Deck 21: Monetary Policy Strategy

Question 1

The FOMC directive contains a target growth rate for

A) nominal GDP.
B) real GDP.
C) the inflation rate.
D) M2.

Answer 1

D

Question 2

M3 is an example of a Federal Reserve

A) directive.
B) tool.
C) intermediate target.
D) operating target.

Answer 2

C

Question 3

An effective Federal Reserve operating target is a target that is reliably linked to

A) inflation and unemployment rates.
B) other operating targets.
C) fiscal policy.
D) open market operations.

Answer 3

A

Question 4

Which of the following is an ultimate objective of the Federal Reserve?

A) Real GDP growth
B) M1 growth
C) M2 growth
D) Low interest rates

Question 5

The FOMC directive does not contain a target

A) growth rate for M1.
B) growth rate for M2.
C) growth rate for M3.
D) federal funds interest rate.

Question 6

Since mid-2000, the Fed's only operating target has been

A) M2 money supply growth.
B) the discount rate.
C) the consumer price index.
D) the federal funds rate.

Question 7

The full minutes of FOMC meetings are

A) released to the public immediately after the meeting.
B) released to the public only after the next meeting.
C) never released to the public.
D) always geared towards controlling inflation.

Question 8

The interest rate target emphasized in recent Federal Open Market Committee press releases is the

A) discount rate.
B) prime rate.
C) federal funds rate.
D) equilibrium rate.

Question 9

Long-term interest rates are an example of

A) an intermediate target.
B) an operating target.
C) a monetary policy objective.
D) a monetary policy tool.

Question 10

Which of the following is a reserve target specified in the FOMC directive?

A) Bank reserves
B) Commercial bank capital requirements
C) Demand deposits
D) The prime rate

Question 11

When forecasting interest rates and the direction of monetary policy, economists often examine the

A) Federal Deposit Insurance Corporation Report.
B) Economic Report of the President.
C) Federal Advisory Council Statement.
D) Federal Open Market Committee directive.

Question 12

The unemployment rate is an example of a Federal Reserve

A) tool.
B) operating target.
C) intermediate target.
D) ultimate objective.

Question 13

Which of the following is an example of a Federal Reserve operating target?

A) Federal funds rate
B) Unemployment rate
C) Non-financial debt
D) M2

Question 14

Which of the following is an example of a reserve aggregate closely watched by the Federal Reserve?

A) Monetary base
B) Currency held by the public
C) Vault cash
D) Total non-financial debt

Question 15

Which of the following is a goal of the Federal Reserve?

A) The federal funds rate target
B) Changes in reserve aggregates
C) Changes in monetary aggregates
D) Control of the rate of inflation

Question 16

Until the year 2000, the Humphrey-Hawkins Act directed the Fed to pursue all of the following, except

A) maximum employment.
B) price stability.
C) high economic growth.
D) moderate long-term interest rates.

Question 17

The Federal Open Market Committee directive is a

A) general statement of Federal Reserve policy goals.
B) detailed description of government security purchases to be carried out by the New York Federal Reserve bank.
C) statement specifying the maximum level of inflation the Federal Reserve will accept.
D) statement specifying the maximum level of unemployment the Federal Reserve will accept.

Question 18

Which of the following is an interest rate target specified in the FOMC directive?

A) Discount rate
B) Treasury bond rate
C) Federal funds rate
D) The prime rate

Question 19

Total bank reserves are an example of a Federal Reserve

A) tool.
B) intermediate target.
C) operating target.
D) objective.

Question 20

Which order does the Federal Reserve's plan for implementing monetary policy follow?

A) Tools => Intermediate Targets => Operating Targets => Goals
B) Goals => Tools => Intermediate Targets => Operating Targets
C) Tools => Operating Targets => Intermediate Targets => Goals
D) Tools => Goals => Operating Targets => Intermediate Targets

Question 21

Targeting reserves would be the best choice if

A) there is a close and predictable relationship between bank reserves and total spending.
B) there is an unpredictable relationship between bank reserves and total spending.
C) the discount rate is fixed.
D) private sector spending is very stable.

Question 22

A(n)__________ in consumer spending will __________ the demand for reserves, resulting in a __________ federal funds rate.

A) increase; raise; lower
B) increase; raise; higher
C) decrease; raise; higher
D) decrease; lower; higher

Question 23

The effectiveness of the federal funds rate as an operating target is limited because

A) the Treasury often uses federal funds market.
B) reserve requirements often change.
C) the demand for reserves is difficult to predict.
D) the deposit expansion multiplier is difficult to predict.

Question 24

The supply of and demand for bank reserves determines the

A) Treasury bill rate.
B) prime rate.
C) discount rate.
D) federal funds rate.

Question 25

The federal funds rate is a better target for the Fed when

A) the link between reserves and spending is strong.
B) there is a lot of variation in the demand for reserves that isn't related to changes in spending.
C) changes in interest rates stabilize the economy.
D) bank reserves are very stable.

Question 26

If banks borrowed from the Fed when the federal funds rate was below its target level

A) the supply of reserves would decrease and the federal funds rate could fall even further.
B) the supply of reserves would increase and the federal funds rate would rise.
C) the supply of reserves would decrease and the federal funds rate would rise.
D) the supply of reserves would increase and the federal funds rate could fall even further.

Question 27

If the federal funds rate is above the equilibrium federal funds rate, then the supply of reserves would be __________ than the demand for reserves and the banks would try to __________ reserves causing the federal funds rate to fall.

A) greater than; lend
B) greater than; borrow
C) less than; lend
D) less than; borrow

Question 28

One effect of a shrinking economy is

A) an increase in the discount rate.
B) a decrease in the discount rate.
C) an increase in the federal funds rate.
D) a decrease in the federal funds rate.

Question 29

The supply of reserves __________ when the federal funds rate __________.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) does not change; changes

Question 30

Which of the following cannot be controlled precisely by the Federal Reserve?

A) Government securities held by the New York Federal Reserve
B) The discount rate
C) Reserve requirement ratios
D) Total bank reserves

Question 31

The Federal Reserve uses the federal funds rate as an operating target because

A) it is an excellent indicator of the economy's underlying inflation rate.
B) it is very sensitive to bank reserve level changes.
C) it is determined by the Treasury.
D) the Fed sets the rate directly.

Question 32

If the federal funds rate is below the equilibrium federal funds rate, then the supply of reserves would be __________ than the demand for reserves and the banks would try to __________ reserves causing the federal funds rate to fall.

A) greater than; lend
B) greater than; borrow
C) less than; lend
D) less than; borrow

Question 33

The demand for reserves is __________ related to the federal funds rate because banks __________ their excess reserves as the federal funds rate falls.

A) inversely; increase
B) inversely; decrease
C) positively; increase
D) positively; decrease

Question 34

The relationship between money and spending is

A) very reliable.
B) very unreliable.
C) not important.
D) None of the above.

Question 35

Federal funds rate targets and reserve targets are incompatible when the Federal Reserve wants to

A) expand reserves and lower interest rates.
B) expand reserves and raise interest rates.
C) contract reserves and the money supply.
D) contract reserves and raise interest rates.

Question 36

Reserve targets and federal funds targets are compatible when the Federal Reserve wants to

A) lower interest rates and expand reserves.
B) raise interest rates and the money supply.
C) raise interest rates and reserves.
D) contract interest rates and reserves.

Question 37

Federal funds are

A) funds owned by the federal government.
B) funds owned by the Federal Reserve.
C) bank reserves that are lent overnight between banks.
D) bank reserves that are lent overnight by the Federal Reserve to banks.

Question 38

If the federal funds rate is __________ the equilibrium interest rate, banks would try to __________ in the federal funds market.

A) above; borrow
B) below; lend
C) below; borrow
D) None of the above.

Question 39

If the Federal Reserve wants to lower the federal funds rate, it should

A) increase reserve requirements.
B) announce a lower rate.
C) request a lower rate.
D) purchase government securities.

Question 40

Under the new discount window system, the interest rate for primary credit loans is set

A) one percentage point below the federal funds rate target.
B) one percentage point above the federal funds rate target.
C) two percentage points above the federal funds rate target.
D) two percentage points below the federal funds rate target.

Question 41

During recent years, the Fed's focus has clearly been on the use of

A) the discount rate.
B) the federal funds rate.
C) the M2 money supply.
D) borrowed reserves.

Question 42

Assume that the actual inflation rate is 3 percent, the target inflation rate is 2.5 percent, and that the percentage difference between actual and potential real GDP is 1 percent. According to the Taylor rule, the federal funds rate target should be

A) 3.25 percent.
B) 5.75 percent.
C) 6.25 percent.
D) 5.50 percent.

Question 43

Assume that the actual inflation rate is 3 percent, the target inflation rate is 3 percent, and that the percentage difference between actual and potential real GDP is 2 percent. According to the Taylor rule, the federal funds rate target should be

A) 3.5 percent.
B) 6.5 percent.
C) 5.5 percent.
D) 5.0 percent.

Question 44

In general, the fed funds rate

A) moves in the direction suggested by the Taylor rule.
B) moves in the opposite direction as suggested by the Taylor rule.
C) is uncorrelated with the Taylor rule prediction.
D) None of the above.

Question 45

The Taylor rule says that the fed funds rate target is a function of all of the following, except

A) the actual inflation rate.
B) the target inflation rate.
C) the percentage difference between actual and potential real GDP.
D) the level of borrowed reserves.