.

Question 26

There are 12 Federal Reserve districts. Why is the New York Federal Reserve bank given a permanent vote on the FOMC?
(i) New York is the home of the Open Market Trading Desk.
(ii) New York is the home of the New York Stock Exchange.
(iii) New York is the home of Wall Street.
(iv) The New York Federal Reserve district bank oversees a location with a very high concentration of financial transactions.

A)(iv) only
B)(ii) only
C)(ii, (iii), and (iv)
D)(i), (ii), (iii), and (iv)

Question 27

Why does the Federal Reserve target inflation rather than unemployment?

A)The inflation rate is directly related to monetary policy and is thus an easier target to maintain.
B)The Fed cares more about inflation than about unemployment.
C)If inflation is kept low, this automatically keeps the economy at maximum sustainable employment levels.
D)The public will not see the Fed as credible if it targets the unemployment rate.

Question 28

Why does the Federal Reserve target inflation rather than unemployment?

A)The inflation rate is an easy target to attain.
B)Full employment is not an attainable target.
C)It would be poor optics for the Fed to intentionally increase unemployment.
D)The inflation rate does not change much.

Question 29

What was the Fed's inflation target in 2019?

A)0.75%.
B)2%.
C)3.5%.
D)5%.

Question 30

Critics of the Federal Reserve have accused the Fed of using the 2% inflation target as a ceiling. What does this mean?

A)The Fed ensures inflation does not rise above 2% instead of allowing inflation to fluctuate around 2%.
B)The Fed ensures unemployment is unable to fall below 2%.
C)The Fed ensures the real interest rate does not rise above 2% instead of allowing the real interest rate to fluctuate around 2%.
D)The Fed ensures inflation does not fall below 2% instead of allowing inflation to fluctuate around 2%.

Question 31

What might be an unintended effect of an inflation rate ceiling?

A)The real interest rate can become negative if inflation is high enough.
B)The real interest rate will always be very high, and this will discourage borrowing.
C)Businesses will not know the nominal interest rate.
D)It becomes impossible to calculate the real interest rate.

Question 32

Why might maintaining an interest rate ceiling in an economy be a bad idea?

A)Instituting a nominal interest rate ceiling also effectively institutes a real interest rate ceiling.
B)If inflation rises and the real interest rate falls, this will stifle consumption and investment.
C)If deflation occurs and the real interest rate rises, it will discourage consumption and investment.
D)It becomes impossible to calculate the real interest rate.

Question 33

If unemployment is below its sustainable level, then the economy is:

A)experiencing below normal growth rates.
B)operating above capacity, and inflation will likely rise.
C)operating below capacity, and inflation will likely fall.
D)at potential GDP, and inflation is at its target level.

Question 34

If unemployment is above its sustainable level, then the economy is:

A)experiencing above normal growth rates.
B)operating above capacity, and inflation will likely rise.
C)operating below capacity, and inflation will likely fall.
D)at potential GDP, and inflation is at its target level.

Question 35

If inflation is 2% and a firm does not give its workers a nominal raise, then:

A)nominal wages are zero.
B)inflation goes down by 2%.
C)real wages have fallen by 2%.
D)real wages have risen by 2%.

Question 36

If inflation is 4% and a firm gives its workers a 1.5% nominal wage raise, then:

A)real wages have gone up by 2.5%.
B)inflation decreases by 1.5%.
C)inflation rises by 1.5%.
D)real wages have fallen by 2.5%.

Question 37

If inflation is 0%, and a firm wants to lower real wages by 1%, it will need to:

A)raise nominal wages by 1%.
B)lower nominal wages by 1%.
C)lower real wages by 2%.
D)raise inflation by 2%.

Question 38

If inflation is 0% and a firm wants to raise real wages by 1%, it will need to:

A)raise nominal wages by 1%.
B)lower nominal wages by 1%.
C)lower real wages by 2%.
D)raise inflation by 2%.

Question 39

If there is deflation of 1% and a firm wants to leave real wages unchanged, it will need to:

A)raise nominal wages by 1%.
B)lower nominal wages by 1%.
C)lower real wages by 2%.
D)leave nominal wages unchanged.

Question 40

If there is deflation of 1% and a firm wants to lower real wages by 1%, it will need to:

A)raise nominal wages by 1%.
B)lower nominal wages by 2%.
C)lower real wages by 2%.
D)leave nominal wages unchanged.

Question 41

How might deflation set off further deflation?

A)Falling prices can increase the nominal interest rates in the economy and reduce consumption.
B)If prices are falling in the economy, this will cause a decrease in the number of goods exported from the country and thus cause prices to fall further.
C)Falling prices may cause people to defer spending in expectation of further lower prices, and this leads to more deflation.
D)Falling prices cause firms to increase production, and the increase in supply causes prices to fall further.

Question 42

The neutral interest rate is the rate at which:

A)real GDP equals potential GDP.
B)real GDP exceeds potential GDP.
C)real interest rates equal nominal interest rates.
D)the inflation rate is equal to zero.

Question 43

The neutral interest rate is the rate at which:

A)macroeconomic equilibrium has been reached.
B)the zero bound has been reached.
C)real interest rates equal nominal interest rates.
D)the output gap is equal to zero.

Question 44

When choosing a new interest rate, the neutral interest rate is an important starting point for the Federal Reserve because it is the rate at which:

A)there is macroeconomic equilibrium.
B)the economy is neither underperforming nor in an inflationary gap.
C)potential GDP has reached its maximum point.
D)there is no unemployment in the economy.

Question 45

The federal funds rate is the:

A)interest rate the public pays on loans from banks.
B)nominal interest rate that banks pay on overnight interbank loans.
C)nominal interest rate minus the inflation rate.
D)interest rate on loans from the Federal Reserve's discount window.

Question 46

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 3%, then the Fed will want the new real interest rate to be:

A)higher than the neutral interest rate.
B)lower than the neutral interest rate.
C)equal to the inflation rate.
D)equal to the neutral interest rate.

Question 47

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 2%, then, the Fed will:

A)want the new real interest rate to be higher than the neutral interest rate.
B)want the new real interest rate to be lower than the neutral interest rate.
C)want the new real interest rate to be equal to the inflation rate.
D)not change the real interest rate.

Question 48

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 1%, then the Fed will want the new real interest rate to be:

A)higher than the neutral interest rate.
B)lower than the neutral interest rate.
C)equal to the inflation rate.
D)equal to the neutral interest rate.

Question 49

If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

A)raise; down
B)raise; up
C)lower; down
D)lower; up

Question 50

If the actual inflation rate is less than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

A)raise; down
B)raise; up
C)lower; down
D)lower; up

Question 51

If the output gap is positive, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

A)raise; down
B)raise; up
C)lower; down
D)lower; up

Question 52

If the output gap is negative, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

A)raise; down
B)raise; up
C)lower; down
D)lower; up

Question 53

If the output gap is positive, the Federal Reserve will _____ the real interest rate to _____.

A)lower; cool inflationary pressures
B)lower; reduce unemployment
C)raise; cool inflationary pressures
D)raise; reduce unemployment

Question 54

If the output gap is negative, the Federal Reserve will _____ the real interest rate to _____.

A)lower; cool inflationary pressures
B)lower; reduce unemployment
C)raise; cool inflationary pressures
D)raise; reduce unemployment

Question 55

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 0.75%, and the output gap is -1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

A)2.125%
B)1.125%
C)0.375%
D)1.375%

Question 56

You are sitting at your desk in your new job as the Chair of the Federal Reserve Bank of the United States. The interest rate where potential GDP meets real GDP is 2%, the inflation rate is 1%, and the output gap is -1%. What is the appropriate new nominal federal funds rate that you should set for the economy?

A)2.5%
B)1%
C)0.5%
D)1.5%

Question 57

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 1%, and the output gap is -0.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

A)0.5%
B)3%
C)2%
D)1%

Question 58

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3%, and the output gap is 1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

A)6.5%
B)3.5%
C)3%
D)4.5%

Question 59

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

A)7.75%
B)5%
C)3.5%
D)4.25%

Question 60

Suppose you have the following statistics for the economy. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. If the Federal Reserve sets the federal funds rate according to the Fed's rule of thumb, then what is the real interest rate?

A)7.75%
B)5%
C)3.5%
D)4.25%

Question 61

What are bank reserves?

A)deposits held at commercial banks
B)cash that the Federal Reserve keeps to lend through the discount window
C)cash that banks need to keep on hand in order to make payments
D)the sum of all the loans made through the banking sector

Question 62

What is a reserve requirement?

A)the minimum amount of reserves that each bank must hold
B)a maximum loan amount on the overnight loan market
C)the ceiling on the federal funds rate
D)the amount of money that the Federal Reserve spends on buying bonds

Question 63

If a bank's reserves are low, it can increase reserves by:

A)buying bonds.
B)encouraging more deposits.
C)borrowing from other banks in the overnight loan market.
D)setting a cap on the amount that borrowers can borrow.

Question 64

Banks whose current reserves are lower than the reserve requirement:

A)demand overnight loans.
B)supply overnight loans.
C)supply bonds in the bond market.
D)have excess reserves.

Question 65

Banks whose current reserves are higher than the reserve requirement:

A)demand overnight loans.
B)supply overnight loans.
C)supply bonds in the bond market.
D)do not have excess reserves.

Question 66

The Open Market Trading Desk is where the Federal Reserve:

A)buys and sells government bonds.
B)makes discount window loans to banks.
C)issues requirements on excess reserves.
D)issues statements on monetary policy changes.

Question 67

What are overnight reverse repurchase agreements?

A)government-issued bonds that the Treasury Department sells to the Federal Reserve
B)the issue of discount window loans to financial institutions, with an agreement for the financial institutions to pay back the loans the next day
C)the demand and supply of overnight loans in the overnight loan market
D)the sale of government bonds to financial institutions, with an agreement to purchase the bonds back the next day, at a higher price

Question 68

How do overnight reverse repurchase agreements work?

A)The Open Market Trading Desk makes loans to banks and charges them an interest rate higher or lower than the discount rate.
B)They set the exact federal funds rate that can be charged by financial institutions.
C)They increase the amount of reserves held by financial institutions and thus allow banks to make more loans.
D)The Open Market Trading Desk sells bonds to banks and agrees to purchase the bonds back the next day at higher prices. This implicitly sets the floor for the federal funds rate.

Question 69

What is the floor framework that the Federal Reserve uses to influence the federal funds rate?

A)Operations by the Open Market Trading Desk at the Fed
B)The use of open market operations by the Fed
C)The Fed's approach of setting other interest rates to put a lower bound on how low the federal funds rate can go
D)The Fed's approach of setting the discount rate above the federal funds rate

Question 70

Why is the discount rate the upper bound for the federal funds rate?

A)It is set higher than the federal funds rate.
B)It is set lower than the federal funds rate.
C)The discount rate does not change over time.
D)The discount rate is the highest interest rate that banks can charge the public when they make loans.

Question 71

The ceiling for the federal funds rate is set by the:

A)repurchase agreements and interest on excess reserves.
B)discount rate.
C)open market trading desk.
D)president of the country.

Question 72

The lower bound for the federal funds rate is set by the:

A)repurchase agreements and interest on excess reserves.
B)discount rate.
C)open market trading desk.
D)president of the country.

Question 73

If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.

A)lower; less; decrease
B)lower; less; increase
C)raise; more; increase
D)raise; more; decrease

Question 74

If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.

A)lower; less; decrease
B)lower; less; increase
C)raise; more; increase
D)raise; more; decrease

Question 75

If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy.

A)lower; downward; decrease
B)lower; downward; increase
C)raise; upward; increase
D)raise; upward; decrease

Question 76

If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy.

A)lower; downward; decrease
B)lower; downward; increase
C)raise; upward; increase
D)raise; upward; decrease

Question 77

Quantitative easing is the:

A)purchase of large quantities of longer-term government bonds and other securities in an effort to drive down longer-term interest rates.
B)sale of both short-term and long-term government bonds by the government.
C)purchase of bonds by the Federal Reserve.
D)setting of the discount rate by the Federal Reserve in an effort to increase loans to the banking sector.

Question 78

Forward guidance occurs when the Federal Reserve:

A)provides information about the future course of monetary policy in order to influence expectations about future interest rates.
B)follows the same future course of monetary policy that it has been following in the past.
C)carries out open market operations to influence future interest rates.
D)provides information about current monetary policy in order to influence expectations about future interest rates.

Question 79

If the economy is below potential and interest rates are at the zero bound, how can the Federal Reserve still push long-term interest rates down?

A)through the Open Market Trading Desk at the New York Federal Reserve district bank
B)by using open market operations
C)through forward guidance and quantitative easing
D)by relying on fiscal policy

Question 80

What kind of interest rate does forward guidance affect?

A)the federal funds rate
B)the discount rate on loans from the Federal Reserve's window
C)interest rates on overnight loans
D)longer-term interest rates