Question 1

According to the Taylor rule, if the target rate of inflation for the Fed is 2 percent and real GDP rises by 1 percent above potential GDP, then the Fed should

Accepted Answer

The Taylor rule suggests adjusting the federal funds rate based on deviations of actual inflation from the target and real GDP from potential GDP. A 1% rise in GDP above potential typically calls for a 0.5% increase in the rate.

Question 2

An increase in the money supply, ceteris paribus, usually

Accepted Answer

When there is an increase in the money supply, it generally leads to a decrease in interest rates as the supply of money available to borrow increases. This leads to an increase in investment and consumption expenditure, which in turn increases aggregate demand.

Question 3

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy,

Accepted Answer

An increase in the money supply typically leads to a decrease in the rate of interest because more funds are available for lending, reducing the cost of borrowing.

Question 4

As expansionary monetary policy tools, quantitative easing (QE) and traditional open-market purchase differ in terms of the following, except

Accepted Answer

The answer of As expansionary monetary policy tools, quantitative easing...

Question 5

The purpose of an expansionary monetary policy is to increase

Accepted Answer

Expansionary monetary policy aims to increase real GDP by lowering interest rates, which encourages borrowing and spending.

Question 6

Which of the following is a monetary policy intended to rein in inflation?

Accepted Answer

Decreasing the money supply to shift the aggregate demand curve leftward is a contractionary monetary policy aimed at reducing inflation by lowering spending and investment.

Question 7

The Federal Reserve can increase aggregate demand by

Accepted Answer

By reducing the discount rate, the Federal Reserve would lower the interest rate at which banks can borrow money from them, making it cheaper for banks to lend to consumers and businesses. This would increase the money supply in the economy and lead to an increase in aggregate demand. The other options would decrease the money supply and lead to a decrease in aggregate demand.

Question 8

The level of GDP, ceteris paribus, will tend to increase when

Accepted Answer

When the Federal Reserve buys government securities in the open market, it increases the money supply in the economy. This leads to a decrease in interest rates, which encourages investment and consumption spending. As a result, the level of GDP tends to increase. Increasing reserve requirements (A) and the discount rate (B) both decrease the money supply and can lead to a decrease in spending, and selling government securities (D) also decreases the money supply and can have a similar effect.

Question 9

If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when

Accepted Answer

When the demand for money increases, it puts upward pressure on interest rates. By buying government bonds in the open market, the Fed injects liquidity into the banking system, increasing the supply of money, which helps to maintain the current interest rates.

Question 10

The Fed, at the end of 2015, announced its intent to start "normalizing" monetary policy and returning short-term interest rates to their normal range of 3 percent or higher.Its normalization plan had two major tools,

Accepted Answer

The Fed's normalization plan included paying interest on excess reserves to influence banks' lending behaviors and using reverse repos to manage short-term interest rates by temporarily selling securities with an agreement to repurchase them.

Question 11

If real GDP is 2 percent below potential GDP and the inflation rate is 1 percent, then according to the Taylor rule, the Fed should make the real federal funds rate

Accepted Answer

According to the Taylor rule, the Fed should adjust the real federal funds rate based on the output gap and inflation. With real GDP 2% below potential, the output gap is -2%. The Taylor rule suggests decreasing the rate by 1.5 times the output gap, which is -3%, but since the inflation rate is 1%, the net decrease is 1.5%.

Question 12

Which of the following best describes what occurs when monetary authorities sell government securities?

Accepted Answer

When monetary authorities sell government securities, the commercial banks purchase them, which decreases the size of their excess reserves. As a result, the money supply decreases, and interest rates rise due to the increased demand for borrowed funds. The increase in interest rates causes a decrease in investment spending and real GDP.

Question 13

Before the financial crisis of 2008, restrictive monetary policy by the Fed involved

Accepted Answer

Restrictive monetary policy involves raising interest rates to curb inflation. The Fed raises the target federal funds rate and sells bonds to reduce bank reserves, increasing the federal funds rate.

Question 14

Assume the economy faces high unemployment but stable prices.Which combination of government policies is most likely to reduce unemployment?

Accepted Answer

The purchase of government securities in the open market and an increase in government spending is known as expansionary monetary and fiscal policy. This policy aims to increase the money supply in the economy and increase aggregate demand, which will lead to an increase in employment. Sustaining stable prices shows that the economy is not facing inflationary pressure, so the increase in government spending is not likely to trigger a rise in prices.

Question 15

Which of the following is the most accurate description of events when monetary authorities increase the size of commercial banks' excess reserves?

Accepted Answer

When monetary authorities increase the size of commercial banks' excess reserves, this increases the money supply. With more money available to lend, the interest rate decreases, making it cheaper for individuals and firms to borrow money. This leads to an increase in investment spending, which in turn leads to an increase in output and employment. Therefore, the most accurate description is that the money supply is increased, which decreases the interest rate and causes investment spending, output, and employment to increase.

Question 16

Quantitative easing (QE) and traditional open-market purchase differ in that

Accepted Answer

An open-market purchase is traditionally used to reduce the federal funds rate by increasing the reserves in the banking system, making loans cheaper. Quantitative easing (QE) also aims to inject money into the economy but is used in situations where traditional methods like adjusting the federal funds rate are no longer effective, typically because rates are already near zero. Both increase reserves but have different contexts and scales of application.

Question 17

According to the Taylor rule, if the inflation rate is one percentage point below the target of 2 percent, then the Fed should

Accepted Answer

The Taylor rule suggests adjusting the federal funds rate based on deviations from the target inflation rate and output gap. If inflation is below target, the rule typically prescribes lowering the rate, and a common coefficient for inflation deviation is 0.5.

Question 18

According to the Taylor rule, when real GDP is equal to potential GDP and the inflation rate is equal to its target rate of 2 percent, the Federal funds rate should be

Accepted Answer

The Taylor rule suggests that when real GDP equals potential GDP and inflation is at its target, the nominal interest rate should be set at the sum of the real interest rate (typically 2%) and the inflation rate (2%), resulting in a nominal rate of 4%.

Question 19

Which of the following combinations of Fed actions would be most effective in "mopping up" reserves away from the banking system?

Accepted Answer

Reducing the interest paid on excess reserves makes it less attractive for banks to hold excess reserves. Doing reverse repos with banks and nonbanks also reduces the amount of reserves in the banking system.

Question 20

Since the financial crisis of 2008, the main tool of expansionary monetary policy used by the Fed has been

Accepted Answer

Quantitative easing is a monetary policy tool used by central banks to increase the money supply and encourage lending and investment. It involves the purchase of large quantities of government bonds or other financial assets by the central bank, which increases the money supply and lowers interest rates.

Quiz 36: Interest Rates and Monetary Policy