Question 1

When the economy is in recession, does the Fed want to raise the interest rate so as to increase aggregate demand and increase real GDP? Explain your answer.

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Question 2

Explain how the Fed's response to inflation works its through the economy to ultimately affecting real GDP and the price level.

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Question 3

"When the Fed buys securities from a bank, the quantity of money eventually decreases by a fraction of the initial change in the monetary base." Is the previous statement correct or incorrect? Explain your answer.

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Question 4

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 5

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

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Question 6

Explain how the Fed's response to a recession works its through the economy to ultimately affecting real GDP and the price level.

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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

When the Fed buys securities from a bank, what happens to the monetary base and the quantity of money? Which changes by more or do both change by the same amount?

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Question 9

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

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Question 10

"The Fed can affect aggregate demand through monetary policy by changing the federal funds rate and thereby influencing interest rates." Is the previous statement correct or incorrect?

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Question 11

"When the Fed is concerned with inflation, it buys government securities." Is the previous statement correct or incorrect? Explain your answer.

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Question 12

How does a rise in the federal funds rate target affect aggregate demand, real GDP, and the price level in the short run?

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Question 13

If the Fed is concerned about inflation, in the short run what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability?

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Question 14

When would the Fed want to carry out a monetary policy that decreases aggregate demand?

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Question 15

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 16

If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money?

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Question 17

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 18

In the short run, if the Fed wants to fight a recession, should it buy or sell government securities? Why?

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Question 19

In the aggregate demand/aggregate supply framework, lowering the federal funds rate has what short- run effects on real GDP?

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Question 20

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

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Quiz 14: Monetary Policy