Chapter 15: Monetary Policy, GDP, and the Price Level

The ______ ______ 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

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

Blank 1: two, 2, to, or too

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

Discourage investment. Lowering aggregate demand Restraining demand-pull inflation

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

Employment Output Income

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

Equilibrium interest rate

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 of the following lags does monetary policy face?

Operational Recognition

If there is an increase in the nation's money supply, the interest rate will:

fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

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

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

The Fed was designed to be insulated from political pressure so that it might take a _________ perspective and be immune from lobbying and special interest groups. Without protection from political pressure, the Fed may be influenced to take an overly _________ monetary policy to keep politicians and special interest groups happy.

long-term; expansionary

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

low or lower

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

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

restrictive or contractionary

The Federal Reserve's three administered rates are:

the IORB rate, the discount rate, and the ON RRP rate.

The rate that is most important rate in terms of helping to mitigate or avoid bank runs is:

the discount rate

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

Setting a target range for _________ is one of the Fed's main tools used for issuing forward guidance.

the federal funds rate.

The idea that there are limits to the range of interest rates over which a decline in the interest rate will lead to more economic activity is called:

the zero lower bound

The Fed decided to use quantitative easing during the financial crisis of 2007-2008 because of:

the zero lower bound problem

The IORB is the rate that banks receive for any money that Blank______.

they lend to the Fed

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

The Federal Reserve may use open-market operations to influence interest rates and the money supply. Open-market operations involve the Federal Reserve _________

either buying or selling bonds

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

equilibrium

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

When economists say that monetary policy can exhibit cyclical asymmetry, it means that:

expansionary monetary policy and restrictive monetary policy do not have the same potential for economic expansion and contraction.

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

3-6 months

Which of the following statements best explains 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?

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?

Administered rate

Investment spending is one of the determinants of what?

Aggregate demand

Monetary policy faces a recognition lag and an operational lag, but avoids the ________ (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 1: borrow

How does the Fed complete open-market operations?

By buying and selling bonds in public markets

Which of the following are functions of restrictive monetary policy?

Curtail the expansion of aggregate demand Increase interest rates

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

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.

Field 1: securities, bonds, or debt

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

Fiscal

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

Full-employment rate of unemployment Target rate of inflation

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

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

Interest rate on reserve balances Overnight reverse repo rate

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

What component of aggregate demand is most influenced by technological change?

Investment expenditures

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.

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

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

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 quantitative easing?

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

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 from overnight to one year.

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

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

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 quantitative tightening?

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

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

It was set at 2% when it was established.

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

______ 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 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 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 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

Which interest rate is the most critical for investment decisions?

Real

Which of the following are lags facing fiscal policy?

Recognition lag Administrative lag Operational lag

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

_____ 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

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

Speed Flexibility Isolation from political pressure

Select all the choices that accurately describe administered rates.

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.

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

The Fed's target rates for the dual mandate

Which of the following statements accurately describe the IORB?

The IORB is one of the three administered rates. 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.

What is cyclical asymmetry?

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

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

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.

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 Employing administrative rates to lower interest rates Making massive purchases of long-term bonds

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

aggregate supply and aggregate demand

The federal funds rate is the interest rate that Blank______.

banks charge each other for lending reserves on an overnight basis

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

increased from $4.1 trillion to $7.1 trillion

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.

inflation

The Fed employs forward guidance for the purpose of:

influencing people to change their behaviors immediately.

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 Fed's two-percent inflation target helps with downward wage flexibly because:

it allows employers to cut real wages without angering workers.

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 Blank______ policy,

monetary

Cyclical asymmetry is important to policymakers because:

monetary policy is more effective in fighting inflation than a recession.

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

nominal

The bullseye chart, developed by the Federal Reserve Bank of Chicago, is a visual comparison of the current state of the economy with the Fed's dual mandate of full employment and stable prices. A point representing actual unemployment and inflation is plotted on the chart and can be visually compared to the Fed's target point. If the current point lies to the _________ of the center of the bullseye, the state of the economy will suggest opposite monetary policy stances.

northeast or southwest

The bullseye chart, developed by the Federal Reserve Bank of Chicago, is a visual comparison of the current state of the economy with the Fed's dual mandate of full employment and stable prices. A point representing actual unemployment and inflation is plotted on the chart and can be visually compared to the Fed's target point. If the current point lies to the _________ of the center of the bullseye, the Fed's stance on monetary policy will be clear.

northwest or southeast

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

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______.

positive rates of inflation.

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

The main difference between quantitative easing and quantitative tightening is that quantitative easing tends to _________ interest rates, while quantitative tightening has the opposite effect.

reduce long-term

Interest rates below zero percent would likely cause:

reduced economic activity

If the Federal Reserve wanted to influence interest rates to increase it could _________.

sell bonds

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

taking innovative actions