Economics CH 13-14-15
The 1977 congressional directive that the Federal Reserve System's highest priorities should be full employment and price level stability is known as ______. -quantitative easing -quantitative tightening -the federal funds rate -the dual mandate
the dual mandate
Which interest rate is the most critical for investment decisions? -Real -Nominal -Historic -False
real
The time it takes for the Fed to realize that a fluctuation in economic activity is heading toward a genuine recession is called the ______ gap.
recognition
Select all that apply Which of the following are functions of restrictive monetary policy? -Curtail the expansion of aggregate demand -Increase borrowing and spending -Increase interest rates -Increase price levels
-Curtail the expansion of aggregate demand -Increase interest rates
Select all that apply A high interest rate environment will have which of the following effects? -Encouraging investment -Increasing supply -Discourage investment. -Restraining demand-pull inflation -Lowering aggregate demand
-Discourage investment. -Restraining demand-pull inflation -Lowering aggregate demand
Select all that apply Which measures were taken by the Fed to prevent a damaging economic crisis in the wake of the COVID-19 lockdown? -Employing administrative rates to lower interest rates -Raising the federal funds range to its highest limit -Making massive purchases of long-term bonds -Using forward guidance to reassure the public
-Employing administrative rates to lower interest rates -Making massive purchases of long-term bonds -Using forward guidance to reassure the public
What is the administered rate that the Fed offers to commercial banks on any currency that they choose to keep on deposit overnight as reserve balances at one of the twelve Federal Reserve Banks? -IORB -ON RRP -Policy rate -Discount rate
-IORB
Select all that apply What are the two administered rates used to influence market equilibrium interest rates in the money market? -Discount rate -Interest rate on reserve -balances -Fixed exchange rate -Flexible exchange rate Overnight reverse repo rate
-Interest rate on reserve balances -Overnight reverse repo rate
Select all that apply 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 implemented negative rates for the first time in history. -It was concerned that negative rates would quickly overstimulate the economy. -It decided that negative rates would decrease spending.
-It felt that implementing negative rates would cause a slow bank panic. -It decided that negative rates would decrease spending.
Select all that apply Which are true statements about the full-employment rate of unemployment? -It includes frictional and structural unemployment. -It is a negative number. -It is not zero. -It occurs when the economy is producing at potential output.
-It includes frictional and structural unemployment. -It is not zero. -It occurs when the economy is producing at potential output.
Select all that apply 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 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 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.
Select all that apply Which of the following choices accurately describe the overnight reverse repo rate? Multiple select question. -It is administered separately from the interest rate on reserve balances. -It allows the Fed to remove the floor holding up money market interest rates. -It uses bonds as collateral in case of default. -It lets the Fed provide nonbanks with an option besides money market investments.
-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.
Select all the following choices that are true statements about the target rate of unemployment. -It remains constant from year to year. -It is currently estimated between 4% and 5% for the U.S. economy. -It is the Fed's desired rate of unemployment. -It is equal to the minimum rate of employment for unemployment.-
-It is currently estimated between 4% and 5% for the U.S. economy. -It is the Fed's desired rate of unemployment.
Select all that apply Which of the following choices accurately describe the money market? -It is made up of lending markets that involve commercial and financial loans. -It involves loans lasting ten to thirty years. -It involves loans lasting from overnight to one year. -It primarily involves high-risk, high-interest rate loans.
-It is made up of lending markets that involve commercial and financial loans. -It involves loans lasting from overnight to one year.
Select all that apply Which of the following choices accurately describe the overnight reverse repo rate? -It allows the Fed to remove the floor holding up money market interest rates. -It uses bonds as collateral in case of default. -It is administered separately from the interest rate on reserve balances. -It lets the Fed provide nonbanks with an option besides money market investments.
-It uses bonds as collateral in case of default. -It is administered separately from the interest rate on reserve balances. -It lets the Fed provide nonbanks with an option besides money market investments.
Select all that apply Which of the following choices accurately describe quantitative tightening? -It was implemented to counter the effects of quantitative easing. -In involved huge sales of bonds by the Fed. -It was implemented in 2008 to avert a major financial crisis. -It was intended to increase interest rates.
-It was implemented to counter the effects of quantitative easing. -In involved huge sales of bonds by the Fed.
Select the following choice that accurately describe the Fed's target rate of inflation. -It has been seldom used since the financial crisis of 2007-2009. -It was established in 2000. -It was set at 2% when it was established. -It has been withheld from the public.
-It was set at 2% when it was established.
What is the term for the purchases and sales of U.S. government securities that the Federal Reserve System undertakes in order to influence interest rates and the money supply? -Open-market operations -Quantitative easing -Forward guidance -Quantitative tightening
-Open-market operations
Select all that apply Which of the following are lags facing fiscal policy?. -Investment lag -Operational lag -Administrative lag -Interest rate lag -Recognition lag
-Operational lag -Administrative lag -Recognition lag
Select all that apply Which of the following are actions that the Fed may take to decrease the money supply? -Lower the discount rate -Sell government bonds as part of QT -Raise the effective federal funds rate -Lower IORB and ON RRP rates
-Sell government bonds as part of QT -Raise the effective federal funds rate
Select all that apply Which actions can the Fed plan in order to engage in restrictive monetary policy? -Sell longer-term bonds as part of quantitative tightening -Announce a lower effective federal funds rate -Buy government securities in the open market -Increase the IORB and ON RRP rates
-Sell longer-term bonds as part of quantitative tightening -Increase the IORB and ON RRP rates
Select all that apply Which of the following are advantages of monetary policy over fiscal policy? -Speed -Isolation from political pressure -Bipartisan agreement -Flexibility -Lower costs
-Speed -Isolation from political pressure -Flexibility
Select all that apply What are the Fed's targets used to meet the dual mandate? -Target rate of inflation -100% excess reserves rate -0% interest rate -Full-employment rate of unemployment
-Target rate of inflation -Full-employment rate of unemployment
Select all the choices that accurately describe administered rates. -The Fed uses three administered rates. -Administered rates serve as an outside influence on many equilibrium interest rates. -Administered rates are directly controlled by the Fed. -Administered rates are a product of market forces.
-The Fed uses three administered rates. -Administered rates serve as an outside influence on many equilibrium interest rates. -Administered rates are directly controlled by the Fed.
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.
1. Interest rates will fall 2. Investment spending will rise 3. Aggregate demand will rise 4. Real GDP and the price level will rise.
Click and drag on elements in order Arrange the events that are caused by a restrictive monetary policy in the order they occur, with the first event at the top. -Interest rates will rise. - Investment spending will drop. -Aggregate demand will fall. -Inflation will decline.
1. Interest rates will rise. 2. Investment spending will drop. 3. Aggregate demand will fall. 4. Inflation will decline.
The Fed's target rate of inflation has been set at _____ % since it was first established.
2
In most cases, how long is the expected operational lag when the Fed makes changes in interest rates? -a fiscal year -several weeks -3-6 months -3-6 days
3-6 months
Which of the following statements best explains liquidity trap? -Households are holding too many liquid assets. -Homeowners borrow too much money. -Homeowners owe more on their homes than they are worth. -Adding more liquidity to banks has no effects on the economy.
Adding more liquidity to banks has no effects on the economy.
What is the term for an interest rate set by a central bank to help it manage market-determined interest rates? -Annual percentage rate -Flexible exchange rate -Fixed exchange rate -Administered rate
Administered rate
Investment spending is one of the determinants of what? -Total demand -Aggregate demand -Price level -Reserve ratio
Aggregate demand
1. Interest Rates will fall2. Investment spending will rise3. Aggregate demand will rise4. Real GDP and the price level will rise
Arrange the events that are caused by an expansionary monetary policy in the order they occur, with the first event at the top
The ______ interest rate is the rate at which the amount of money demanded and the amount supplied are equal.
equilibrium
expansionary
Buying bonds, lowering the reserve ratio, lowering the discount rate, or increasing reserve auctions involve what type of monetary policy? Multiple choice question. Contractionary Open-market Restrictive Expansionary
How does the Fed complete open-market operations? -By buying and selling bonds in public markets -By buying and selling stocks in private markets -By buying and selling bonds in private markets -By buying and selling stocks in public markets
By buying and selling bonds in public markets
_____ policy is hindered by three delays, called recognition, administrative, and operational lags.
Fiscal
expansionary
During a recession, with a negative GDP gap and substantial unemployment, the Fed should institute what type of monetary policy? Multiple choice question. Investment Restrictive Expansionary Contractionary
The rate at which the amount of money demanded and the amount supplied are equal is called what? -Medium price level interest rate -Equilibrium interest rate -Average discount interest rate -Equal money interest rate
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? -Restrictive -Tight -Expansionary -Contractionary
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 term for the financial market in which short-term, low-risk debt securities are traded, including U.S. Treasury bills, overnight loans of bank reserves, and commercial paper? -Stock exchange -Money market -Stock market -Currency exchange
Money market
What is the administered rate that the Fed offers to commercial banks on any currency that they choose to keep on deposit overnight as reserve balances at one of the twelve Federal Reserve Banks? -Discount rate -IORB -Policy rate -ON RRP
IORB
expansionary monetary policy; easy
If the economy faces recession and unemployment, the Fed will initiate Blank______ also known as "Blank______ money policy." Multiple choice question. expansionary fiscal policy; tight contractionary monetary policy; easy expansionary monetary policy; tight expansionary monetary policy; easy expansionary fiscal policy; easy
the market for money
In the figure, the demand curve for money and the supply curve of money are brought together, representing Blank______. Multiple choice question. the market for investment demand the level of interest rates the market for money the price level
What are administered rates? -Rates of exchange that are pegged by a government or central bank at a particular ratio. -The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply. -Rates of exchange that are determined by the international supply of and demand for a nation's money. -Interest rates set by the fed to influence the lending and borrowing decisions of financial institutions.
Interest rates set by the fed to influence the lending and borrowing decisions of financial institutions.
What is the nature of the relationship between the interest rate and the amount of investment spending? -Positive -Direct -Inverse -Independent
Inverse
Which portion of total spending is influenced the most by interest rate changes? -Investment expenditure -Depreciation -Government expenditure -Transfer payments
Investment expenditure
increase
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 ________the moneysupply
Why was there a major fear that the Fed was out of options in dealing with the financial crisis of 2007-2008? -It was unable to change the IORB. -It could raise interest rates no further. -It could lower interest rates no further. correct -It was unable to change the ON RRP.
It could lower interest rates no further.
What action did the Fed take in response to the financial crisis of 2007-2008? -It raised the federal funds rate dramatically. -It left the federal funds rate unchanged. -It dropped the federal funds rate below zero. -It dopped the federal funds rate to near zero.
It dopped the federal funds rate to near zero.
Which of the following best describes the overnight reverse repo rate? -It is an overnight loan from the Fed to a nonbank lender. -It is an overnight loan from a bank to the Fed. -It is an overnight loan from the Fed to a bank. -It is an overnight loan from a nonbank lender to the Fed.
It is an overnight loan from a nonbank lender to the Fed.
What happens when the Fed raises the IORB rate? -It increases the money supply and puts downward pressure on all interest rates. -It increases the money supply and puts downward pressure only on money market interest rates. -It reduces the money supply and puts upward pressure on all interest rates. -It reduces the money supply and puts upward pressure only on money market interest rates.
It reduces the money supply and puts upward pressure on all interest rates.
_______ policy may be highly effective in slowing expansions and controlling inflation but less reliable in pushing the economy from a severe recession.
Monetary
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? -Liquidity trapping -Quantitative tightening -Forward guidance -Quantitative easing
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? -Bond purchasing programs -Quantitative easing -Quantitative tightening -Negative interest rates
Quantitative tightening
During a recession When the GDP gap is negative
Select all that apply Under which conditions should the Fed follow an expansionary monetary policy? Multiple select question. During a recession When the GDP gap is negative During high inflation When unemployment is low
Select all that apply Which of the following lags does monetary policy face? -Administrative -Recognition -Operational -Investment
Recognition Operational
During times of rising inflation the Fed will undertake which of the following monetary policies? -Expansionary -Investment -Open market -Restrictive
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? -Investment -Restrictive -Open market -Expansionary
Restrictive Reason: Also known as contractionary.
_______ 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.
Restrictive/Contractionary/ or Tight
outcome, input, employment
Select all that apply The interaction of aggregate supply and aggregate demand result in the levels of which of the following? Multiple select question. Checkable deposits Reserves Output Income Employment
Target rate of inflation Full-employment rate of unemployment
Select all that apply What are the Fed's targets used to meet the dual mandate? Multiple select question. 100% excess reserves rate 0% interest rate Target rate of inflation Full-employment rate of unemployment
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.
Select all that apply Which of the following statements accurately describes the federal funds rate? Multiple select question. The federal funds market is unregulated. The Fed sets a target federal funds range with a difference between the upper and lower limit of two percent. The Fed can lower the effective federal funds rate by lowering the IORB and ON RRP rates. The Fed keeps the target federal funds range confidential. The effective federal funds rate is always within the federal funds target range.
It was set at 2% when it was established.
Select all the following choices that accurately describe the Fed's target rate of inflation. Multiple choice question. It has been withheld from the public. It was established in 2000. It has been seldom used since the financial crisis of 2007-2009. It was set at 2% when it was established.
recession and unemployment
The Fed will initiate expansionary monetary policy when faced with Blank______. Multiple choice question. recession and inflation expansion and unemployment recession and expansion recession and unemployment
What is represented by the center of the Fed's bullseye chart? -The Fed's target rates for the dual mandate -The amount by which actual rates differ from target rates -An economy with zero inflation and zero unemployment -The actual employment and inflation rates on a given date
The Fed's target rates for the dual mandate
What is cyclical asymmetry? -When the central bank's injection of additional reserves into the banking system has little or no positive impact -When the central bank's injection of additional reserves into the banking system has a large positive impact. -The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in ending severe recession -The idea that monetary policy may be better at extracting the economy from severe recession than in slowing expansions and controlling inflation.
The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in ending severe recession
aggregate supply and aggregate demand
The levels of output, employment, income, and prices all result from the interaction of Blank______. Multiple choice question. aggregate supply and aggregate demand wages and investment checkable deposits and interest rates stocks and bonds
What effect did the actions of the Fed have on the COVID-19 recession? -They shortened it. -They worsened it. -They prevented it. -They lengthened it.
They shortened it.
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. -The Fed does not have the ability to create negative interest rates. -They were afraid negative rates would pump too many lendable funds into the banking system. -There were no economic arguments in support of negative rates.
They were afraid negative rates would discourage spending.
money
This figure represents the market for _______, in which the demand curve and the supply curve are brought together.
contractionary
Under __________ monetary policy, the Federal Reserve will sell bonds, increase reserve ratios, raise the discount rate or decrease reserve auctions.
Federal funds target range
What is the 0.25 percent wide range used by the Fed to guide its policy rate and to facilitate forward guidance communications? Multiple choice question. Federal discount rate range Overnight reverse repo rate Effective federal funds rate Federal funds target range
Lower the IORB and ON RRP rates Lower the effective federal funds rate
Which of the following are actions that the Fed may take to increase the money supply? Sell government bonds as part of QT incorrect Raise the discount rate incorrect Lower the IORB and ON RRP rates incorrect Lower the effective federal funds rate
expansionary, contractionary
_________-monetary policy addresses the problem of unemployment and recession, while _________monetary policy deals with the problem of inflation. (Enter one word per blank.)
If the red dot on the Fed's bullseye chart is northwest of the center, then ______ is needed. -it is unclear what type of monetary policy -a restrictive monetary policy -an expansionary monetary policy -no change to monetary policy
a restrictive monetary policy
Monetary policy faces a recognition lag and an operational lag, but avoids the ______ lag that hinders fiscal policy.
administrative
Investment spending is one of the determinants of _____ demand
aggregate
The Fed will enact restrictive monetary policy when aggregate demand is ______ in relation to the economy's full-employment level of real output.
excessive/high/or exceeds
The federal funds rate is the interest rate that ______. -the Fed pays on bank reserves -banks charge the Fed for using its reserves -the Fed charges banks that borrow from it -banks charge each other for lending reserves on an overnight basis
banks charge each other for lending reserves on an overnight basis
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 ______.
borrow
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 ______ the money supply.
decrease/ lower/ drop/ or shrink
In 2007, the Fed lowered the ____ rate and the target for federal ___ rate.
discount; funds
The ____ ____ rate is the interest rate banks charge on overnight loans to each other.
federal; funds
In a bullseye chart, the amount by which actual unemployment and inflation differ from the Fed's target rates is ______. -found by drawing a triangle linking the center to two red dots -represented by the center of the red dot -represented by the center of the bullseye -found by looking at the position of the red dot relative to the center
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 _____. -have an unclear stance on monetary policy -automatically implement an expansionary monetary policy -have a clear stance on monetary policy -automatically implement a restrictive monetary policy
have a clear stance on monetary policy
The Federal Reserve's holdings ______ during the COVID-19 recession. -increased from $4.1 trillion to $7.1 trillion -remained around $4 trillion -decreased from $4.1 trillion to $3.8 trillion -increased from $4.1 trillion to $14.1 trillion
increased from $4.1 trillion to $7.1 trillion
There is a(n) ______ relationship between the interest rate and the amount of investment spending.
inverse/indirect/ or negative
Changes in the interest rate mainly affect the ____ component of total spending, and also affect spending on durable consumer goods that are purchased on credit.
investment
The efforts of the Fed when it increases reserves will be pointless if commercial banks seek liquidity and are unwilling to ______. -lend -borrow -take losses -invest
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 ______. -excess reserves -lending -currency -required reserves
lending
A ____ interest rate environment will encourage investment, raise aggregate demand and unleash demand-pull inflation.
low
Speed, flexibility, and isolation from political pressure are main advantages of ______ policy.
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 ______ policy, -monetary -beggar-thy-neighbor -cyclical asymmetry -expansionary -fiscal
monetary
The real; not the ____ rate of interest is critical for investment decisions.
nominal
The Federal Reserve's actions during March and April 2020 were _____ the quantitative easing that it engaged in from 2011-2014. -much smaller than -much greater than -of the same magnitude as
of the same magnitude as
During times of rising inflation the Fed will undertake _____ monetary policy or "tight money policy."
restrictive or contractionary
With ______ 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.
restrictive/contractionary/ or tight
When the Fed buys ______ from the public, people may choose to pay off existing loans with the money received, rather than increasing their spending on goods and services.
securities
During the financial crisis and severe recession, the Fed was credited with _____. -bailing out large financial institutions -raising interest rates at the right time -keeping interest rates low for too long -taking innovative actions
taking innovative actions
