Ch 15 Monetary Policy, GDP & Price Level Graded Smartbook Assignment

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

1. Interest Rates will fall 2. Investment spending will rise 3. Aggregate demand will rise 4. Real GDP and the price level will rise

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

What is the term for an interest rate set by a central bank to help it manage market-determined interest rates?

Administered rate

Investment spending is one of the determinants of what?

Aggregate demand

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

a restrictive monetary policy

Investment spending is one of the determinants of _____ demand.

aggregate

The federal funds rate is the interest rate that _____.

banks charge each other for lending reserves on an overnight basis

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

The greater the level of investment, the farther to the right lies the aggregate ______ curve.

demand

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

demand supply

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

equilibrium

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

expansionary

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

expansionary monetary policy; easy

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

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

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

high

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

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 money supply.

increase

Restrictive monetary policy is expected to ______.

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

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

investment

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

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

it is not clear what type of monetary policy

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

low

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

money

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

negative

The real, not _____ the rate of interest is critical for investment decisions.

nominal

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

protect savers

Which interest rate is the most critical for investment decisions?

real

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

recession and unemployment

During times of rising inflation, the Fed will undertake ____ monetary policy or "tight money policy."

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

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

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

restrictive, contractionary, or tight

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

southwest

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

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

What are administered rates?

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?

Inverse

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

Investment expenditure

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 choices accurately describe the money market?

It involves loans lasting from overnight to one year. It is made up of lending markets that involve commercial and financial loans.

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

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

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.

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

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.

How does higher investment spending influence the aggregate demand curve?

It moves it to the right.

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.

What happens when the Fed raises the IORB rate?

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

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

It was set at 2% when it was established.

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

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

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

Lowering aggregate demand Discourage investment. Restraining demand-pull inflation

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?

Money market

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 of the following three choices accurately describes the main effects of the Fed's purchases and sales of bonds in open-market operations?

They influence the interest rate of bonds. They influence the supply of money available to the public. They influence the equilibrium price of bonds.

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

To fight inflation

What is the effect of the Fed's purchases and sales of bonds?

The Fed buys and sells large quantities of bonds to influence the equilibrium price and interest rates on bonds.

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.

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

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

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

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

When the GDP gap is negative During a recession

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

2

What happens when the Fed buys bonds?

Bond prices increase, and interest rates decrease

How does the Fed complete open-market operations?

By buying and selling bonds in public markets

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

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

Which of the following are results of restrictive monetary policy?

Interest rates rise. Money supply falls.

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

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

Equilibrium interest rate

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

Expansionary

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

Expansionary

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

Expansionary

______ monetary policy addresses the problem of unemployment and recession, while _____ monetary policy deals with the problem of inflation.

Expansionary, restrictive

Which of the following choices accurately describe what happens when the Fed purchases 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.

The _____ _____ rate is the interest rate banks charge on overnight loans to each other.

Federal funds

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

Full-employment rate of unemployment Target rate of inflation

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

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

Income Employment Output

Which of the following are functions of restrictive monetary policy?

Increase interest rates Curtail the expansion of aggregate demand

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

Increase investment Increase aggregate demand

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

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

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

Inflationary expectations

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

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

Overnight reverse repo rate

What are the two administered rates used to influence market equilibrium interest rates in the money market?

Overnight reverse repo rate Interest rate on reserve balances

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

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

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

Restrictive

______ 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

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

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

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

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. Borrowers will be less likely to borrow. Lenders will be less likely to lend.

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 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. The Fed must have public credibility in order to influence inflationary expectations. They are expectations of the public.

Which of the following statements accurately describes policy rates?

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