Question 1

"As the Fed Chases Inflation, Critics Shout, 'Faster!'" "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "...the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake."
Www)nytimes, 7/1/2004
The goal of the Fed's policy in 2004 was to decrease

Accepted Answer

The Fed's policy aimed to decrease consumption expenditure by raising interest rates, which would make borrowing more expensive and thus reduce spending.

Question 2

Explain the ripple effects of a sale of securities in an open market operation.

Accepted Answer

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Question 3

Assume the Fed is concerned with a possible recession so it wants to lower the interest rate. How does the Fed lower the interest rate in the short run?

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Question 4

List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model. Tell what the impact is when the Fed eases monetary policy to fight a recession.

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Question 5

"As the Fed Chases Inflation, Critics Shout, 'Faster!'" "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "...the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake."
www.nytimes, 7/1/2004
As a result of the Fed's policy, which of the rates will increase?

Accepted Answer

The answer of "As the Fed Chases Inflation, Critics Shout,...

Question 6

In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008
The "interest rates" the Fed is cutting is the

Accepted Answer

The Federal Reserve primarily adjusts the Federal Funds rate as a means to influence the economy, which is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.

Question 7

Discuss how the Fed raising the federal funds rate ripples through the different sectors of the economy.

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Question 8

Suppose in the money market the equilibrium interest rate is 5 percent and quantity of money demanded and supplied are both equal to $2 trillion dollars. If the Fed increases the quantity of money, what is the effect on the interest rate?

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Question 9

In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008
The Fed's rates cuts will initially impact ________ and eventually ________.

Accepted Answer

The Fed's rate cuts initially impact bank reserves by increasing them, which eventually affects real GDP by stimulating economic activity.

Question 10

"The Bank of Israel lowered its benchmark lending rate by half a percentage point, the fourth cut in seven weeks, as the global financial turmoil slows economic growth and inflation expectations ease." www.bloomberg.com 11/24/2008
The Bank of Israel's actions ________ bank reserves and have the goal of ________ consumption.

Accepted Answer

The Bank of Israel's actions of lowering its benchmark lending rate would increase bank reserves by making it cheaper for banks to borrow money, which in turn is aimed at increasing consumption by making borrowing more attractive for consumers and businesses.

Question 11

Does an open market operation in which the Fed buys securities from the general public decrease or increase the banking system's reserves?

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Question 12

In December, the Bank of England reduced interest rates by another 50 basis points (a basis point is 0.01 percentage point) after it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move." Reuters, 11/27/2008
In order to ________, the Bank of England's rate cut must ________.

Accepted Answer

The Bank of England's rate cut is intended to stimulate economic activity by making borrowing cheaper, thereby increasing consumption and potentially increasing real GDP. A decrease in the interest rate reduces the cost of borrowing, encouraging both consumers and businesses to spend more. This does not directly aim to increase long-run interest rates or decrease real GDP.

Question 13

Describe how open market operations change the quantity of money.

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Question 14

Suppose the economy is in recession. Write a letter to the brand-new chairman of the Federal Reserve suggesting how the Fed might help end the recession. Be sure to explain how a change in monetary policy will affect economic activity.

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Question 15

In December, the Bank of England reduced interest rates by another 50 basis points after points (a basis point is 0.01 percentage point) it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move." Data show that "... inflation staged its biggest drop since records began ...potentially opening the door to even bigger cuts." Reuters, 11/27/2008
If the Bank's policies given above can ________ the real long-term interest rate,the Bank will be able to ________.

Accepted Answer

Lowering the nominal interest rate can lead to a decrease in the real interest rate, which typically increases aggregate demand by making borrowing cheaper, encouraging spending and investment.

Question 16

What is the effect of lowering the interest rate on net exports? Explain your answer.

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Question 17

Why does the Fed pursue price stability as its ultimate goal?

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Question 18

In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008
The Fed's rate cuts will ________ bank reserves and ________.

Accepted Answer

The Federal Reserve's decision to cut interest rates typically increases bank reserves because it lowers the cost of borrowing money, which encourages banks to lend more. This, in turn, increases the money supply as more money is available in the economy. An increased money supply can stimulate economic activity, leading to an increase in real GDP.

Question 19

In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008
These rate cuts are designed to

Accepted Answer

Decreasing the real long-term interest rate makes borrowing cheaper, which can stimulate investment and consumption, leading to an increase in real GDP.

Question 20

"As the Fed Chases Inflation, Critics Shout, 'Faster!'" "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "...the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake."
Www)nytimes, 7/1/2004
The Fed's policy will ________ the quantity of money and ________ the supply of loanable funds.

Accepted Answer

Raising interest rates typically leads to a decrease in the quantity of money and a decrease in the supply of loanable funds, as borrowing becomes more expensive.

Quiz 14: Monetary Policy