Q: The long-term real interest rate is determined by equilibrium in the market for loanable funds and is calculated as:

$$\text{Nominal interest rate} - \text{Expected inflation rate}$$

Q: Which of the following best describes the Taylor rule for setting the federal funds rate?

$$\text{FFR} = 2 + \text{INF} + 0.5(\text{INF} - 2) + 0.5\text{GAP}$$

Question 1

Which of the following best describes the Fed's dual mandate as outlined in the Federal Reserve Act?

Accepted Answer

To achieve stable prices and full employment

Question 2

The Fed uses the core PCEPI as its operational guide for inflation because:

Accepted Answer

It is less volatile than the CPI and provides a better measure of underlying inflation trends

Question 3

If the output gap is negative, which of the following is most likely true?

Accepted Answer

Unemployment is above the natural rate

Question 4

Which monetary policy instrument can the Fed directly control?

Accepted Answer

The quantity of bank reserves

Question 5

What is the effect of a large open market purchase by the Fed, sometimes called 'Quantitative Easing'?

Accepted Answer

The Fed buys U.S. T-Bills and bonds, increasing reserves

Question 6

The federal funds rate is:

Accepted Answer

The interest rate on overnight loans of reserves among banks

Question 7

In the 'corridor' system, which two rates set by the Fed limit the movement of the federal funds rate?

Accepted Answer

The discount rate and the interest rate on reserves

Question 8

Suppose the Fed wants to lower the federal funds rate. Which action is it most likely to take?

Accepted Answer

Buy U.S. T-Bills and bonds in the open market

Question 9

When the Fed lowers the federal funds rate, what is the expected effect on aggregate demand?

Accepted Answer

Aggregate demand increases

Question 10

The long-term real interest rate is determined by equilibrium in the market for loanable funds and is calculated as:

Accepted Answer

$$	ext{Nominal interest rate} - 	ext{Expected inflation rate}$$

Question 11

If the Fed raises the federal funds rate, what is the likely effect on investment?

Accepted Answer

Investment decreases

Question 12

Which of the following best describes the Taylor rule for setting the federal funds rate?

Accepted Answer

$$	ext{FFR} = 2 + 	ext{INF} + 0.5(	ext{INF} - 2) + 0.5	ext{GAP}$$

Question 13

A central bank that uses inflation rate targeting will:

Accepted Answer

Make a public commitment to achieve an explicit inflation target and explain its policy actions

Question 14

If the Fed engages in quantitative tightening, which of the following occurs?

Accepted Answer

The Fed sells U.S. T-Bills and bonds, decreasing reserves

Question 15

Which of the following is a plausible consequence of the Fed lowering the federal funds rate during a recession?

Accepted Answer

Long-term real interest rate falls, increasing aggregate demand

Question 16

If the Fed's target inflation rate is 2 percent and the actual inflation rate is 3 percent with an output gap of 1 percent, what is the federal funds rate according to the Taylor rule?

Accepted Answer

$$	ext{FFR} = 2 + 3 + 0.5(3 - 2) + 0.5 	imes 1 = 2 + 3 + 0.5 + 0.5 = 6$$

Question 17

Which of the following best explains why monetary policy transmission is described as having 'long and variable lags'?

Accepted Answer

Long-term interest rates are loosely linked to the federal funds rate and many unpredictable factors affect spending

Question 18

If the Fed lowers the interest rate on reserves, what is the likely effect on the federal funds rate?

Accepted Answer

The federal funds rate will move closer to the lower bound of the corridor

Question 19

Which of the following is NOT a direct effect of the Fed lowering the federal funds rate?

Accepted Answer

Decrease in the unemployment rate immediately

Chapter 14: Monetary Policy – Objectives, Instruments, and Transmission

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