Question 1

Explain and demonstrate graphically how targeting nonborrowed reserves can result in federal funds rate instability.

Accepted Answer

The answer of Explain and demonstrate graphically how targeting nonborrowed...

Question 2

The Fed's mistakes of the early 1930s were compounded by its decision to

Accepted Answer

The Fed's decision to raise reserve requirements in 1936-1937 reduced the amount of money available for lending and contributed to the recession of 1937-1938. This decision arguably delayed full economic recovery from the Great Depression.

Question 3

The Fed accidentally discovered open market operations when

Accepted Answer

The Fed stumbled upon the concept of open market operations when it bought securities to generate income after the 1920-1921 recession, inadvertently discovering that such purchases could influence the banking system's reserves.

Question 4

The guiding principle for the conduct of monetary policy that held that as long as loans were being made for "productive" purposes,then providing reserves to the banking system to make these loans would not be inflationary became known as the

Accepted Answer

The principle described is known as the real bills doctrine, in which central banks provide reserves to the banking system (thus increasing the money supply) as long as the loans being made were for productive purposes, or backed by real bills of trade. This was the dominant principle guiding monetary policy in the late 19th and early 20th centuries.

Question 5

Using Taylor's rule,when the equilibrium real federal funds rate is 3 percent,the positive output gap is 2 percent,the target inflation rate is 1 percent,and the actual inflation rate is 2 percent,the nominal federal funds rate target should be

Accepted Answer

According to Taylor's rule, the nominal federal funds rate target is calculated as follows:

Nominal federal funds rate target= equilibrium real federal funds rate+ inflation target+ 0.5*(inflation gap)+0.5*(output gap)

In this case,

Equilibrium real federal funds rate= 3%
Inflation target= 1%
Inflation gap= actual inflation rate - inflation target= 2% - 1% = 1%
Output gap= positive output gap= 2%

Therefore,

Nominal federal funds rate target= 3% + 1% + 0.5*(1%) + 0.5*(2%)= 6.5%

Hence, the choice is D, which is 6.5 percent.

Question 6

In its earliest years,the Federal Reserve's guiding principle for the conduct of monetary policy was known as the

Accepted Answer

The real bills doctrine was the guiding principle for the conduct of monetary policy in the early years of the Federal Reserve. This doctrine held that the central bank should only lend money against short-term commercial bills that represented real goods in transit or held in inventory. The goal was to ensure that the supply of money matched the demand for goods and services, which was believed to prevent inflation and promote economic growth. This doctrine was later replaced by the modern approach to monetary policy, which focuses on interest rate targeting and the management of inflation expectations.

Question 7

When it comes to choosing an policy instrument,both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay.

Accepted Answer

The federal funds rate is the interest rate at which banks lend and borrow reserves from each other overnight, and it is set by the Federal Reserve through open market operations. The level of reserves held by banks is a key component of monetary policy, as it affects the ability of banks to lend and the overall level of money in the economy. Both the federal funds rate and reserve aggregates are measured accurately and are available daily with almost no delay, making them useful for the Federal Reserve to adjust its policy instrument in response to changing economic conditions. The three-month T-bill rate is less directly related to the Federal Reserve's policy instrument and is subject to market forces in addition to monetary policy.

Question 8

The rate of inflation increases when

Accepted Answer

The rate of inflation tends to increase when the unemployment rate is less than the Non-Accelerating Inflation Rate of Unemployment (NAIRU), as this situation typically indicates that the economy is overheating, leading to upward pressure on wages and prices.

Question 9

According to the Taylor rule,the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target.

Accepted Answer

The answer of According to the Taylor rule,the Fed should...

Question 10

Using Taylor's rule,when the equilibrium real federal funds rate is 2 percent,there is no output gap,the actual inflation rate is zero,and the target inflation rate is 2 percent,the nominal federal funds rate should be

Accepted Answer

The answer of Using Taylor's rule,when the equilibrium real federal...

Question 11

Explain the Taylor rule,including the formula for setting the federal funds rate target,and the components of the formula.If the Fed were to use this rule,how many goals would it use to set monetary policy?

Accepted Answer

The answer of Explain the Taylor rule,including the formula for...

Question 12

Which of the following is not a requirement in selecting a policy instrument?

Accepted Answer

Flexibility is not a requirement for selecting a policy instrument; the focus is usually on measurability, controllability, and predictability to ensure effective implementation and outcomes.

Question 13

Explain and demonstrate graphically how targeting the federal funds rate can result in fluctuations in nonborrowed reserves.

Accepted Answer

The answer of Explain and demonstrate graphically how targeting the...

Question 14

According to the Taylor Principle,when the inflation rate rises,the nominal interest rate should be ________ by ________ than the inflation rate increase.

Accepted Answer

The Taylor Principle states that the central bank should increase the nominal interest rate more than the increase in the inflation rate to anchor inflation expectations and maintain price stability. Therefore, as the inflation rate rises, the nominal interest rate should be increased by more than the increase in the inflation rate to achieve the desired outcome.

Question 15

If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate,then real interest rates will ________ and monetary policy will be too ________.

Accepted Answer

If nominal interest rates are increased by less than the inflation rate, real interest rates (nominal interest rates adjusted for inflation) will fall, making borrowing cheaper in real terms. This situation indicates that monetary policy is too loose, as it does not sufficiently counteract inflation by making borrowing more expensive.

Question 16

The rate of inflation tends to remain constant when

Accepted Answer

The NAIRU (Non-Accelerating Inflation Rate of Unemployment) is the unemployment rate at which inflation remains constant. Therefore, when the unemployment rate equals the NAIRU, the rate of inflation is expected to remain constant. If the unemployment rate is above the NAIRU, inflation is expected to decrease, and if it is below the NAIRU, inflation is expected to increase. Option D is incorrect because the NAIRU does not increase; it is a fixed rate specific to an economy.

Question 17

During World War II,whenever interest rates would ________ and the price of bonds would begin to ________,the Fed would make open market purchases.

Accepted Answer

During World War II, when interest rates would rise and the price of bonds would begin to fall, the Federal Reserve (Fed) would make open market purchases to stabilize the economy and support the war effort by keeping interest rates low.

Question 18

Which of the following criteria need not be satisfied for choosing a policy instrument?

Accepted Answer

The variable being transportable is not a necessary criterion for choosing a policy instrument. The other criteria (measurability, controllability, and predictability) are important to consider when choosing an effective policy instrument.

Question 19

The real bills doctrine was the guiding principle for the conduct of monetary policy during the

Accepted Answer

The real bills doctrine was most influential in the 1910s, particularly during the National Banking Era in the United States. It held that banks should only discount short-term commercial bills that represented real goods and services being produced and exchanged in the economy, rather than speculative or financial bills. The doctrine advocated for a laissez-faire approach to monetary policy, with the money supply being adjusted based on the demand for credit by productive industries. While the real bills doctrine remained influential through the first half of the 20th century, it was largely abandoned as a guiding principle for policy by the 1960s.

Question 20

The Fed accidentally discovered open market operations in the early

Accepted Answer

The Federal Reserve accidentally discovered the power of open market operations in the early 1920s. This discovery was a pivotal moment in the development of monetary policy tools, allowing the Fed to influence the economy by buying and selling government securities to adjust the federal funds rate.

Quiz 16: The Conduct of Monetary Policy: Strategy and Tactics