Question 1

Which of the following is NOT one of the four main goals of the Federal Reserve's monetary policy?

Accepted Answer

Low government budget deficits

Question 2

Suppose the economy is experiencing high inflation and real GDP is above potential GDP. According to the AD-AS model, which monetary policy action should the Fed take?

Accepted Answer

Raise the target for the federal funds rate to reduce aggregate demand

Question 3

What is the main way the Federal Reserve can influence aggregate demand in the economy?

Accepted Answer

By affecting interest rates

Question 4

The federal funds rate is best defined as:

Accepted Answer

The interest rate banks charge each other for overnight loans

Question 5

If the Fed wants to pursue expansionary monetary policy, what will it do to the target for the federal funds rate?

Accepted Answer

Lower the target for the federal funds rate

Question 6

Which of the following best describes quantitative easing?

Accepted Answer

The Fed policy that attempts to increase aggregate demand by buying long-term securities

Question 7

Suppose the Fed increases the supply of reserves in a scarce-reserves regime. What is the expected effect on the federal funds rate?

Accepted Answer

The federal funds rate will decrease

Question 8

Which of the following equations represents the Taylor Rule for setting the federal funds rate?

Accepted Answer

$$federal\ funds\ rate = current\ inflation\ rate + equilibrium\ real\ federal\ funds\ rate + 0.5 	imes (inflation\ gap) + 0.5 	imes (output\ gap)$$

Question 9

If the Fed is operating in an ample-reserves regime, which tool does it primarily use to control the federal funds rate?

Accepted Answer

Adjusting the interest rate on reserve balances (IORB)

Question 10

Which of the following best explains why the Fed cannot set both the money supply and the interest rate independently?

Accepted Answer

Because changes in money demand will alter the equilibrium interest rate if the money supply is fixed

Question 11

During the 2007-2009 financial crisis, why did the Fed and Treasury take unprecedented actions such as lending to non-bank financial institutions?

Accepted Answer

To prevent a collapse of the financial system and limit the severity of the recession

Question 12

Which of the following is a direct effect of an expansionary monetary policy on the AD-AS model?

Accepted Answer

Aggregate demand shifts to the right

Question 13

Suppose the Fed lowers the interest rate on reserve balances (IORB). What is the likely effect on the federal funds rate in an ample-reserves regime?

Accepted Answer

The federal funds rate will decrease

Question 14

Which of the following is a reason why the Fed's ability to eliminate recessions is limited?

Accepted Answer

There are lags in recognizing economic conditions and implementing policy

Question 15

If the Fed wants to put a true floor under the federal funds rate, which tool does it use?

Accepted Answer

Interest rate on overnight reverse repurchase agreements (ON RRP)

Question 16

Which of the following best describes the dual mandate of the Federal Reserve?

Accepted Answer

Price stability and high employment

Question 17

Suppose the Fed sells Treasury securities in the open market. What is the expected effect on the money supply and interest rates?

Accepted Answer

Money supply decreases; interest rates increase

Question 18

Which of the following is a likely consequence of the Fed pursuing a contractionary monetary policy when real GDP exceeds potential GDP?

Accepted Answer

The inflation rate will decrease

Question 19

Why did the monetary growth rule fall out of favor as a policy tool for the Fed?

Accepted Answer

Because the relationship between the money supply and real GDP became unstable

Question 20

If the Fed announces that it will keep the federal funds rate near zero for a prolonged period, this is an example of:

Accepted Answer

Forward guidance

Monetary Policy and the Federal Reserve: Tools, Goals, and Economic Impact

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