Econ Chapter 22 Review

If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment. lower; up raise; down lower; down raise; up

B

If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy. -raise; upward; increase -raise; upward; decrease -lower; downward; increase -lower; downward; decrease

B

Forward guidance occurs when the Federal Reserve: -provides information about the future course of monetary policy in order to influence expectations about future interest rates. -provides information about current monetary policy in order to influence expectations about future interest rates. -carries out open market operations to influence future interest rates. -follows the same future course of monetary policy that it has been following in the past.

A

What was the Fed's inflation target in 2019? 2%. 0.75%. 3.5%. 5%.

A

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 1%, and the output gap is -0.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy? 2% 3% 1% 0.5%

A

You have saved $747. Where should you go if you want to open a checking account? -a commercial bank -the New York Federal Reserve district bank -your local federal reserve district bank -the Federal Reserve in Washington, D.C.

A

A bank run occurs when: -interest rates are too high. -many people want to withdraw their savings from a bank at the same time, and the bank does not have enough cash on hand. -too many borrowers want to take out loans from a bank, and the bank is unable to meet loan demands. -consumers increase their deposits at banks faster than the bank can loan out the funds.

B

If inflation is 4% and a firm gives its workers a 1.5% nominal wage raise, then: inflation decreases by 1.5%. real wages have fallen by 2.5%. inflation rises by 1.5%. real wages have gone up by 2.5%.

B

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 1%, then the Fed will want the new real interest rate to be: -equal to the neutral interest rate. -lower than the neutral interest rate. -equal to the inflation rate. -higher than the neutral interest rate.

B

You are the manager of a local bank. Due to unstable financial conditions, savers are worried that your bank may fail. When they show up in large numbers to withdraw their savings, you find that you do not have enough cash to meet the obligations. Where can you turn for a loan if no other bank will lend to you? -The stock market -The discount window -The market for overnight loans -The bond markets

B

If inflation is 0%, and a firm wants to lower real wages by 1%, it will need to: lower real wages by 2%. raise nominal wages by 1%. lower nominal wages by 1%. raise inflation by 2%.

C

Monetary policy is defined as the: -change in government spending to change economic conditions. -change of the tax code to achieve economic changes. -adjustment of interest rates to influence economic conditions. -implementation of ceilings on the federal funds rate in the economy.

C

What is a reserve requirement? -a maximum loan amount on the overnight loan market -the ceiling on the federal funds rate -the minimum amount of reserves that each bank must hold -the amount of money that the Federal Reserve spends on buying bonds

C

You are sitting at your desk in your new job as the Chair of the Federal Reserve Bank of the United States. The interest rate where potential GDP meets real GDP is 2%, the inflation rate is 1%, and the output gap is -1%. What is the appropriate new nominal federal funds rate that you should set for the economy? 2.5% 1% 1.5% 0.5%

C

If the output gap is negative, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment. -lower; down -raise; up -raise; down -lower; up

D

If the output gap is positive, the Federal Reserve will _____ the real interest rate to _____. lower; reduce unemployment lower; cool inflationary pressures raise; reduce unemployment raise; cool inflationary pressures

D

The Federal Reserve was created after: -a period of very high unemployment. -an increase in the inflation rate. -an extended period of economic stagnation. -a series of bank runs and bankruptcies.

D

The Federal Reserve's lender-of-last-resort function has been curtailed over time by the: -governor of the Federal Reserve. -public. -very financial institutions that it is meant to serve. -Dodd-Frank Act.

D

What is the floor framework that the Federal Reserve uses to influence the federal funds rate? -The Fed's approach of setting the discount rate above the federal funds rate -Operations by the Open Market Trading Desk at the Fed -The use of open market operations by the Fed -The Fed's approach of setting other interest rates to put a lower bound on how low the federal funds rate can go

D

Why is the discount rate the upper bound for the federal funds rate? -It is set lower than the federal funds rate. -The discount rate does not change over time. -The discount rate is the highest interest rate that banks can charge the public when they make loans. -It is set higher than the federal funds rate.

D