Chapter 14

A monetary policy instrument is

a variable that the Fed can directly control or closely target

During 2012, the inflation rate increased but remained in the "comfort zone" and the unemployment rate remained high. -->Explain the dilemma that rising inflation and high unemployment pose for the FED

1. Starting from a below full employment equilibrium, a rise in the interest rate increases the recessionary gap 2. If the Fed lowers the interest rate to combat unemployment, the inflation rate will rise further 3. If the Fed raises the interest rate to combat inflation, the unemployment rate will rise further

Unemployment is a more serious economic problem than inflation and should be the focus of the Fed's monetary policy

1. The Fed's goals are maximum employment, stable prices, and moderate long term interest rates 2. The Fed's primary goal is price stability because price stability helps the Fed reach all 3 of its goals

The objectives of monetary policy are

1. maximum employment 2. stable prices 3. moderate long term interest rates

To determine whether the federal rate should be raised, lowered, or left unchanged, the Fed forecasts

1. the unemployment rate 2. the output gap 3. the inflation rate

1. The Fed's adjusts the supply of reserves to keep the federal funds rate on target 2. Equilibrium in the market for bank reserves determines the federal funds rate 3. The higher the federal funds rate, the higher is the opportunity cost of holding reserves and the greater the incentive to economize the quantity of reserves held

:)

1. The higher the federal funds rate, the smaller the quantity of reserves demanded 2. Banks hold reserves to meet the pyramid reserve ratio and so they can make payments 3. Banks reserves are costly to hold because they can be loaned in the federal funds market and earn the federal funds rate

:)

The -- appoints the members and the Chairmen of the Board of Governors of the Fed

President

The -- plays no role in making monetary policy decisions

Congress

the monetary policy transmission process is almost immediate and its results are relatively easy to predict

False

The -- is responsible for the conduct of monetary policy

Fed

How do the Fed's monetary policy actions influence the exchange rate?

The Fed influences the exchange rate by changing the US interest rate differential

Inflation responds --- after the change in the federal funds rate

between 1 and 2 years

The goals of monetary policy are in -- in the short run and in -- in the long run

conflict; harmony

To determine whether the goal of stable prices is being achieved, the Fed pays closest attention to the

core PCE deflator, which is the PCE deflator excluding food and fuel

The supply of loanable funds-- and investment --. Aggregate demand -- with a multiplier effect. Real GDP - and the price level rises.

increases; increases; increases; increases

Financing the budget deficit

does not directly affect the Fed's purchases and sales of government securities

In the short run, a change in the -- changes the equilibrium real interest rate

federal funds rate

Other things remaining the same, the lower the real interest rate, the-- is the amount of investment and the -- are net exports

greater; greater

Other things remaining the same, the lower the real interest rate, the -- is the amount of consumption expenditure and the -- is the amount of saving

greater; smaller

When the Fed lowers interest rates, business investment

increases

Because core inflation rate excludes the prices of food and fuel, the Fed should pay no attention to it and should instead be concerned about the CPI inflation rate -->Core inflation is

inflation calculated using the PC deflator excluding prices on food and fuel

The Fed focuses on core inflation more heavily than overall inflation because core inflation

is a better indicator of the direction in which monetary policy should lean because it is less volatile than the CPI inflation rate

During 2009 and 2010, both the inflation rate and the unemployment rate increased. --> During this period, the Fed would have raised the interest rate if

it thought that the rising inflation rate was a greater problem than the rising unemployment rate

Demand and supply in the market for -- determine the long run interest rate

loanable funds

The inflation rate rises when the Fed makes an open market--. The supply of money -- and the interest rate--.

purchase; increases; falls

The federal government gets funds to cover its budget deficit by

selling government securities

If a further open market purchase of securities decreased the federal funds rate, you would expect the RD curve to

slope downward below the current federal funds rate

Based on the performance of US inflation and unemployment since 2000,

the Fed's goal of stable price has taken priority

The Fed's monetary policy instrument is

the federal funds rate

The main influences of the FOMC federal funds rate decision are

the inflation rate, the unemployment rate, and the output gap