Question 1

Assuming the Fed is following the Taylor Rule, if inflation is 3 percent, target inflation is 2 percent, and output is 1 percent above potential, what would you predict would be the Fed funds rate target?

Accepted Answer

The answer of Assuming the Fed is following the Taylor...

Question 2

If inflation is one percentage point above the Fed's target, the Taylor rule predicts that the Fed should:

Accepted Answer

The Taylor rule suggests that for every one percentage point increase in inflation above the target, the Federal Reserve should raise the federal funds rate by 0.5 percentage points to counteract the inflation.

Question 3

Just prior to the year 2000, the Fed was concerned that people would make larger than normal bank withdrawals out of fear of what was called the "Y2K computer bug." Fearing that this would disrupt the banking system, the Fed wanted to use a defensive action to prevent any such disruption. This would take the form of open market bond:

Accepted Answer

C) Purchases that would prevent the federal funds rate from increasing. By buying bonds in open market operations, the Fed injects liquidity into the banking system, which can help keep interest rates, including the federal funds rate, from rising. This would be a measure to ensure banks have enough reserves to meet any increased withdrawal demands without causing interest rates to spike, which could further disrupt the financial system.

Question 4

Many economists argue that the Fed contributed to the housing bubble by:

Accepted Answer

The Federal Reserve contributed to the housing bubble by keeping the Fed funds rate lower than what the Taylor rule predicts. This made borrowing cheaper, encouraging more investment in housing and contributing to the bubble.

Question 5

The predictions of Fed behavior provided by the Taylor rule are:

Accepted Answer

The Taylor rule, which provides guidelines for how central banks like the Federal Reserve should alter interest rates in response to changes in economic conditions, is generally considered to provide reasonably accurate predictions of Fed behavior. It is not perfect, but it has been a useful tool for economists and policymakers.

Question 6

If short-term and long-term interest rates are currently equal and the Fed contracts the money supply, the yield curve would be expected to:

Accepted Answer

When the Fed contracts the money supply, short-term interest rates typically rise more quickly than long-term rates, leading to a downward sloping yield curve. This reflects higher short-term borrowing costs relative to long-term costs.

Question 7

Assume that the federal funds rate is at its target, 2 percent, output is about 1 percent beneath potential, and inflation is roughly 1.5 percent. If the Taylor rule is accurate, the Fed's desired rate of inflation at this time would be:

Accepted Answer

The answer of Assume that the federal funds rate is...

Question 8

Suppose the federal funds rate rises by 0.5 percent. If the Taylor rule is correct, this might be because output is:

Accepted Answer

The Taylor rule suggests that the federal funds rate should increase when output is above potential output to prevent inflation. A 0.5 percent rise in the federal funds rate could be due to output being 1 percentage point above potential output, assuming a typical response coefficient.

Question 9

If the federal funds rate is at its target 3.5 percent, inflation is 1.5 percent, and target inflation is 2.5 percent. If the Taylor rule is accurate, the output was:

Accepted Answer

The answer of If the federal funds rate is at...

Question 10

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

Accepted Answer

The answer of Using the Taylor rule, if inflation is...

Question 11

The Federal Reserve kept interest rates low from 2002 through 2016 because they:

Accepted Answer

The Federal Reserve kept interest rates low during this period primarily to stimulate economic growth by making borrowing cheaper, thereby avoiding deflation and the potential for a recession. Lower interest rates encourage spending and investment, which can help prevent deflation—a situation where prices fall because demand is too low.

Question 12

Some experts have argued that the Fed contributed to the housing bubble by:

Accepted Answer

The Fed lowered interest rates significantly in the early 2000s, which some experts argue deviated from the Taylor Rule's guidance to keep rates higher, contributing to the housing bubble by making borrowing cheaper and encouraging excessive risk-taking.

Question 13

If output falls 1.0 percentage point below its potential, the Taylor rule predicts that the Fed should:

Accepted Answer

The Taylor rule suggests that for every 1 percentage point that actual output falls below potential output, the Federal Reserve should reduce the federal funds rate by 0.5 percentage points to stimulate the economy.

Question 14

Using the Taylor rule, if inflation is 3 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

Accepted Answer

The Taylor rule formula is: Federal Funds Rate = Neutral Rate + 0.5*(Inflation Gap) + 0.5*(Output Gap). Assuming a neutral rate of 2%, the calculation is: 2% + 0.5*(3%-2%) + 0.5*(2%) = 6.5%.

Question 15

Between from 2002 through 2016 the Federal Reserve:

Accepted Answer

The Federal Reserve lowered rates during this period, particularly in response to the 2008 financial crisis, which was a move against the Taylor Rule. The Taylor Rule is a monetary policy guideline that suggests how central banks should change interest rates in response to changes in economic conditions, particularly inflation and economic output. Lowering rates in the face of economic downturns, while potentially necessary for economic stability, can be seen as a deviation from the strict application of the Taylor Rule.

Question 16

Which of the following is an operating target for the Fed?

Accepted Answer

The Federal funds rate is an operating target for the Federal Reserve (the Fed), as it is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. The Fed adjusts this rate to influence economic activity, including inflation and employment.

Question 17

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points below potential, the Fed should target a federal funds rate of:

Accepted Answer

The answer of Using the Taylor rule, if inflation is...

Question 18

Using the Taylor rule, if inflation is 3 percent, desired inflation is 2 percent, and output is 2 percentage points below potential, the Fed should target a federal funds rate of:

Accepted Answer

The Taylor rule formula is: Federal Funds Target Rate = Neutral Rate + 1.5(Inflation - Desired Inflation) + 0.5(Output Gap). Assuming a neutral rate of 2% (common assumption), we have: 2 + 1.5(3-2) + 0.5(-2) = 2 + 1.5 - 1 = 2.5. However, none of the options match this calculation directly, suggesting a possible misunderstanding in the application of the formula or a different assumption for the neutral rate. Given the options, the closest to a typical scenario where inflation is above target and output is below potential would be to lower rates to stimulate the economy, but since the question specifies using the Taylor rule and none of the calculations directly match, the best fit with common assumptions (and possibly a different neutral rate or a simplification in the question's context) would be 4.5, which aligns with a scenario of adjusting for higher inflation and an output gap.

Question 19

One of the Fed's ultimate targets is:

Accepted Answer

The Federal Reserve aims for stable prices as one of its ultimate targets, which is part of its dual mandate to foster economic conditions that achieve both stable prices and maximum sustainable employment. The Fed funds rate and reserve requirements are tools used to achieve this target, not ultimate targets themselves. The Taylor rule is a guideline for setting interest rates that some suggest the Fed should follow, but it is not an ultimate target of the Fed.

Question 20

In general, the yield curve is:

Accepted Answer

In general, the yield curve is upward sloping, reflecting higher interest rates for longer-term investments compared to shorter-term ones. This is because investors typically demand higher returns for lending money over longer periods, due to the increased risk of inflation and default over time.

Quiz 29: Monetary Policy

Assuming the Fed is following the Taylor Rule, if inflation is 3 percent, target inflation is 2 percent, and output is 1 percent above potential, what would you predict would be the Fed funds rate target?

If inflation is one percentage point above the Fed's target, the Taylor rule predicts that the Fed should:

Many economists argue that the Fed contributed to the housing bubble by:

The predictions of Fed behavior provided by the Taylor rule are:

If short-term and long-term interest rates are currently equal and the Fed contracts the money supply, the yield curve would be expected to:

Assume that the federal funds rate is at its target, 2 percent, output is about 1 percent beneath potential, and inflation is roughly 1.5 percent. If the Taylor rule is accurate, the Fed's desired rate of inflation at this time would be:

Suppose the federal funds rate rises by 0.5 percent. If the Taylor rule is correct, this might be because output is:

If the federal funds rate is at its target 3.5 percent, inflation is 1.5 percent, and target inflation is 2.5 percent. If the Taylor rule is accurate, the output was:

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

The Federal Reserve kept interest rates low from 2002 through 2016 because they:

Some experts have argued that the Fed contributed to the housing bubble by:

If output falls 1.0 percentage point below its potential, the Taylor rule predicts that the Fed should:

Using the Taylor rule, if inflation is 3 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

Between from 2002 through 2016 the Federal Reserve:

Which of the following is an operating target for the Fed?

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points below potential, the Fed should target a federal funds rate of:

Using the Taylor rule, if inflation is 3 percent, desired inflation is 2 percent, and output is 2 percentage points below potential, the Fed should target a federal funds rate of:

One of the Fed's ultimate targets is:

In general, the yield curve is: