Deck 3: The Fed and Interest Rates

Question 1

Restrictive monetary policy in the United States may slow down nominal GDP.

Answer 1

True

Question 2

When reserve requirements are increased, interest rates should increase.

Answer 2

True

Question 3

If cash drains increase, the Fed may offset their effects with open market sales.

Answer 3

False

Question 4

The Emergency Economic Stabilization Act of 2008 authorized the increase in deposit insurance from $100,000 to $250,000.

Question 5

Stable or growing employment is one of the objectives of monetary policy.

Question 6

There is definitely a tradeoff between stable prices and full employment.

Question 7

The monetary base exceeds the money supply.

Question 8

The cash-holding behavior of the public affects the monetary base.

Question 9

The Federal Reserve decreases the monetary base whenever it sells government securities.

Question 10

Monetarists think changing the money supply impacts economic units directly rather than just through interest rates.

Question 11

A significant move by the Fed toward a "tight" money policy is likely to enhance exports.

Question 12

A prolonged "tight" monetary policy can be associated with falling bond prices.

Question 13

The Fed attempts to control M2 by controlling total reserves of depository institutions.

Question 14

Increasing interest rates increases wealth and encourages spending.

Question 15

Decreasing interest rates tend to increase financial wealth and encourage consumer spending.

Question 16

The experience since 2008 has shown that a decrease in the Fed Funds target rate will not always lead to fewer excess reserves and an increase in bank lending.

Question 17

Housing investment is sensitive to changes in interest rates.

Question 18

Unexpected high levels of inflation aid debtors at the expense of lenders.

Question 19

An increase in the money supply should ultimately cause security prices to decrease all else equal.

Question 20

Easy monetary policy strengthens the dollar.

Question 21

The expected effect of quantitative easing (QE) is to lower long-term interest rates to boost the economy.

Question 22

According to the Taylor Rule the Fed kept interest rates too high from 2004 to 2006 and helped create the mortgage bubble.

Question 23

Monetary policy first affects financial markets and institutions, then the real economy.

Question 24

Full employment means that everyone in the economy has a job.

Question 25

The Fed perfectly controls the money supply.

Question 26

Reserve requirements are not useful for "fine tuning" the economy.

Question 27

Interest rates and the money supply tend to vary inversely, at least in the short term.

Question 28

Explain how the Fed adjusts its balance sheet to increase or decrease the monetary base.

Question 29

Whether an increase in the money supply results in real growth or inflation is impacted by how close the economy is to full capacity.

Question 30

The Fed purchased over $300 billion in commercial paper during the financial crisis to prop up this market.

Question 31

High debt levels can make it harder for the Fed to stimulate the economy.

Question 32

Monetary policy only works in the long term.

Question 33

High stock prices are a goal of monetary policy.

Question 34

"Cash drains" are an example of a factor that complicates the Fed's ability to control the money supply.

Question 35

The long term trend in ten year Treasury rates was positive from 1981 to 2014.

Question 36

Real investment is encouraged by rising interest rates.

Question 37

Changes in velocity make it harder for the Fed to predict how a change in the money supply will impact the economy.

Question 38

How does the Federal Reserve control the money supply by controlling the size of the monetary base? Note the tools of monetary policy and how each can affect the monetary base and money supply.

Question 39

When the Fed increases the Fed Funds Rate, financial institutions "go to the Window".

Question 40

The goals of U.S. monetary policy were set by Congress.

Question 41

What should happen to consumption if the monetary base increases? Explain.

Question 42

What exactly is the Fed Funds Rate, and how is it used in setting monetary policy?

Question 43

List and briefly describe the channels of transmission of monetary policy.