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
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 2

In October 2008, central banks around the world coordinated a decrease in interest rates. Ben Bernanke, then Chairman of the Federal Reserve, stated that "policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant."
If all the banks enacted the policy simultaneously, which of the following expenditure components would increase in the United States?
I.exports
II.consumption
III.investment

Accepted Answer

A decrease in interest rates would encourage investment through borrowing, therefore increasing investment, and also increase consumption through cheaper borrowing, hence increasing consumption. However, it could also lead to a stronger dollar, making exports relatively more expensive, hence exports would not likely increase. Therefore, the correct answer is II and III only.

Question 3

An inflation rate targeting rule

Accepted Answer

Adopting an inflation rate targeting rule reduces uncertainty about monetary policy by providing a clear and transparent framework for how the central bank will respond to changes in inflation. This helps businesses and consumers make better-informed decisions about their spending and investment plans. B is incorrect because open market operations are a key tool for implementing an inflation rate targeting rule. C is incorrect because the Fed had already adopted an inflation rate targeting regime before the financial crisis, although it may have modified its approach in response to the crisis. D is incorrect because the specific level of the inflation target will depend on the central bank's assessment of the trade-off between inflation and other macroeconomic objectives.

Question 4

In November 2008, the Reserve Bank of India (RBI)lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent.
The Economist, 11/6/2008
In its attempt to change real GDP, which of following sequences CORRECTLY describes the transmission of RBI's monetary policy?
I.The real interest rate falls.
II.The money supply increases.
III.Bank reserves increase.
IV.Supply of loanable funds increases.
V.Aggregate demand increases.

Accepted Answer

The correct sequence for the transmission of RBI's monetary policy starts with an increase in bank reserves (III) as the RBI lends more to banks at a lower rate. This leads to an increase in the money supply (II) because banks have more funds to lend. With more funds available, the supply of loanable funds increases (IV), which typically leads to a fall in the real interest rate (I). Lower interest rates make borrowing cheaper, encouraging investment and consumption, which in turn increases aggregate demand (V).

Question 5

The Taylor Rule states that the

Accepted Answer

The Taylor Rule is a monetary policy rule that recommends adjusting the federal funds rate in response to deviations of inflation from its target and real GDP from potential GDP. It does not suggest targeting the monetary base or using an exchange rate target. Therefore, choice C is the correct answer.

Question 6

In October 2008, central banks around the world coordinated a decrease in interest rates. Ben Bernanke, then Chairman of the Federal Reserve, stated that "policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant."
If all the banks enacted the policy simultaneously, the U.S. interest rate differential would ________ and so the U.S. exchange rate would ________.

Accepted Answer

When all central banks around the world coordinated a decrease in interest rates simultaneously, the interest rate differential between the U.S. and other countries would not change because all are moving in the same direction by the same relative amount. Consequently, the exchange rate would not be expected to change based on interest rate differentials alone.

Question 7

"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
Economists estimate that if the Fed's policy was enacted in July 2004, the impact on the economy

Accepted Answer

The article does not provide a specific timeline for the impact of the Fed's policy, but mentions that some economists believe the Fed's restrained policy is a mistake and that inflation needs to be chased faster. Therefore, the impact can be expected to stretch over one to two years rather than being immediate or happening within a few months.

Question 8

The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States.
Www)nytimes.com, 11/26/2008
Other things remaining the same, there will be ________ in the exchange rate, ________ in imports and ________ in exports.

Accepted Answer

Lowering the lending rate typically leads to a depreciation of the currency, which makes imports more expensive (decrease) and exports cheaper for foreign buyers (increase).

Question 9

In September 2012 the Fed announced that because of weak labor market conditions, it would ________ $40 billion of mortgage backed securities per month. Critics of the action said that banks have ________ excessive reserves so the action would be futile.

Accepted Answer

The Fed announced that it would buy $40 billion of mortgage-backed securities per month, a policy known as quantitative easing. The purpose of this policy was to increase the money supply and stimulate economic growth. Critics argued that banks were already holding huge amounts of excess reserves and therefore the policy would be ineffective.

Question 10

In November 2008, the Reserve Bank of India (RBI)lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent.
The Economist, 11/6/2008
The Reserve Bank of India is lowering its rates to fight

Accepted Answer

By lowering its "repo" rate twice in a span of two weeks, the Reserve Bank of India is aiming to boost lending and encourage spending, ultimately working to combat a possible recession. Lower interest rates make borrowing cheaper, which can potentially increase consumer spending and business investments.

Question 11

The Taylor rule uses three variables to determine the target for the federal funds rate. Which of the following is NOT one of those variables?

Accepted Answer

The three variables used in the Taylor rule are the equilibrium real interest rate, inflation rate, and output gap. The monetary base is not one of the variables used in the Taylor rule.

Question 12

"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
By increasing the federal funds target, the Fed will ________ reserves and ________ the quantity of money.

Accepted Answer

By increasing the federal funds target, the Fed makes borrowing more expensive, which decreases bank reserves and reduces the quantity of money in the economy.

Question 13

The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States.
Www)nytimes.com, 11/26/2008
This policy ________ the supply of loanable funds. As a result, the long-term real interest rate ________, and planned expenditures ________.

Accepted Answer

Lowering the lending rate increases the supply of loanable funds, which typically decreases the long-term real interest rate, encouraging more planned expenditures.

Question 14

If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would

Accepted Answer

The Taylor Rule suggests that in times of recession, the Fed should lower the federal funds rate to stimulate economic activity and increase employment. Therefore, the best answer is A.

Question 15

The People's Bank of China announced that it was lowering by 1.08 percentage points the one-year lending rate in response to the slowdown in the Chinese economy. This rate is the Chinese equivalent of the federal funds rate in the United States.
www.nytimes.com, 11/26/2008
Other things remaining the same, which of the following components will decrease in response to the bank's actions?
i.exchange rate
iI.interest rate
iII.investment

Accepted Answer

Lowering the lending rate typically leads to a decrease in interest rates and can lead to a depreciation of the exchange rate as lower interest rates make a currency less attractive to foreign investors. Investment, however, is likely to increase due to lower borrowing costs.

Question 16

"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

The Fed's intention to raise interest rates means that it plans to decrease the quantity of money and decrease the supply of loanable funds. This is because higher interest rates make borrowing more expensive, which discourages consumers and businesses from taking out loans and decreases the supply of loanable funds available. Additionally, decreasing the quantity of money helps to control inflation.

Question 17

Suppose that the inflation rate is 3 percent and the output gap is -1 percent. Assuming that the equilibrium real interest rate is 2 percent, what target should the Fed set for the federal funds rate, if the Taylor rule is used?

Accepted Answer

The answer of Suppose that the inflation rate is 3...

Question 18

In September 2012 the Fed announced that it would buy $40 billion of mortgage backed securities per month. One goal of this policy was to ________ the price of these securities and thereby help ________.

Accepted Answer

The Fed's policy of buying mortgage backed securities was intended to raise the price of these securities, which would cause the yield (or interest rate) on these securities to fall. This would in turn lower long-term interest rates, making borrowing cheaper and stimulating the housing market and economy as a whole.

Question 19

Suppose that the equilibrium real interest rate is 2 percent per year, inflation is 2.5 percent and the output gap is 1 percent. Using the Taylor rule, what is the federal funds rate?

Accepted Answer

The Taylor rule for the federal funds rate is:
federal funds rate = equilibrium real interest rate + current inflation + 0.5(actual inflation - target inflation) + 0.5(output gap)
Plugging in the given values, we get:
federal funds rate = 2% + 2.5% + 0.5(2.5%-2%) + 0.5(1%)
federal funds rate = 5.25%
Therefore, the answer is C, 5.25 percent.

Question 20

The Taylor rule

Accepted Answer

The Taylor rule shows how the Fed could set the federal funds rate based on inflation and output gaps. It does not solely focus on fluctuations in real GDP and takes into account both price level stability and inflation. While the Fed may not always follow the Taylor rule exactly, it is a widely used guideline for monetary policy.

Quiz 14: Monetary Policy