Wk 5 - Practice: Fiscal and Monetary Policy Homework

Which of the following statements is true?

The Federal Reserve does not set the federal funds rate, but it influences it through the use of its open-market operations.

Use the following graphs to answer the next question. In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output of Y* in the economy, the Fed should

decrease the interest rate from 8 percent to 6 percent.

If the Federal Reserve wants to prevent inflation, it should

decrease the money supply to raise interest rates and lower aggregate demand.

An increase in the money supply, all else held constant, usually

decreases the interest rate and increases aggregate demand.

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the

discount rate.

Suppose the economy is experiencing a recession. If the Federal Reserve enacts expansionary monetary policy, interest rates will likely

fall causing investment to increase.

Answer the next question on the basis of the information in the following table. In the table, investment is in billions. Suppose the Fed reduces the interest rate from 6 percent to 4 percent. As a result of this decrease in the interest rate, using column (2) investment will

increase by $20 billion.

A contractionary monetary policy

is used when the inflation rate is high.

If the Fed wishes to reduce nominal interest rates, it must engage in an open market ______ of bonds to ______ the money supply.

purchase; increase

Changes in interest rates, all else held constant, cause a shift in

the aggregate demand curve, but not the investment demand curve.

Lowering the reserve requirement

turns required reserves into excess reserves.

Which of the following represents the chain of causation for expansionary policy?

An increase in the money supply reduces the interest rate, which increases investment, which increases real GDP.

The federal funds rate is the interest rate that _______ charge(s) _______.

banks; other banks

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?

buying government securities and lowering the discount rate

Use the information in the following table to answer the next question. In the table, investment is in billions. Suppose the Fed increases the interest rate from 5 percent to 6 percent. As a result of this increase in the interest rate, using column (2) investment will

decrease by $10 billion.