Macroeconomics Chapter 15

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.

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

either buying or selling bonds

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

it allows employers to cut real wages without angering workers.

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

the federal funds rate.

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

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.

What is the zero lower bound problem?

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

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

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 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 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.

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

How did the Federal Reserve control the federal funds rate before the 2007-2009 financial crisis?

Open-market operations

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

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 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 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.

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 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.

Suppose that the FOMC chair makes an official public statement that 1. substantially increases investor expectations for faster economic growth, but which 2. does not change the administered rates or what the Fed has been doing with respect to quantitative easing, open-market operations, and other monetary policy actions. Which of the following statements is the most likely effect of this announcement on the investment demand curve? (Hint. Recall the difference between a movement along a curve and a shift of a curve.)

The investment demand curve would shift to the right.

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.

Which of the following statements accurately describes policy rates?

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

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.

A liquidity trap occurs when expansionary monetary policy fails to work because a decrease in interest rates does not cause an increase in lending and borrowing.

True

In which situation does the Fed have to worry most about downward price stickiness?

When applying restrictive monetary policy

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

The Taylor Rule puts

a higher weight on resolving the unemployment gap

Other things equal, improvements in the productivity of capital would cause the interest rate to:

increase

Productivity improvements would likely cause investment spending to:

increase

The Fed employs forward guidance for the purpose of:

influencing people to change their behaviors immediately.

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

long-term; expansionary

The dual mandate tells the Fed that its two highest priorities should be stable prices and:

low unemployment.

Cyclical asymmetry is important to policymakers because:

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

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

Other things equal, a lower real interest rate will cause:

the AD curve to shift right.

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 Taylor Rule puts _________blank as much weight on closing the unemployment gap as it does on closing the inflation gap.

twice

Technological change _________blank influence aggregate supply.

would