Question 1

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

Accepted Answer

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Question 2

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 3

When the Fed purchases U.S. government securities in the open market, the federal funds falls.)

Accepted Answer

When the Fed purchases U.S. government securities in the open market, it injects reserves into the banking system, increasing the supply of funds and lowering the federal funds rate.

Question 4

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

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Question 5

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 6

The President of the United States is also the chairman of the Federal Reserve.

Accepted Answer

The President of the United States is not the chairman of the Federal Reserve. The Federal Reserve is an independent agency, and its chairman is appointed by the President and confirmed by the Senate.

Question 7

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 8

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

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Question 9

A positive output gap is an inflationary gap.

Accepted Answer

A positive output gap means that actual output is higher than potential output, which indicates that the economy is operating beyond its full capacity. This leads to increased demand for goods and services, as well as increased pressure on input resources, which can cause inflationary pressures.

Question 10

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

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Question 11

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

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Question 12

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

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Question 13

The Fed targets the 30-year bond rate as its monetary policy instrument.)

Accepted Answer

The 30-year bond rate is not the monetary policy instrument used by the Fed. The Fed uses the federal funds rate as its primary monetary policy tool.

Question 14

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

Accepted Answer

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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

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

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Question 17

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 18

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 19

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 20

The core inflation rate is more volatile than the total CPI inflation rate.)

Accepted Answer

The core inflation rate excludes food and energy prices because they are more volatile. Therefore, the total CPI inflation rate, which includes these items, tends to be more volatile than the core inflation rate.

Quiz 14: Monetary Policy