Econ 201 - Monetary Policy, GDP, and the Price Level (Ch. 15)
The rate that is most important rate in terms of helping to mitigate or avoid bank runs is:
the discount rate
What is the interest rate Federal Reserve banks charge on loans they make to commercial banks and thrifts?
discount rate
What are ways in which the Fed uses the overnight reverse repo rate? - It uses this rate because the Fed is allowed to pay interest only to nonbank lenders. - It has traditionally set the ON RRP rate about 0.10 percentage point below the IORB rate. - It raises the rate to decrease the money supply and increase interest rates. - It has traditionally set the ON RRP rate equal to the IORB rate.
- It has traditionally set the ON RRP rate about 0.10 percentage point below the IORB rate. - It raises the rate to decrease the money supply and increase interest rates.
Which of the following choices accurately describe what happens when the Fed purchases bonds. - The demand for bonds increases when they are purchased by the Fed. - Money is created when the Fed pays people for bonds. - Fed bond purchases decrease both the equilibrium price and demand for bonds. - Fed bond purchases decrease the equilibrium interest rate of bonds. - Fed bond purchases increase the equilibrium price of bonds.
- The demand for bonds increases when they are purchased by the Fed. - Money is created when the Fed pays people for bonds. - Fed bond purchases decrease the equilibrium interest rate of bonds. - Fed bond purchases increase the equilibrium price of bonds.
Which of the following are likely to happen if the Fed's forward guidance is pessimistic about the economy's prospects? - The total amount of checkable deposit money will decrease. - Lenders will be less likely to lend. - Borrowers will be less likely to borrow. - Money supply will increase.
- The total amount of checkable deposit money will decrease. - Lenders will be less likely to lend. - Borrowers will be less likely to borrow.
Which of the following arguments supports the use of unconventional methods by the Fed? The huge reserves the Fed built during QE could lead to inflation if used to increase bank lending and the money supply. The methods had worked in dealing with the 2007-2008 financial crisis. The Fed could use the methods to control long-term and short-term interest rates independently of each other. The low long-term interest rates served to encourage Congress to run up larger budget deficits than it would otherwise.
The methods had worked in dealing with the 2007-2008 financial crisis. The Fed could use the methods to control long-term and short-term interest rates independently of each other.
The bullseye chart, developed by the Federal Reserve Bank of Chicago, is a visual comparison of the current state of the economy with the Fed's dual mandate of full employment and stable prices. A point representing actual unemployment and inflation is plotted on the chart and can be visually compared to the Fed's target point. If the current point lies to the _________ of the center of the bullseye, the Fed's stance on monetary policy will be clear.
northwest or southeast
The Fed was designed to be insulated from political pressure so that it might take a _________ perspective and be immune from lobbying and special interest groups. Without protection from political pressure, the Fed may be influenced to take an overly _________ monetary policy to keep politicians and special interest groups happy.
long-term; expansionary
shifters of money supply
reserve requirement, discount rate, open market operations
interest on reserves balance rate
the amount that the fed pay commercial banks
interest on reserve balances (IORB) - description
interest rate paid by the fed on currency deposits held at Federal Reserve banks
a bond's price and its interest rate are ____ related
inversely
The Federal Reserve may use open-market operations to influence interest rates and the money supply. Open-market operations involve the Federal Reserve _________
either buying or selling bonds
Setting a target range for _________ is one of the Fed's main tools used for issuing forward guidance.
the federal funds rate.
The Federal Reserve's three administered rates are:
the IORB rate, the discount rate, and the ON RRP rate.
discount rate - description
the interest rate paid to the fed for currency reserves borrowed against collateral
money multiplier formula
1/reserve ratio
If the effective federal funds rate is 2.14 percent, which of the following is most likely to be the Fed's target range for the federal funds rate?
2.00 to 2.25 percent
What happens when the Fed sells bonds?
Bond prices drop, and interest rates climb.
Which of the following statements accurately describe how the Fed approached monetary policy before the financial crisis in 2007-2008? It bought or sold short-term securities from banks to change the banks' reserve balances at the Fed. It relied on quantitative easing and quantitative tightening. It regularly adjusted IORB and ON RRP rates. It set targets for the federal funds rate. It used open-market operations to influence the federal funds rate.
It bought or sold short-term securities from banks to change the banks' reserve balances at the Fed. It set targets for the federal funds rate. It used open-market operations to influence the federal funds rate.
Which of the following best describes the overnight reverse repo rate? It is an overnight loan from a bank to the Fed. It is an overnight loan from a nonbank lender to the Fed. It is an overnight loan from the Fed to a bank. It is an overnight loan from the Fed to a nonbank lender.
It is an overnight loan from a nonbank lender to the Fed.
What happens when the Fed raises the IORB rate?
It reduces the money supply and puts upward pressure on all interest rates.
If the IORB rate is 4.25 percent, the effective federal funds rate is 4.18 percent, and the ON RRP rate is 4.00 percent, which group might lend money in the federal funds market?
Non-bank financial companies
How did the Federal Reserve control the federal funds rate before the 2007-2009 financial crisis?
Open-market operations
Which of the following choices accurately describes inflationary expectations? They are based on the public's belief that the Fed will try to attain the 2% target inflation rate. They are expectations of the Fed members. They are based on the public's belief that the Fed will try to attain the 2% nominal interest rate for businesses and consumers. The Fed must have public credibility in order to influence inflationary expectations. They are expectations of the public.
They are based on the public's belief that the Fed will try to attain the 2% target inflation rate. The Fed must have public credibility in order to influence inflationary expectations. They are expectations of the public.
A liquidity trap occurs when expansionary monetary policy fails to work because a decrease in interest rates does not cause an increase in lending and borrowing. T or F
True
In the United States, monetary policy has two key advantages over fiscal policy: isolation from political pressure and speed and flexibility T or F
True
In which situation does the Fed have to worry most about downward price stickiness? When applying expansionary monetary policy When applying restrictive monetary policy When continuing a neutral monetary policy All the answer choices are correct.
When applying restrictive monetary policy
the fed buys bonds. what is the effect on the bond interest rate?
bond interest rate decreases as equilibrium bond price increases.
the fed sells bonds. what is the effect on the bond interest rate?
bond interest rate increases as the equilibrium bond price decreases.
the discount rate is an interest rate at which depository institutions can....
borrow money from the fed
open market operations is when the fed
buys or sells bonds
To find the expenditure multiplier....
change in actual GDP/change in investment
when banks and thrifts issue new loans they do so by creating new ________ money that gets deposited into borrower's checking accounts.
checkable-deposit
interest on reserve balances (IORB) - purpose
control of money market interest rates
overnight reserve repo rate (ON RRP) - purpose
control of money market interest rates
In a bullseye chart, the amount by which actual unemployment and inflation differ from the Fed's target rates is
found by looking at the position of the red dot relative to the center
when a bond's price ↑, the interest rate...
goes down
low interest rates cause
high quantity money demand
expansionary monetary policy
increase the money supply, decrease interest rates, increase investment & AD
buys bonds
increase the money supply. buy big
the gap between the ON RRP rate and the IORB rate allows the Fed to manage the money-market lending behavior of banks and non-banks ______ of each other
independently
high interest rates cause
low quantity money demand
discount rate - purpose
low-cost emergency liquidity for depository institutions
At the interest rate of 5%, potential GDP is $350 and actual GDP is $330. Since actual GDP is less than potential GDP, there is a.... what is the amount of the recessionary gap?
recessionary (negative) GDP gap. The gap is the difference, so the amount of the recessionary gap is $20.
The main difference between quantitative easing and quantitative tightening is that quantitative easing tends to _________ interest rates, while quantitative tightening has the opposite effect.
reduce long-term
reserve ratio
the fraction of deposits that banks hold as reserves
if the money supply decreases then
the interest rates rise, leading to less investment and less spending
the fed sells bonds. what is the effect on the money supply?
the money supply decreases because the fed removes from circulation the money that it receives for the bonds.
the fed buys bonds. what is the effect on the money supply?
the money supply increases because the fed creates new money to pay for the bonds.
if the fed increases the discount rate
the money supply is likely to decrease
open market operations
the purchase and sale of U.S. government bonds by the Fed
The idea that there are limits to the range of interest rates over which a decline in the interest rate will lead to more economic activity is called:
the zero lower bound
The Fed decided to use quantitative easing during the financial crisis of 2007-2008 because of:
the zero lower bound problem
what is the point of the discount rate?
to give banks a backup source of low-cost (low-interest-rate) liquidity if they are unable to obtain funds in the money market
The Fed employs forward guidance for the purpose of:
influencing people to change their behaviors immediately.
two administrative rates that are set/administrated by the fed to influence market equilibrium interest rates in the money market
interest rate on reserve balances & the overnight reverse repo rate
What happens when the Fed buys bonds?
price increases and interest rates decrease
shifters of money demand
price level, income, technology
Which of the following are reasons the Fed sets its target inflation rate at the current level? To protect savers To reward high-earners To assist downward wage flexibility To reduce tariffs To compensate for upward measurement bias
upward measurement bias protect savers assist downward wage flexibility
Which of the following choices accurately describes what happens when the Fed sells bonds? - Equilibrium bond prices go down. - The money supply will increase. - Money is taken out of circulation when people pay for the bonds. - Equilibrium interest rates on bonds go up. - The supply of bonds will go down.
- Equilibrium bond prices go down. - Money is taken out of circulation when people pay for the bonds. - Equilibrium interest rates on bonds go up.
sells bonds
decrease the money supply. sell small
discount rate - eligible entities
depository institutions (banks and thrifts)
interest on reserve balances (IORB) - eligible entities
depository institutions (banks and thrifts)
contractionary monetary policy
designed to fight inflation. decrease the money supply, increase interest rates, decrease investment & AD
What happens when the Fed buys bonds?
Bond prices increase, and interest rates decrease.
If there is an increase in the nation's money supply, the interest rate will:
fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.
the fed buys bonds. what is the effect on the bond price?
fed buying increases bond demand, driving up the equilibrium bond price.
The dual mandate tells the Fed that its two highest priorities should be stable prices and:
low unemployment.
The Fed increases the reserve requirements
money supply decreases
FED lowers reserve requirement
money supply increases
if the fed decreases the discount rate
money supply increases
Interest rates below zero percent would likely cause:
reduced economic activity
overnight reserve repo rate (ON RRP) - eligible entities
select non-depository financial firms, including money market funds
If the Federal Reserve wanted to influence interest rates to increase it could _________.
sell bonds
discount rate
the interest rate the FED charges banks that borrow money
The equilibrium interest rate occurs at...
the interest rate where the quantity of money supplied equals the quantity of money demanded.
if the money supply increases then
the interest rates fall, leading to more investment and more spending
overnight reserve repo rate (ON RRP) - description
interest rate paid by the fed on collateralized loans
The bullseye chart, developed by the Federal Reserve Bank of Chicago, is a visual comparison of the current state of the economy with the Fed's dual mandate of full employment and stable prices. A point representing actual unemployment and inflation is plotted on the chart and can be visually compared to the Fed's target point. If the current point lies to the _________ of the center of the bullseye, the state of the economy will suggest opposite monetary policy stances.
northeast or southwest
Which of the following choices accurately describe quantitative easing? It involves the Fed's selling billions of dollars of long-term bonds. It involves announcing the quantity of securities to be purchased in order to ease borrowing conditions. It is intended to lower long-term interest rates. It involves the Fed's purchasing billions of dollars of long-term bonds.
It involves announcing the quantity of securities to be purchased in order to ease borrowing conditions. It is intended to lower long-term interest rates. It involves the Fed's purchasing billions of dollars of long-term bonds.
What is the purpose of the discount rate?
To give banks a backup source of low-interest liquidity if they cannot get funds in the money market
the fed sells bonds. what is the effect on the bond price?
fed selling increases bond supply, driving down the equilibrium bond price.
when the fed raises the ON RRP rate, what happens to the overall money supply and interest rates?
it decreases the overall money supply and puts upward pressure on interest rates in general
