Question 1

If a bank's reserves are low, it can increase reserves by:

Accepted Answer

A)  buying bonds.
B)  encouraging more deposits.
C)  borrowing from other banks in the overnight loan market.
D)  setting a cap on the amount that borrowers can borrow.E) B) and C)
F) A) and C)

Question 2

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 2%, then, the Fed will:

Accepted Answer

A)  want the new real interest rate to be higher than the neutral interest rate.
B)  want the new real interest rate to be lower than the neutral interest rate.
C)  want the new real interest rate to be equal to the inflation rate.
D)  not change the real interest rate.E) B) and C)
F) C) and D)

Question 3

You have saved $747. Where should you go if you want to open a checking account?

Accepted Answer

A)  the New York Federal Reserve district bank
B)  a commercial bank
C)  the Federal Reserve in Washington,
D)  your local federal reserve district bankE) C) and D)
F) A) and B)

Question 4

If inflation is 0% and a firm wants to raise real wages by 1%, it will need to:

Accepted Answer

A)  raise nominal wages by 1%.
B)  lower nominal wages by 1%.
C)  lower real wages by 2%.
D)  raise inflation by 2%.E) A) and B)
F) C) and D)

Question 5

How would the Federal Reserve uses its floor framework and the discount rate if the economy has a positive output gap?

Accepted Answer

By raising the interest rate on excess reserves in banks and by borrowing more from financial institutions, the Fed adjusts the lower bound of the federal funds rate. The increased demand for overnight loans and the decreased reserves that banks have available to loan out lead to a rise in the federal funds rate. The discount rate is set above the federal funds rate, and so by increasing the discount rate, the Fed adjusts the upper bound of the federal funds rate. The rise in the federal funds rate percolates through to lower short-term and long-term interest rates. Thus, consumption and investment fall (and there is also a possible fall in government expenditure when the government pays more in interest payments). This lowers real GDP and reduces the output gap.

Question 6

The Federal Reserve was created to:

Accepted Answer

A)  increase employment in the United States.
B)  provide stability in the banking sector and the economy.
C)  correct deflation in the United States.
D)  establish a banking system in the United States.E) B) and D)
F) C) and D) B

Question 7

If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

Accepted Answer

A)  raise; down
B)  raise; up
C)  lower; down
D)  lower; upE) A) and B)
F) A) and C) A

Question 8

Which of the following does the Federal Reserve control directly?
(i)  inflation
(ii)  unemployment
(iii)  output
(iv)  real GDP

Accepted Answer

A)  (i)  and (ii) 
B)  (ii)  and (iii) 
C)  (i) , (ii) , (iii) , and (iv) 
D)  None of the above.E) All of the above
F) C) and D)

Question 9

If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.

Accepted Answer

A)  lower; less; decrease
B)  lower; less; increase
C)  raise; more; increase
D)  raise; more; decreaseE) None of the above
F) All of the above

Question 10

The Federal Reserve System is made up of the:

Accepted Answer

A)  Board of Governors and 12 Federal Reserve district banks.
B)  president of the United States and 12 Federal Reserve district banks.
C)  chair of the Federal Reserve and 12 Federal Reserve district banks.
D)  chair of the Federal Reserve, the president of the New York Federal Reserve district bank, and four other Federal Reserve district bank presidents.E) C) and D)
F) A) and B)

Question 11

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Accepted Answer

A)  7.75%
B)  5%
C)  3.5%
D)  4.25%E) None of the above
F) A) and D)

Question 12

Who runs the Federal Reserve of the United States?

Accepted Answer

A)  the speaker of the House of Representatives
B)  the chief of the Armed Forces
C)  the president of the United States
D)  the chair of the Federal ReserveE) B) and D)
F) All of the above

Question 13

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 0.75%, and the output gap is -1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Accepted Answer

A)  2.125%
B)  1.125%
C)  0.375%
D)  1.375%E) B) and C)
F) A) and B)

Question 14

What might be an unintended effect of an inflation rate ceiling?

Accepted Answer

A)  The real interest rate can become negative if inflation is high enough.
B)  The real interest rate will always be very high, and this will discourage borrowing.
C)  Businesses will not know the nominal interest rate.
D)  It becomes impossible to calculate the real interest rate.E) A) and B)
F) All of the above

Question 15

The Federal Reserve uses the _____ to fulfill its function as lender of last resort.

Accepted Answer

A)  bonds markets
B)  market for overnight loans
C)  discount window
D)  stock marketE) A) and C)
F) B) and D)

Question 16

If the actual inflation rate is less than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

Accepted Answer

A)  raise; down
B)  raise; up
C)  lower; down
D)  lower; upE) B) and D)
F) A) and B)

Question 17

You are the governor of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 2.75%, and the output gap is 1.25%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Accepted Answer

The answer of You are the governor of the Federal...

Question 18

Explain how a change in the federal funds rate affects short-term interest rates in the market.

Accepted Answer

The answer of Explain how a change in the federal...

Question 19

What are overnight reverse repurchase agreements?

Accepted Answer

A)  government-issued bonds that the Treasury Department sells to the Federal Reserve
B)  the issue of discount window loans to financial institutions, with an agreement for the financial institutions to pay back the loans the next day
C)  the demand and supply of overnight loans in the overnight loan market
D)  the sale of government bonds to financial institutions, with an agreement to purchase the bonds back the next day, at a higher priceE) B) and D)
F) B) and C)

Question 20

Why does the Federal Reserve target inflation rather than unemployment?

Accepted Answer

A)  The inflation rate is an easy target to attain.
B)  Full employment is not an attainable target.
C)  It would be poor optics for the Fed to intentionally increase unemployment.
D)  The inflation rate does not change much.E) A) and D)
F) A) and C)

Exam 34: Monetary Policy

If a bank's reserves are low, it can increase reserves by:

Correct Answer
verified

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 2%, then, the Fed will:

Correct Answer
verified

You have saved $747. Where should you go if you want to open a checking account?

Correct Answer
verified

If inflation is 0% and a firm wants to raise real wages by 1%, it will need to:

Correct Answer
verified

How would the Federal Reserve uses its floor framework and the discount rate if the economy has a positive output gap?

The Federal Reserve was created to:

Correct Answer
verified
B

If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _ the real interest rate to drive _ consumption and investment.

Correct Answer
verified
A

Which of the following does the Federal Reserve control directly? (i) inflation (ii) unemployment (iii) output (iv) real GDP

Correct Answer
verified

If the output gap is negative, then the Federal Reserve will use its floor framework to ___ the interest on excess reserves, borrow _ money from financial institutions to set the lower bound for the federal funds rate, and ___ the discount rate to set the upper bound for the federal funds rate.

Correct Answer
verified

The Federal Reserve System is made up of the:

Correct Answer
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You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Correct Answer
verified

Who runs the Federal Reserve of the United States?

Correct Answer
verified

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 0.75%, and the output gap is -1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Correct Answer
verified

What might be an unintended effect of an inflation rate ceiling?

Correct Answer
verified

The Federal Reserve uses the _____ to fulfill its function as lender of last resort.

Correct Answer
verified

If the actual inflation rate is less than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _ the real interest rate to drive _ consumption and investment.

Correct Answer
verified

You are the governor of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 2.75%, and the output gap is 1.25%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Correct Answer
verified

Explain how a change in the federal funds rate affects short-term interest rates in the market.

Correct Answer
verified

What are overnight reverse repurchase agreements?

Correct Answer
verified

Why does the Federal Reserve target inflation rather than unemployment?

Correct Answer
verified

Exam 34: Monetary Policy

If a bank's reserves are low, it can increase reserves by:

Correct AnswerverifiedShow Answer

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 2%, then, the Fed will:

Correct AnswerverifiedShow Answer

You have saved $747. Where should you go if you want to open a checking account?

Correct AnswerverifiedShow Answer

If inflation is 0% and a firm wants to raise real wages by 1%, it will need to:

Correct AnswerverifiedShow Answer

How would the Federal Reserve uses its floor framework and the discount rate if the economy has a positive output gap?

The Federal Reserve was created to:

Correct AnswerverifiedB

If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

Correct AnswerverifiedA

Which of the following does the Federal Reserve control directly? (i) inflation (ii) unemployment (iii) output (iv) real GDP

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The Federal Reserve System is made up of the:

Correct AnswerverifiedShow Answer

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Correct AnswerverifiedShow Answer

Who runs the Federal Reserve of the United States?

Correct AnswerverifiedShow Answer

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 0.75%, and the output gap is -1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Correct AnswerverifiedShow Answer

What might be an unintended effect of an inflation rate ceiling?

Correct AnswerverifiedShow Answer

The Federal Reserve uses the _____ to fulfill its function as lender of last resort.

Correct AnswerverifiedShow Answer

If the actual inflation rate is less than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

Correct AnswerverifiedShow Answer

You are the governor of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 2.75%, and the output gap is 1.25%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Correct AnswerverifiedShow Answer

Explain how a change in the federal funds rate affects short-term interest rates in the market.

Correct AnswerverifiedShow Answer

What are overnight reverse repurchase agreements?

Correct AnswerverifiedShow Answer

Why does the Federal Reserve target inflation rather than unemployment?

Correct AnswerverifiedShow Answer

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B

If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _ the real interest rate to drive _ consumption and investment.

Correct Answer
verified
A

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If the actual inflation rate is less than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _ the real interest rate to drive _ consumption and investment.

Correct Answer
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