SB Chapter 15

What created the need to develop quantitative easing?

The Fed needed to further stimulate the economy after lowering the federal funds rate to near zero.

Which of the following choices accurately describes how the Fed dealt with forward guidance after the financial crisis of 2007-2008?

The Fed tried to clarify its statements to the public more than ever. The Fed used forward guidance to instill confidence in its new tactics.

What has the Fed stated will be its approach to using unconventional methods in the future?

The Fed will continue to use these methods.

Which of the following choices accurately describe a neutral monetary policy?

The Fed would consider it if unemployment were at or near 3.5 %. It focuses on the Fed leaving the economy alone. The Fed would change it if notable inflation or deflation occurred.

What is represented by the center of the Fed's bullseye chart?

The Fed's target rates for the dual mandate

The Fed's target rate of inflation has been set at (blank) % since it was first established.

2

Investment spending is one of the determinants of what?

Aggregate demand

Investment spending is one of the determinants of demand.

Blank 1: aggregate

Investment spending plus consumption spending, net exports, and government spending yields (blank) demand.

Blank 1: aggregate or total

The greater the level of investment, the farther to the right lies the aggregate (blank) curve.

Blank 1: demand

The (blank) interest rate is the rate at which the amount of money demanded and the amount supplied are equal.

Blank 1: equilibrium

The (blank) (blank) rate is the interest rate banks charge on overnight loans to each other. (Enter one word in each blank.)

Blank 1: federal or fed Blank 2: funds

A(n) (blank) in the money supply will lower the interest rate, increasing investment, aggregate demand, and equilibrium GDP.

Blank 1: increase or rise

The real, not the (blank) rate of interest is critical for investment decisions.

Blank 1: nominal

Which of the following are likely to happen if the Fed's forward guidance is pessimistic about the economy's prospects?

Borrowers will be less likely to borrow. Lenders will be less likely to lend. The total amount of checkable deposit money will decrease.

Why do changing interest rates have a large influence on investment spending?

Capital purchases have a long-term nature. Capital purchases have a large-cost.

Aggregate demand includes which of the following?

Consumption spending (C) investment spending (I) Government spending (G) Net exports (X-M)

What is the interest rate Federal Reserve banks charge on loans they make to commercial banks and thrifts?

Discount rate

Which administered rate involves depository institutions borrowing money from the Fed?

Discount rate

A high interest rate environment will have which of the following effects?

Discourage investment. Lowering aggregate demand Restraining demand-pull inflation

Under which conditions should the Fed follow an expansionary monetary policy?

During a recession When the GDP gap is negative

Which of the following statements accurately describes the three administered rates?

Each of the three rates was lowered between 2020 and 2022 because of the pandemic. The discount rate is paid to the Fed; the other rates are paid by the Fed.

The rate at which the amount of money demanded and the amount supplied are equal is called what?

Equilibrium interest rate

By lowering interest rates to bolster borrowing and spending to increase aggregate demand, the Fed is instituting which type of monetary policy?

Expansionary

True or false: Expansionary monetary policy will increase interest rates to bolster borrowing and spending, which will increase aggregate demand and expand real output.

False

What is the 0.25 percent wide range used by the Fed to guide its policy rate and to facilitate forward guidance communications?

Federal funds target range

What is the term for public communications made by a central bank to the public to describe how it sees the economy and how it intends to mange monetary policy?

Forward guidance

What are the Fed's targets used to meet the dual mandate?

Full-employment rate of unemployment Target rate of inflation

Which of the following choices accurately describe quantitative tightening?

In involved huge sales of bonds by the Fed. It was implemented to counter the effects of quantitative easing.

An increase in the money supply will do which of the following?

Increase aggregate demand Increase investment

Which term refers to the public's forecast about likely future inflation rates?

Inflationary expectations

What is the zero lower bound problem?

Interest rates below zero cause people to withdraw money from banks.

What is the nature of the relationship between the interest rate and the amount of investment spending?

Inverse

Which portion of total spending is influenced the most by interest rate changes?

Investment expenditure

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 set targets for the federal funds rate. It used open-market operations to influence the federal funds rate.

Why was there a major fear that the Fed was out of options in dealing with the financial crisis of 2007-2008?

It could lower interest rates no further.

What action did the Fed take in response to the financial crisis of 2007-2008?

It dopped the federal funds rate to near zero.

Which of the following choices accurately describe how the Fed approached negative interest rates during the 2007-2008 financial crisis?

It felt that implementing negative rates would cause a slow bank panic. It decided that negative rates would decrease spending.

What type of credibility does the Fed have in enforcing the three administered rates?

It has complete credibility in enforcing all three.

What was the mindset of the Fed that led it to begin quantitative easing?

Long-term interest rates are important in business decisions.

Which of the following are actions that the Fed may take to increase the money supply?

Lower the effective federal funds rate Lower the IORB and ON RRP rates

What is the term for a central bank's disposition regarding how it sees the current and future state of the economy?

Monetary policy stance

What is a monetary policy in which the money supply and interest rates are left as they are by the central bank because the economy appears to be operating at potential output with stable prices and a low level of unemployment?

Neutral monetary policy

Which administered rate involves select nondepository financial firms as its eligible entities?

Overnight reverse repo rate

What is a short-term interest rate that a central bank manages to help communicate the stance of monetary policy as well as to achieve its monetary policy goals?

Policy rate

What is an open-market operation in which a central bank pre-announces that it will spend a fixed quantity of money purchasing long-term bonds in order to lower long-term interest rates and thereby ease credit conditions for long-horizon investors?

Quantitative easing

After the economic crisis of 2007-2008 ended and the economy returned to normal, which policy did the Fed implement to reduce the economic stimulus?

Quantitative tightening

Which unconventional method, unavailable before the 2007-2009 recession, did the Fed use to try to control inflation in 2021?

Raising the IORB and ON RRP rates

Which interest rate is the most critical for investment decisions?

Real

What is equal to the full-employment rate of unemployment?

Target rate of unemployment

What is the term for the Fed's desired rate of unemployment?

Target unemployment rate

Which of the following statements accurately describe the Fed's ability to enforce the three administrated rates?

The Fed can create all the money needed to lend to institutions that need to borrow money at any time. The Fed has full ability to enforce all three rates. The Fed can pay interest on money loaned to it overnight by creating any amount of money at any time.

Which of the following statements accurately describes the federal funds rate?

The Fed can lower the effective federal funds rate by lowering the IORB and ON RRP rates. The effective federal funds rate is always within the federal funds target range.

Which of the following arguments supports the use of unconventional methods by the Fed?

The Fed could use the methods to control long-term and short-term interest rates independently of each other. The methods had worked in dealing with the 2007-2008 financial crisis.

In the figure, if aggregate demand decreases from AD2, what is represented by the movement along the dashed horizontal line?

The change in the economy's equilibrium

What is the zero lower bound problem?

The fact that nominal interest rates cannot fall below zero.

What are the consequences of a negative interest rate?

The reserves in the banking system are reduced. People do not want to leave their money in their checking accounts.

What is likely to happen if the Fed's forward guidance is optimistic about the economy's prospects?

The total volume of money in checkable deposits at banks and thrifts will increase.

Which of the following statements accurately describes policy rates?

They are easy to understand. They explain whether or not the central bank feels expansionary, restrictive, or neutral. They are part of forward guidance programs. They are used to communicate with the public.

Which of the following choices accurately describes inflationary expectations?

They are expectations of the public. The Fed must have public credibility in order to influence inflationary expectations. They are based on the public's belief that the Fed will try to attain the 2% target inflation rate.

How do policymakers tend to view unemployment and inflation?

They are more concerned with unemployment.

Why did the Fed decide against implementing negative interest rates in the financial crisis of 2007-2008?

They were afraid negative rates would discourage spending.

When would the Fed pursue a tight or restrictive monetary policy?

To fight inflation

Which of the following are reasons the Fed sets its target inflation rate at the current level?

To protect savers To assist downward wage flexibility To compensate for upward measurement bias

What is monetary policy stance?

Whether the central bank sees the the outlook for monetary policy as expansionary, restrictive, or neutral

What led the Fed to implement quantitative easing?

Zero lower bound problem

What is the term for the constraint placed on the ability of a central bank to stimulate the economy through lower short-term interest rates by the fact the short-term interest rates cannot be driven too low without causing depositors to withdraw funds from the banking system?

Zero lower-bound problem

If the red dot on the Fed's bullseye chart is northwest of the center, then Blank______ is needed.

a restrictive monetary policy

The federal funds rate is the interest rate that Blank______.

banks charge each other for lending reserves on an overnight basis

If the economy faces recession and unemployment, the Fed will initiate Blank______ also known as "Blank______ money policy."

expansionary monetary policy; easy

The Taylor rule is based on the fact that policymakers usually Blank______.

focus more on unemployment than inflation

In a bullseye chart, the amount by which actual unemployment and inflation differ from the Fed's target rates is Blank______.

found by looking at the position of the red dot relative to the center

If the red dot on the Fed's bullseye chart is located northwest or southeast of the center, then the Fed will Blank______.

have a clear stance on monetary policy

Restrictive monetary policy is expected to Blank______.

increase interest rates decrease lending lower inflation decrease borrowing in the economy

There is a(n) (blank) relationship between the interest rate and the amount of investment spending.

inverse

If the red dot is southwest or northeast of the center of the Fed's bullseye chart, then Blank______ is needed.

it is not clear what type of monetary policy

This figure represents the market for (blank), in which the demand curve and the supply curve are brought together.

money

Avoiding decreases in the purchasing power of people on fixed incomes shows how target rate of inflation is set to Blank______.

protect savers

The Fed will initiate expansionary monetary policy when faced with Blank______.

recession and unemployment

If there is a red dot in the Blank______ quadrant of the Fed's bullseye chart, the unemployment rate suggests a restrictive monetary policy while the inflation rate suggests an expansionary policy.

southwest

In the figure, if aggregate Blank______ declines, the economy's equilibrium will move leftward along the dashed horizontal line.

supply demand

The 1977 congressional directive that the Federal Reserve System's highest priorities should be full employment and price level stability is known as Blank______.

the dual mandate

In the figure, the demand curve for money and the supply curve of money are brought together, representing Blank______.

the market for money

Arrange the events that are caused by a restrictive monetary policy in the order they occur, with the first event at the top.

1 Interest rates will rise. 2 Investment spending will drop. 3 Aggregate demand will fall. 4 Inflation will decline.

In most cases, how long is the expected operational lag when the Fed makes changes in interest rates?

3-6 months

Which best describes the Fed's "ample reserves regime"?

A high-liquidity policy

What was Federal Reserve's monetary policy called ZIRP?

A monetary policy in which the Fed set nominal interest rates at or near 0% in order to stimulate the economy

Which of the following statements best explains liquidity trap?

Adding more liquidity to banks has no effects on the economy.

(blank) monetary policy addresses the problem of unemployment and recession, while (blank) monetary policy deals with the problem of inflation. (Enter one word per blank.)

Blank 1: Expansionary, Loose, or Easy Blank 2: restrictive, contractionary, or tight

(blank) policy is hindered by three delays, called recognition, administrative, and operational lags.

Blank 1: Fiscal

(blank) policy has become the dominant component of U.S. national stabilization policy.

Blank 1: Monetary

(blank) policy may be highly effective in slowing expansions and controlling inflation but less reliable in pushing the economy from a severe recession.

Blank 1: Monetary

(blank) monetary policy will increase the interest rate in order to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases.

Blank 1: Restrictive, Contractionary, or Tight

Monetary policy faces a recognition lag and an operational lag, but avoids the (blank)(use only one word) lag that hinders fiscal policy.

Blank 1: administrative

The intentions of the Fed when it pursues an expansionary monetary policy and creates excess reserves can be frustrated by businesses that do not want to (blank)

Blank 1: borrow

Economists say that monetary policy may suffer from (blank) asymmetry.

Blank 1: cyclical

In 2007 a major wave of (blank) on home mortgages threatened the health of any financial institution that had invested in home mortgages.

Blank 1: defaults

In 2007, the Fed lowered the (blank) rate and the target for federal (blank) rate.

Blank 1: discount Blank 2: funds

The Fed will enact restrictive monetary policy when aggregate demand is (blank) in relation to the economy's full-employment level of real output.

Blank 1: excessive, high, or exceeds

Under (blank) monetary policy, excess reserves increase, federal funds rate falls, money supply rises, interest rates fall, and real GDP rises.

Blank 1: expansionary, easy, or loose

Issuing positive forward guidance, lowering the effective federal funds rate, lowering the IORB and ON RRP rates, and purchasing government bonds as part of QE are all actions the Fed may take to (blank) the money supply.

Blank 1: increase, raise, up, or boost

During the COVID pandemic, fiscal stimulus money received by consumers, coupled with problems in the supply chain, caused aggregate demand to exceed aggregate supply—a situation that resulted in a jump in the U.S. (blank) rate.

Blank 1: inflation

Changes in the interest rate mainly affect the (blank) component of total spending, and also affect spending on durable consumer goods that are purchased on credit.

Blank 1: investment

The impact of changing interest rates on (blank) spending is great because of the large cost and long-term nature of capital purchases.

Blank 1: investment

Speed, flexibility, and isolation from political pressure are main advantages of (blank) policy.

Blank 1: monetary

The buying and selling of securities in the (blank) (blank) has the advantage of flexibility and the impact on bank reserves is prompt.

Blank 1: open Blank 2: market

After 2008 the Fed introduced (blank) easing in an attempt to increase banks' reserves and thereby encourage lending.

Blank 1: quantitative

The time it takes for the Fed to realize that a fluctuation in economic activity is heading toward a genuine recession is called the (blank) gap.

Blank 1: recognition

During times of rising inflation the Fed will undertake (blank) monetary policy or "tight money policy."

Blank 1: restrictive or contractionary

Under (blank) monetary policy, the Federal Reserve will sell bonds, increase reserve ratios, raise the discount rate or decrease reserve auctions.

Blank 1: restrictive, contractionary, or tight

With (blank) monetary policy, the Fed will announce a higher federal funds target range, raise the IORB and ON RRP rates, or sell longer-term government securities.

Blank 1: restrictive, contractionary, or tight

When the Fed buys (blank) from the public, people may choose to pay off existing loans with the money received, rather than increasing their spending on goods and services.

Blank 1: securities, bonds, or debt

How has the Fed maintained high reserve balances in the banking systems since the start of the COVID-19 pandemic?

By purchasing large amounts of bonds

What was the goal of quantitative easing after 2008?

Encourage the banks to lend more

Buying bonds, lowering the reserve ratio, lowering the discount rate, or increasing reserve auctions involve what type of monetary policy?

Expansionary

Which of the following were causes of increased inflation during the second year of the COVID-19 pandemic?

Fiscal stimulus checks sent to individuals by the government Disruptions in the supply chain

Which of the following are functions of restrictive monetary policy?

Increase interest rates Curtail the expansion of aggregate demand

Which of the following are results of restrictive monetary policy?

Interest rates rise. Money supply falls.

Arrange the events that are caused by an expansionary monetary policy in the order they occur, with the first event at the top.

Interest rates will fall. Investment spending will rise. Aggregate demand will rise. Real GDP and the price level will rise.

Which are true statements about the full-employment rate of unemployment?

It includes frictional and structural unemployment. It is not zero. It occurs when the economy is producing at potential output.

Which of the following best describes the overnight reverse repo rate?

It is an overnight loan from a nonbank lender to the Fed.

What was one of the primary reasons fiscal policy was used during the financial crisis and severe recession?

Liquidity trap

Which of the following actions did the Fed take in response to the mortgage debt crisis?

Lowered the discount rate Lowered the Federal funds rate

What has become the dominant component of U.S. national stabilization policy?

Monetary policy

Which of the following lags does monetary policy face?

Operational Recognition

Which of the following are lags facing fiscal policy?

Operational lag Administrative lag Recognition lag

The interaction of aggregate supply and aggregate demand result in the levels of which of the following?

Output Employment Income

Which of the following are advantages of the buying and selling of securities in the open market?

Prompt impact on bank reserves. Flexibility.

Which of the following are actions that the Fed may take to decrease the money supply?

Raise the effective federal funds rate Sell government bonds as part of QT

During times of rising inflation the Fed will undertake which of the following monetary policies?

Restrictive

When aggregate demand is excessive relative to the economy's full-employment level of real output, the Fed will institute what type of monetary policy?

Restrictive

Which of the following monetary policies addresses the problem of inflation?

Restrictive

Which actions can the Fed plan in order to engage in restrictive monetary policy?

Sell longer-term bonds as part of quantitative tightening Increase the IORB and ON RRP rates

Which of the following are advantages of monetary policy over fiscal policy?

Speed Flexibility Isolation from political pressure

What effect did the actions of the Fed have on the COVID-19 recession?

They shortened it.

Why did the Fed implement a zero interest rate policy (ZIRP) in 2008?

To keep interest rates near zero To stimulate the economy

True or false: Economists say that monetary policy may suffer from cyclical asymmetry.

True

True or false: The Fed can buy or sell securities from day to day, thus affecting the money supply and interest rates almost immediately.

True

Which measures were taken by the Fed to prevent a damaging economic crisis in the wake of the COVID-19 lockdown?

Using forward guidance to reassure the public Making massive purchases of long-term bonds Employing adminstrative rates to lower interest rates

The levels of output, employment, income, and prices all result from the interaction of Blank______.

aggregate supply and aggregate demand

The Federal Reserve's holdings Blank______ during the COVID-19 recession.

increased from $4.1 trillion to $7.1 trillion

The efforts of the Fed when it increases reserves will be pointless if commercial banks seek liquidity and are unwilling to Blank______.

lend

If pursued vigorously, a restrictive monetary policy could deplete commercial banking reserves to the point where banks would be forced to reduce the volume of Blank______.

lending

A (blank) interest rate environment will encourage investment, raise aggregate demand and unleash demand-pull inflation.

low

Issuing negative forward guidance, raising the effective federal funds rate, raising IORB and ON RRP rates, and selling government bonds as part of QT are all actions the Fed may take to (blank) the money supply.

lower

Because it works more subtly, what policy is more desirable?

monetary

The policy that is highly effective in slowing expansions and controlling inflation but less reliable in pushing the economy from a severe recession is called Blank______ policy,

monetary

What threatened the U.S. economy in 2007?

mortgage defaults

The Federal Reserve's actions during March and April 2020 were Blank______ the quantitative easing that it engaged in from 2011-2014.

of the same magnitude as

Which of the following describe monetary policy as compared to fiscal policy?

subtler more politically neutral

During the financial crisis and severe recession, the Fed was credited with Blank______.

taking innovative actions

What is cyclical asymmetry?

the idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession

What was the Fed's approach to forward guidance after the financial crisis of 2007-2008?

It increased its use of forward guidance.

Which of the following choices accurately describe quantitative easing?

It involves the Fed's purchasing billions of dollars of long-term bonds. It is intended to lower long-term interest rates. It involves announcing the quantity of securities to be purchased in order to ease borrowing conditions.

Which of the following choices accurately describe the overnight reverse repo rate?

It is administered separately from the interest rate on reserve balances. It uses bonds as collateral in case of default. It lets the Fed provide nonbanks with an option besides money market investments.

Which of the following statements accurately describe the discount rate?

It is set by the Fed to be higher than the IORB rate. It is useful during bank runs and major crises.

What are ways in which the Fed uses the overnight reverse repo rate?

It raises the rate to decrease the money supply and increase interest rates. It has traditionally set the ON RRP rate about 0.10 percentage point below the IORB rate.

Which of the following statements accurately describe the IORB?

The IORB helps the Fed control the rate at which banks are willing to lend into the money market. Deposits paid at the IORB are functionally equivalent to loans. The IORB is one of the three administered rates.

During a recession, with a negative GDP gap and substantial unemployment, the Fed should institute what type of monetary policy?

Expansionary

Select all the following choices that are true statements about the target rate of unemployment.

It is the Fed's desired rate of unemployment. It is currently estimated between 4% and 5% for the U.S. economy.

How does higher investment spending influence the aggregate demand curve?

It moves it to the right.

What happens when the Fed raises the IORB rate?

It reduces the money supply and puts upward pressure on all interest rates.

How did the Fed manage the economy differently before the 2007-2008 financial crisis?

It used fewer monetary policy tools.

How did the Fed manage the economy differently before the 2007-2008 financial crisis? Multiple choice question.

It used fewer monetary policy tools.

Select all the following choices that accurately describe the Fed's target rate of inflation.

It was set at 2% when it was established.