Question 1

When the Fed wants to raise nominal interest rates, it

Accepted Answer

When the Fed wants to raise nominal interest rates, it sells government bonds. This reduces the money supply and increases the demand for money, which leads to an increase in interest rates.

Question 2

When the Fed takes action to change nominal interest rates, it does so by

Accepted Answer

The Fed uses open market operations to buy and sell bonds, which affects the supply and demand of money in the economy and ultimately impacts nominal interest rates.

Question 3

If the slope of the monetary policy rule line is 2, then when inflation rises by 1 percent, the

Accepted Answer

The slope of the monetary policy rule line represents how much the nominal interest rate changes in response to a change in inflation. If the slope is 2, then a 1 percent increase in inflation leads to a 2 percent increase in the nominal interest rate.

Question 4

When the Fed is worried that the economy is heading into a recession, it

Accepted Answer

When the Fed is worried about a recession, it usually resorts to buying government bonds. This is because buying more bonds in the open market increases the money supply and lowers interest rates, which encourages borrowing and spending. This can help to stimulate economic growth and avoid a recession.

Question 5

An inflation target is

Accepted Answer

An inflation target is the rate of inflation the central bank tries to maintain, on average, over the long run. This is typically set by the central bank's monetary policy committee or board and is usually expressed as a percentage target for the consumer price index (CPI) or another measure of overall price level changes. The central bank can use its policy tools (such as changing interest rates) to try to keep inflation close to this target.

Question 6

The Fed uses the term target when it announces how it intends to change the federal funds rate because

Accepted Answer

The Fed has no direct control over interest rates, but can only influence rates towards a target value. Therefore, it announces a target for the federal funds rate to guide market expectations and shape market interest rates.

Question 7

Inflation and the rate of interest are positively correlated.

Accepted Answer

This is because as inflation increases, the central bank will typically raise interest rates to try to slow down spending and prevent the economy from overheating. Conversely, if inflation is low, the central bank may lower interest rates to stimulate spending and boost economic growth.

Question 8

The text defines the monetary policy rule as the systematic response of the real interest rate to the

Accepted Answer

The monetary policy rule refers to the systematic response of the real interest rate to the rate of inflation as decided by the central bank. This is because central banks use their monetary policy tools, such as adjusting interest rates, in order to achieve their inflation targets. Therefore, the rate of inflation is a key determinant of the central bank's monetary policy rule.

Question 9

In order for the Fed to respond correctly to changes in the inflation rate, the slope of the monetary policy rule line (showing the relationship between the inflation rate and the real interest rate) must be

Accepted Answer

The slope of the monetary policy rule line must be greater than 1 for the Fed to respond appropriately to changes in the inflation rate. This ensures that the real interest rate increases more than one-for-one with inflation, helping to stabilize the economy by cooling down inflationary pressures.

Question 10

The slope of the monetary policy rule line shows that the Fed will seek to change the nominal rate of interest

Accepted Answer

The slope of the monetary policy rule line represents the response of the Fed to changes in the inflation rate. If the slope is greater than 1, it means that the Fed is changing the nominal interest rate by more than the change in inflation, indicating a more aggressive response. Therefore, the best choice is C, which states that the Fed will seek to change the nominal rate of interest by more than the change in the rate of inflation.

Question 11

The target inflation rate for many central banks is about

Accepted Answer

The target inflation rate for many central banks is about 2 percent. This is because a moderate level of inflation can help promote economic growth and stability, while also avoiding the negative consequences of deflation.

Question 12

Of the Fed, the Bank of England, and the Reserve Bank of New Zealand, which of the following statements is true?

Accepted Answer

The answer of Of the Fed, the Bank of England,...

Question 13

Suppose that at the target inflation rate of 2.5 percent the nominal interest rate is 4 percent. This means that at the target inflation rate, the central bank wants the real interest rate to equal

Accepted Answer

The real interest rate can be approximated by subtracting the inflation rate from the nominal interest rate. Therefore, 4 percent (nominal interest rate) - 2.5 percent (inflation rate) = 1.5 percent (real interest rate).

Question 14

The slope of the monetary policy rule line when the nominal interest rate is measured on the vertical axis is

Accepted Answer

The slope of the monetary policy rule line, often associated with the Taylor rule in economics, is typically greater than 1. This reflects the central bank's response to inflation: for every one percentage point increase in inflation, the central bank raises the nominal interest rate by more than one percentage point to stabilize the economy.

Question 15

The inflation rate the central bank tries to maintain, on average, over the long run is referred to as the

Accepted Answer

The target inflation rate is the inflation rate that the central bank tries to maintain, on average, over the long run.

Question 16

When the Fed raises interest rates, it expects

Accepted Answer

When the Fed raises interest rates, it becomes more expensive for businesses and individuals to borrow money, which decreases their spending on investment and consumption. This decrease in spending slows down economic growth, resulting in a decrease in the growth rate of real GDP. However, this does not necessarily lead to a decrease in potential GDP.

Question 17

Which of the following is an appropriate definition of the target inflation rate?

Accepted Answer

The target inflation rate refers to the central bank's goal for the average rate of inflation over the long run, typically around 2% in many developed economies. It is not related to unemployment, short-term fluctuations in inflation, or net exports.

Question 18

If the economy is in a recession, inflation will be ____, and the Fed will want to ____ the interest rate in order to ____ real GDP.

Accepted Answer

In a recession, there is a decline in economic activity and therefore a decrease in demand for goods and services. This leads to a fall in prices and lower inflation. The Fed will want to decrease interest rates to make borrowing cheaper and stimulate spending, which in turn can increase real GDP.

Question 19

According to the monetary policy rule, the Fed raises interest rates only when

Accepted Answer

The answer of According to the monetary policy rule, the...

Question 20

If the central bank determines that aggregate demand is not very sensitive to changes in the interest rate,

Accepted Answer

When aggregate demand is not very sensitive to changes in the interest rate, the monetary policy rule line becomes steeper. This indicates that larger changes in the interest rate are required to affect aggregate demand, reflecting a lower sensitivity of demand to interest rate adjustments.

Quiz 12: The Economic Fluctuations Model