Question 1

If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate _{--------------------}and the quantity of reserves_{--------------------} .

Accepted Answer

When the Fed sells U.S. government securities, it decreases the reserves in the banking system, leading to a higher federal funds rate as banks have fewer reserves to lend to each other.

Question 2

The federal funds rate is_{--------------------}of the Fed.

Accepted Answer

The federal funds rate is the interest rate at which depository institutions trade federal funds with each other overnight. It is used by the Federal Reserve as the primary monetary policy instrument to influence economic activity.

Question 3

The rightward shift of the RS curve will lead to a_{--------------------} in the real interest rate,_{--------------------} in investment, and_{--------------------} in aggregate demand.

Accepted Answer

The answer of

The rightward shift of the RS curve...

Question 4

The Taylor rule is an example of

Accepted Answer

The Taylor rule is an instrument rule that provides guidelines for setting the federal funds rate based on economic conditions like inflation and output.

Question 5

When the Fed raises the federal funds rate, the exchange rate_{--------------------}and net exports_{--------------------}

Accepted Answer

When the Fed raises the federal funds rate, it typically leads to an appreciation of the domestic currency (exchange rate increases) because higher interest rates attract foreign capital. This makes domestic goods more expensive for foreign buyers, leading to a decrease in net exports.

Question 6

When the output gap is positive, it represents_{--------------------} gap, and when it is negative, it represents _{--------------------}Gap.

Accepted Answer

A positive output gap indicates that actual economic output is above potential output, often leading to inflationary pressures. A negative output gap indicates that actual output is below potential output, often associated with recessionary conditions.

Question 7

To pursue its monetary policy goals, the Fed could use
I. a nominal GDP targeting rule.
Ii. a money targeting rule.
Iii. an inflation targeting rule.

Accepted Answer

The Fed can use any of these rules—nominal GDP targeting, money targeting, and inflation targeting—to achieve its monetary policy goals. Each rule provides a different framework for guiding monetary policy decisions.

Question 8

In late 2007, the Fed began a series of cuts in the federal funds rate. Because the core inflation rate was about two percent, the most likely reason for these interest rate cuts was

Accepted Answer

The Federal Reserve likely cut interest rates to stimulate economic activity and avoid a recession, especially given the economic conditions during that period.

Question 9

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

Accepted Answer

Monetary policy does not specifically aim to keep the long-term nominal interest rate equal to the real interest rate plus the inflation rate; this is more of an economic identity rather than a policy goal.

Question 10

When the Fed raises the federal funds rate, the consumption expenditure_{--------------------} and investment_{--------------------} .

Accepted Answer

When the Fed raises the federal funds rate, borrowing costs increase, leading to a decrease in both consumption expenditure and investment as consumers and businesses reduce spending.

Question 11

The FOMC is concerned about inflation and has_{--------------------} the federal funds rate. Due to substitution effects, other _{--------------------}interest rates will _{--------------------}almost immediately.

Accepted Answer

When the FOMC increases the federal funds rate, short-term interest rates typically increase almost immediately due to the substitution effect.

Question 12

If the Fed raises the federal funds rate,

Accepted Answer

Raising the federal funds rate typically strengthens the domestic currency, making exports more expensive and imports cheaper, leading to a decrease in exports and an increase in imports.

Question 13

If the Fed wants to fight inflation, it will_{--------------------}the federal funds rate in order to _{--------------------}

Accepted Answer

Raising the federal funds rate makes borrowing more expensive, which reduces consumer and business spending, thereby decreasing aggregate demand and helping to fight inflation.

Question 14

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 _{--------------------} .

Accepted Answer

When the Fed sells government securities, it decreases the reserves of banks, leading to a decrease in the quantity of money, which helps raise the federal funds rate.

Question 15

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

Accepted Answer

The federal funds rate is a key tool used by the Federal Reserve to influence monetary policy by affecting interest rates and liquidity in the banking system.

Question 16

If the Fed wants to fight recession, it will_{--------------------}the federal funds rate in order to _{--------------------}

Accepted Answer

Lowering the federal funds rate makes borrowing cheaper, encouraging spending and investment, which increases aggregate demand to combat recession.

Question 17

When real GDP is greater than potential GDP, there is_{--------------------}which leads the inflation rate to_{--------------------} .

Accepted Answer

When real GDP exceeds potential GDP, it indicates an inflationary gap, which typically leads to an increase in the inflation rate due to higher demand and pressure on resources.

Question 18

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_{--------------------} .

Accepted Answer

The Federal Reserve uses the core PCE deflator inflation rate to monitor stable prices and the output gap to assess maximum employment.

Question 19

If the Fed sells government securities, in the short run the nominal interest rate_{--------------------} and the real interest rate_{--------------------}.

Accepted Answer

When the Fed sells government securities, it decreases the money supply, leading to higher nominal interest rates. In the short run, real interest rates also rise as they are closely linked to nominal rates and inflation expectations do not adjust immediately.

Question 20

If the Federal Reserve lowers the Federal funds rate,

Accepted Answer

When the Federal Reserve lowers the Federal funds rate, it typically leads to a decrease in other short-term interest rates as well, making borrowing cheaper.

Quiz 17: Monetary Policy

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

The federal funds rate is--------------------of the Fed.

The rightward shift of the RS curve will lead to a-------------------- in the real interest rate,-------------------- in investment, and-------------------- in aggregate demand.

The Taylor rule is an example of

When the Fed raises the federal funds rate, the exchange rate--------------------and net exports--------------------

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

To pursue its monetary policy goals, the Fed could use I. a nominal GDP targeting rule. Ii. a money targeting rule. Iii. an inflation targeting rule.

In late 2007, the Fed began a series of cuts in the federal funds rate. Because the core inflation rate was about two percent, the most likely reason for these interest rate cuts was

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

When the Fed raises the federal funds rate, the consumption expenditure-------------------- and investment-------------------- .

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