Macroeconomics Ch. 15

What is the term for the constraint placed on the ability of a central bank to stimulate the economy through lower short-term interest rates by the fact the short-term interest rates cannot be driven too low without causing depositors to withdraw funds from the banking system?

Zero lower-bound problem

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

a restrictive monetary policy

The federal funds rate is the interest rate that Blank______.

banks charge each other for lending reserves on an overnight basis

The Taylor rule is based on the fact that policymakers usually Blank______.

focus more on unemployment than inflation

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

Restrictive monetary policy is expected to Blank______.

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

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

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

protect savers

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

recession and unemployment

If there is a red dot in the Blank______ 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 Blank______.

the dual mandate

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

2

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

Administered rate

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

Blank 1: federal or fed Blank 2: funds

What happens when the Fed sells bonds?

Bond prices drop, and interest rates climb.

What happens when the Fed buys bonds?

Bond prices increase, and interest rates decrease.

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

Which of the following statements accurately describes the three administered rates?

Each of the three rates was lowered between 2020 and 2022 because of the pandemic. The discount rate is paid to the Fed; the other rates are paid by the Fed.

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 is the term for public communications made by a central bank to the public to describe how it sees the economy and how it intends to mange monetary policy?

Forward guidance

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.

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 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 decided that negative rates would decrease spending.

What type of credibility does the Fed have in enforcing the three administered rates?

It has complete credibility in enforcing all three.

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

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

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

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.

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

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.

What was the mindset of the Fed that led it to begin quantitative easing?

Long-term interest rates are important in business decisions.

What is the term for a central bank's disposition regarding how it sees the current and future state of the economy?

Monetary policy stance

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

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

Overnight reverse repo rate

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 unconventional method, unavailable before the 2007-2009 recession, did the Fed use to try to control inflation in 2021?

Raising the IORB and ON RRP rates

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

Target rate of inflation Full-employment rate of unemployment

What is equal to the full-employment rate of unemployment?

Target rate of unemployment

What is the term for the Fed's desired rate of unemployment?

Target unemployment rate

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.

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 arguments supports the use of unconventional methods by the Fed?

The methods had worked in dealing with the 2007-2008 financial crisis. The Fed could use the methods to control long-term and short-term interest rates independently of each other.

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

To fight inflation

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

expansionary monetary policy; easy

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

they lend to the Fed

What was the Fed's approach to forward guidance after the financial crisis of 2007-2008?

It increased its use of forward guidance.

Which of the following statements accurately describe the discount rate?

It is useful during bank runs and major crises. It is set by the Fed to be higher than the IORB rate.

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.

Which of the following statements accurately describe how the Fed approached monetary policy before the financial crisis in 2007-2008?

It set targets for the federal funds rate. It used open-market operations to influence the federal funds rate. It bought or sold short-term securities from banks to change the banks' reserve balances at the Fed.

How did the Fed manage the economy differently before the 2007-2008 financial crisis?

It used fewer monetary policy tools.

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

Money is created when the Fed pays people for bonds. Fed bond purchases increase the equilibrium price of bonds. The demand for bonds increases when they are purchased by the Fed. Fed bond purchases decrease the equilibrium interest rate of bonds.

Which of the following choices accurately describes what happens when the Fed sells bonds?

Money is taken out of circulation when people pay for the bonds. Equilibrium interest rates on bonds go up. Equilibrium bond prices go down.

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

What is the zero lower bound problem?

Nominal interest rates cannot be driven lower than zero without causing depositors to withdraw funds from the banking system.

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

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 of the following are reasons the Fed sets its target inflation rate at the current level?

To assist downward wage flexibility To compensate for upward measurement bias To protect savers

Which of the following statements accurately describe the Fed's ability to enforce the three administrated rates?

The Fed can create all the money needed to lend to institutions that need to borrow money at any time. The Fed has full ability to enforce all three rates. The Fed can pay interest on money loaned to it overnight by creating any amount of money at any time.

Which of the following choices accurately describes inflationary expectations?

The Fed must have public credibility in order to influence inflationary expectations. They are based on the public's belief that the Fed will try to attain the 2% target inflation rate. They are expectations of the public.

What created the need to develop quantitative easing?

The Fed needed to further stimulate the economy after lowering the federal funds rate to near zero.

Which of the following choices accurately describes how the Fed dealt with forward guidance after the financial crisis of 2007-2008?

The Fed tried to clarify its statements to the public more than ever. The Fed used forward guidance to instill confidence in its new tactics.

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.

What has the Fed stated will be its approach to using unconventional methods in the future?

The Fed will continue to use these methods.

Which of the following choices accurately describe a neutral monetary policy?

The Fed would change it if notable inflation or deflation occurred. It focuses on the Fed leaving the economy alone. The Fed would consider it if unemployment were at or near 3.5 %.

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

What is monetary policy stance?

Whether the central bank sees the the outlook for monetary policy as expansionary, restrictive, or neutral

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 is the zero lower-bound problem?

Interest rates below zero cause people to withdraw money from banks.

What are administered rates?

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

Which of the following choices accurately describe quantitative tightening?

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

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

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 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 are the consequences of a negative interest rate?

The reserves in the banking system are reduced. People do not want to leave their money in their checking accounts.

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

How do policymakers tend to view unemployment and inflation?

They are more concerned with unemployment.

Which of the following statements accurately describes policy rates?

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