Chapter 13-14
plays no role in making monetary policy decisions.
Congress
The monetary base increases The supply of money increases and the interest rate falls
increases, increases, falls
The Federal Reserve monetary policy goals of maximum employment mean
keeping the unemployment rate close to the natural unemployment rate.
An open market sale of government securities by the Federal Reserve shifts the ________ reserves curve ________.
supply of; leftward
Demand and supply in the market for _______ determine the long-term real interest rate. In the short run, a change in the _______ changes the equilibrium real interest rate.
loanable funds; federal funds rate
In the year before Alan Greenspan's optimistic assessment, the Fed ______.
lowered the federal funds rate to increase aggregate demand
A decrease in the federal funds rate
lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand.
What further actions might the Fed take in 2013 to influence the real GDP growth rate in 2013?
The monetary policy is long and drawn out so most likely any actions the Fed takes in 2013 will have no effect on real GDP growth in 2013.
In the figure, if the economy is initially at point a, the shortminus−run effect of a cut in the federal funds rate is given by movement from poin
a to point b, increasing output and decreasing the unemployment rate.
The federal funds rate is the interest rate
banks charge each other on overnight loans.
Former Federal Reserve Chairman Ben Bernanke has defined price stability as occurring when the core inflation is
between 1 and 2 percent.
If the Fed wants to lower the federal funds rate, it can
buy government securities on the open market.
To lower the federal funds rate, the Federal Reserve should
buy government securities.
The core inflation rate is the rate of increase in the ______.
core PCE deflator
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 long-term bond rate is higher than the short-term rates, and it fluctuates less than the short-term rates.
higher, less
During this period, the Fed would have lowered the interest rate (or stimulated in other ways) _______.
if it thought that the unemployment problem was greater than the inflation problem
Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following takes the longest to change?
inflation rate
Mr. Dudley is discussing ______.
inflation rate targeting
A widespread fall in asset prices means that banks might become
insolvent
When the Fed lowers the federal funds rate,
investment expenditures increase.
In 2012, U.S. core inflation was 2.1 percent. This inflation rate
is about equal to the inflation rate that the Fed accepts as creating stable prices.
The Beige Book ______.
is the starting point for the Fed's decision-making process
Price level stability
is thought by most economists to be reached with a measured inflation rate of between 0 and 3 percent a year.
The Fed regards this as a better measure on which to focus than the CPI because ______.
it is less volatile than the total CPI inflation rate and the Fed believes that it provides a better indication of whether price stability is being achieved
A worldwide recession reduces the amount of U.S. exports, and as a result, aggregate demand decreases. To move U.S. GDP back to potential GDP, the Fed should
lower the federal funds rate.
If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would
lower the federal funds rate.
If the demand for reserves is unchanged, an increase in the quantity of reserves will
lower the federal funds rate.
The Fed buys U.S. government securities from banks in order to
lower the federal funds rate.
If the Fed had agreed with Robert Shiller in December 2007, it might have a different policy and lowered the federal funds rate more aggressively.
lowered
The key goal of monetary policy is to
maintain low inflation
The output gap can be used to estimate the extend to which the Fed misses its goal of
maximum employment.
Which of the following is one of the Fed's policy goals?
price level stability
Which of the following is the most important Federal Reserve monetary policy goal?
price level stability
The core inflation rate, measured by the core PCE deflator, measures changes in the
prices of consumer goods except the ones for food and fuel.
Other things remaining the same, the higher the real interest rate, the ______ is the amount of consumption expenditure and the ______ is the amount of saving.
smaller, greater
Other things remaining the same, the higher the real interest rate, the ______ is the amount of investment and the ______ are net exports.
smaller, smaller
Other things remaining the same, the higher the real interest rate, the ______ is the amount of consumption expenditure and the ______ is the amount of saving
smaller; greater
Other things remaining the same, the higher the real interest rate, the ______ is the amount of investment and the ______ are net exports.
smaller; smaller
An open market purchase of government securities by the Federal Reserve shifts the ________ reserves curve ________.
supply of; rightward
When the federal fund rate falls relative to the long-term bond rate, _______.
the Fed is trying to stimulate real GDP growth
The phrase "the dollar under pressure" means _______.
the dollar is depreciating
Currently the Fed targets
the federal funds rate.
In March, 2013, the Fed announced that it might decrease its open market purchases of securities by the end of the year. This announcement suggests that the Fed is concerned that
the inflation rate will rise.
The Beige Book is ______.
the Fed's summary of the current state of the economy
Suppose that initially real GDP equals potential GDP. Then an increase in aggregate demand occurs. According to the Taylor rule, the Fed should ________ the federal funds rate by ________ government securities in the open market.
raise; selling
The Federal Reserve fights recession via open market operations, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________.
rightward; rightward
When the Federal Reserve increases the Federal funds rate, the U.S. interest rate differential ________ and the U.S. exchange rate ________.
rises; appreciates
When the federal fund rate ______ relative to the long-term bond rate, the real GDP growth rate usually ______.
rises; slows about two years later
The budget deficit of 2012 was ______ than it would have been if the Fed's interest rate had been higher, because the low interest rate ______.
smaller; decreased the interest rate on the government debt
Choose the statement that is incorrect.
The Fed's open market operations determine the supply of reserves and the demand for reserves.
The Fed has followed this instruction, as seen by the fact that the core inflation rate has remained within or close to the range of between 1 and 2 percent a year.
True
Choose the statement that is incorrect.
As the federal funds rate rises, the quantity of reserves supplied increases.
The Taylor rule sets the federal funds rate (FFR) using the following formula, where INF is the inflation rate and GAP is the output gap.
B. FFR = 2 + INF + 0.5(INFminus−2) + 0.5GAP
Looking at the federal funds rate since 2000, identify periods during which, with the benefit of hindsight, the rate might have been kept too low. Identify periods during which it might have been too high. Choose the statement that is incorrect.
Between 2002 and 2004 and again in and since 2008, the federal funds rate was set at historically high levels, which lead to increasing unemployment.
If the Federal Reserve lowers the Federal funds rate,
Both answers A and C are correct.
How can monetary policy prevent house prices from falling?
By making the quantity of money grow rapidly.
The Taylor rule sets the federal funds rate (FFR) using the following formula, where INF is the inflation rate and GAP is the output gap.
FFR = 2 + INF + 0.5(INFminus−2) + 0.5GAP
The monetary policy transmission process is almost immediate and its results are relatively easy to predict.
False
Read the following statements and determine if they are true or false. I. The Federal Reserve's monetary policy must be approved by the President of the United States. II. The Federal Reserve Board of Directors meets approximately every six months to review the state of the economy and determine monetary policy.
I and II are both false.
Choose the statement that is incorrect.
In the long run, demand and supply in the loanable funds market depends on demand and supply in the market for bank reserves.
Choose the statement about inflation rate targeting that is incorrect.
Inflation rate targeting includes achieving an explicit inflation target and an explicit purchasing power parity value for the U.S. dollar.
What is the objective of U.S. monetary policy?
Maximum employment, stable prices, and moderate long-term interest rates
Which of the following is a problem in pursuing monetary policy?
None of the above answers is correct.
Choose the statement that is incorrect.
The Fed's open market operations determine the demand for reserves.
Choose the correct statements.
Statements c and d are correct.
Consider the following statement: Monetary policy is too important to be left to the Fed. The President should be responsible for it. How is responsibility for monetary policy allocated among the Fed, the Congress, and the President?
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee
Choose the statement that is incorrect.
The Fed tries to maximize the output gap, especially when that gap is positive.
Choose the statement that is incorrect.
The Fed uses inflation targeting.
Choose the correct statement.
The long-term bond rate is higher than the short-term rates.
appoints the members and the chairman of the Board of Governors.
the president
Suppose that the Bank of England decides to follow the Taylor rule. In 2005, the United Kingdom has an inflation rate of 2.1 percent a year and its output gap is minus−0.3 percent. At what level does the Bank of England set the repo rate (the U.K. equivalent of the federal funds rate)?
4%
Suppose the Fed uses the Taylor rule to set the federal funds rate. The inflation rate is 3 percent a year and the output gap is zero percent. What is the federal funds rate set at, according to the Taylor rule?
5.5
The Fed's monetary policy instrument is _______. A monetary policy instrument is _______.
C. the federal funds rate; a variable that the Fed can directly control or closely target
How do the Fed's monetary policy actions influence the exchange rate?
The Fed influences the exchange rate by changing the U.S. interest rate differential.
When the Fed fights recession, _______.
an increase in the supply of loanable funds lowers the long-term interest rate and increases investment
Equilibrium in the market for bank reserves determines the
federal funds rate.
According to the AS/AD model, in the short run an increase in the federal funds rate will
decrease the price level and decrease real GDP.
The recovery from the 2008minus−2009 recession was so slow because _______.
extreme uncertainty about the future is keeping business investment low
The recovery from the 2008−2009 recession was so slow because _______.
extreme uncertainty about the future is keeping business investment low
Within the market for reserves, an increase in the quantity of reserves results in a
fall in the equilibrium federal funds rate.
The price of Treasury bills falls and the interest rate rises .
falls; rises
The Fed's goals of maximum employment, stable prices, and moderate long-term interest rates are _______.
in harmony and reinforce each other in the long run but in the short run might come into conflict
If the Fed lowers the federal funds rate, the Fed's goal is to
increase aggregate demand.
If the Fed wants to increase the quantity of money, it can
purchase U.S. government securities.
The New York Fed conducts an open market ______ to hit the new ______ federal funds rate targe
purchase; lower
In the figure, suppose that the economy is at point B. Which of the following policy options for the Fed will move the economy toward its LAS?
raise the federal funds rate
In September, 2012, the Fed announced that it would buy $40 billion of mortgage backed securities per month. One goal of this policy was to ________ the price of these securities and thereby help ________.
raise; lower longminus−term interest rates
An inflation rate targeting rule
reduces uncertainty about monetary policy.
An increase in the quantity of reserves leads to a
reduction in the federal funds rate.
The Fed might increase money by more than the potential to increase production _______.
when the economy is in a recession and the Fed wants to move the economy back to potential GDP
A currency drain ______ bank deposits and _______ bank reserves.
decreases; decreases
A rise in the federal funds rate ______ reserves and ______ the quantity of deposits and bank loans created.
decreases; decreases
Easing by the Fed ______ the U.S. interest rate differential, which weakens the dollar and strengthens the euro. Net exports and aggregate demand _______.
decreases; increase
A fall in the exchange rate ______ unemployment and ______ the inflation rate.
decreases; increases
The quantity of money demanded ______. Consumers and firms spend ______.
decreases; less
A fall in the federal funds rate ______ the supply of bank loans and the supply of loanable funds, and ______ the equilibrium real interest rate.
decreases; lowers
When the Fed lowers the federal funds rate, the U.S. dollar ________ on the foreign exchange market and ________.
falls; aggregate demand increases
If the Fed carries out an open market operation and buys U.S. government securities, the federal funds rate ________ and the quantity of reserves ________.
falls; increases
Interest rates ______ in response to the Fed's actions. The short-term interest rateslong dash—the federal funds rate and the short-term bill ratelong dash—move ______.
fluctuate; closely together
In September 2012 unemployment was high and the Fed was concerned that the economy would reminus−enter a recession. Therefore the Fed announced that it would ________ its purchases of securities in an effort to ________.
increase; keep the federal funds rate low
If the interest rate on Treasury bills is lower than the federal funds rate, the quantity of overnight loans supplied ______ and the demand for Treasury bills ______.
increases; decreases
The supply of loanable funds ______ and the long-term interest rate ______.
increases; falls
Investment ______, and aggregate demand ______ with a multiplier effect.
increases; increases
If the Fed raises the interest rate, the first effect in an AS/AD figure is a ________ shift of the ________ curve.
leftward; AD
