Question 1

The Fed seeks to achieve its goals through a form of chain reaction. Describe the chronology and structure of this chain reaction explaining how operating and intermediate targets are used to achieve the Fed's ultimate goals?

Accepted Answer

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Question 2

In the Keynesian view, the Fed's decision to reduce the fed funds rate, by increasing the banking system's excess reserves, should have certain consequences. Explain these consequences.

Accepted Answer

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Question 3

During March 2008, there were surprisingly no concerns that a bankruptcy of Bear Stearns was imminent.

Accepted Answer

During March 2008, there were increasing concerns that a bankruptcy of Bear Stearns was imminent, which eventually led to its collapse and acquisition by JP Morgan.

Question 4

During March 2008, the Fed introduced a new lending facility, called the Primary Dealer Credit Facility, for investment banks and securities dealers. Briefly explain the purpose of this new facility and how it contrasts with that used by commercial banks.

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Question 5

The account of the widely accepted goals of monetary policy reveals a profound problem in the conduct of monetary policy. The goals are numerous, but the Fed's capabilities are limited. Describe the two limitations.

Accepted Answer

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Question 6

Discuss two problems that the Fed has in implementing monetary policy.

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Question 7

Bernanke became chairman during the final 25 basis point increases in the Fed funds rate to 5.25% on June 29, 2006, and maintained this rate through the remainder of 2006 and the first half of 2007.

Accepted Answer

The statement is true. Bernanke became chairman during the final 25 basis point increases in the Fed funds rate to 5.25% on June 29, 2006, and maintained this rate through the remainder of 2006 and the first half of 2007.

Question 8

Intermediate targets may include monetary aggregates and interest rates, but never include foreign currency exchange rates.

Accepted Answer

Intermediate targets may include foreign currency exchange rates in some cases. For example, in countries with managed exchange rates, central banks may set intermediate targets for the exchange rate. Additionally, countries that use inflation targeting may also consider exchange rates as an intermediate target, as changes in exchange rates can affect inflation.

Question 9

Identify and briefly describe three of the major goals of Fed policy.

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Question 10

The targets of Fed policy have changed many times in the past 25 years.

Accepted Answer

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Question 11

Keynesians adopt a monetary policy that largely calls for targeting long-term interest rates.

Accepted Answer

Keynesians typically prioritize fiscal policy over monetary policy, focusing on government spending and taxation to stimulate or cool down the economy. They do not advocate for targeting long-term interest rates as a primary tool for economic management.

Quiz 5: Monetary Policy in the United States