Question 1

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 2

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 and can only influence rates toward a target value. The term "target" is used because the Fed sets a desired range or level for the federal funds rate and then takes actions to guide the market toward that target.

Question 3

The target inflation rate for many central banks is about

Accepted Answer

The target inflation rate for many central banks is around 2 percent. This is because a low and stable inflation rate is believed to support economic growth while keeping prices stable for consumers. A higher inflation rate can lead to uncertainty and instability in the economy, while a zero or negative inflation rate (deflation) can also be problematic for various reasons such as discouraging spending and investment.

Question 4

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

Accepted Answer

The Fed changes nominal interest rates by buying and selling bonds in the open market, which affects the supply of money and the cost of borrowing for banks and other financial institutions.

Question 5

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

Accepted Answer

The target inflation rate is the central bank's goal for the average rate of inflation over the long run. It is typically between 2-3% and is aimed to maintain price stability while allowing for sustainable economic growth. It is not necessarily related to unemployment or net exports.

Question 6

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 7

If a change in interest rates will affect real GDP, the Fed should focus on the change in the nominal interest rate.

Accepted Answer

The Fed should focus on the real interest rate because it reflects the cost of borrowing after adjusting for inflation, directly influencing spending, investment, and economic growth (real GDP).

Question 8

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 9

An inflation target is

Accepted Answer

An inflation target is the rate of inflation that the central bank tries to maintain, on average, over the long run. This target is usually expressed as a percentage and is based on the central bank's assessment of what level of inflation is consistent with its mandate to promote price stability and maximum employment. In the United States, the Federal Reserve has an inflation target of 2%.

Question 10

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 will typically use expansionary monetary policy to stimulate the economy. One tool it has is open market operations, in which it buys government bonds from banks, thereby increasing the money supply and lowering interest rates. This can encourage borrowing and investment, which can help to stimulate economic growth and avoid a recession. Therefore, option B is the best choice.

Question 11

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 rate that the central bank aims to achieve on average over the long run. This rate is often around 2% for many central banks.

Question 12

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 13

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

Accepted Answer

The monetary policy rule is the systematic response of the real interest rate to the rate of inflation as decided by the central bank. The central bank adjusts the interest rate to influence inflation and stabilize the economy.

Question 14

The Federal Reserve cannot directly control interest rates.

Accepted Answer

The Federal Reserve can influence interest rates through various monetary policy tools, but they cannot directly control them. Interest rates are ultimately determined by the actions of lenders and borrowers in the market.

Question 15

When the Fed wants to raise nominal interest rates, it

Accepted Answer

One way the Fed can raise nominal interest rates is by selling government bonds, which reduces the money supply in circulation and increases the demand for loans, thus raising interest rates.

Question 16

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 17

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 18

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 shows that the Fed will seek to change the nominal rate of interest by more than the change in the rate of inflation. This means that if there is an increase in the rate of inflation, the Fed will raise the nominal interest rate by more than the increase in inflation in order to combat inflationary pressures. Conversely, if there is a decrease in the rate of inflation, the Fed will lower the nominal interest rate by more than the decrease in inflation in order to stimulate the economy.

Question 19

Inflation and the rate of interest are positively correlated.

Accepted Answer

When inflation is high, central banks tend to raise interest rates to control the inflationary pressures in the economy. Conversely, when inflation is low, central banks may lower interest rates to stimulate economic growth. Therefore, inflation and interest rates are positively correlated.

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