Prin. Of Macroeconomics Smart Book Chapter 15

low or lower

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

Discourage investment. Lowering aggregate demand Restraining demand-pull inflation

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

inflation

A rule of thumb suggested by economist John Taylor builds on the belief that central banks are willing to tolerate a small positive rate of ______ if doing so will help the economy to produce at potential output.

Quantitative tightening

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?

Expansionary

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

investment

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.

restrictive or contractionary

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

Restrictive

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

By buying and selling bonds in public markets

How does the Fed complete open-market operations?

lending

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______.

have a clear stance on monetary policy

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

a restrictive monetary policy

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

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

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

decrease, lower, drop, or shrink

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.

positive rates of inflation.

John Taylor's rule of thumb builds on the belief that in order to help the economy to produce at potential output, central banks are willing to tolerate Blank______.

Blank 1: administrative

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

The Fed uses three administered rates. Administered rates are directly controlled by the Fed. Administered rates serve as an outside influence on many equilibrium interest rates.

Select all the choices that accurately describe administered rates.

It was set at 2% when it was established.

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

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

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

monetary

Speed, flexibility, and isolation from political pressure are main advantages of ______ policy.

the dual mandate

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

excessive, high, or exceeds

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

Blank 1: two, 2, to, or too

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

of the same magnitude as

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

increased from $4.1 trillion to $7.1 trillion

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

Blank 1: federal or fed Blank 2: funds

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

equilibrium

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

lend

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

banks charge each other for lending reserves on an overnight basis

The federal funds rate is the interest rate that Blank______.

Blank 1: borrow

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 ______.

Employment Output Income

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

aggregate supply and aggregate demand

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

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,

Equilibrium interest rate

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

nominal

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

inverse, indirect, or negative

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

False

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

It dopped the federal funds rate to near zero.

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

Interest rates set by the fed to influence the lending and borrowing decisions of financial institutions.

What are administered rates?

Full-employment rate of unemployment Target rate of inflation

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

Interest rate on reserve balances Overnight reverse repo rate

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

They shortened it.

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

The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in ending severe recession

What is cyclical asymmetry?

The Fed's target rates for the dual mandate

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

Inverse

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

Administered rate

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

Money market

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?

Open-market operations

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?

Liquidity trap

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

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?

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

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

Real

Which interest rate is the most critical for investment decisions?

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

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

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

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

Speed Flexibility Isolation from political pressure

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

Curtail the expansion of aggregate demand Increase interest rates

Which of the following are functions of restrictive monetary policy?

Recognition lag Administrative lag Operational lag

Which of the following are lags facing fiscal policy?

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

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

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

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.

Which of the following choices accurately describe quantitative tightening?

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

Which of the following choices accurately describe the money market?

Operational Recognition

Which of the following lags does monetary policy face?

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

Which of the following statements best explains liquidity trap?

Investment expenditure

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

They were afraid negative rates would discourage spending.

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

It could lower interest rates no further.

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

Restrictive, Contractionary, or Tight

_____ 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.

Fiscal

_____ policy is hindered by three delays, called recognition, administrative, and operational lags.

Monetary

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