Question 1

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

Accepted Answer

Balanced government budget

Question 2

Suppose the Federal Reserve wants to combat a recession. Which combination of actions is most consistent with an expansionary monetary policy?

Accepted Answer

Decrease the federal funds rate and buy government bonds

Question 3

If the Federal Reserve sets the interest rate on reserve balances (IORB) above the equilibrium federal funds rate, what is the likely effect on the federal funds market?

Accepted Answer

The federal funds rate will rise to match the IORB

Question 4

Which of the following best describes the difference between open market operations and quantitative easing?

Accepted Answer

Open market operations are routine and small-scale, while quantitative easing involves large-scale purchases of a wider variety of assets

Question 5

Consider the aggregate demand equation $$Y = C + I + G + (X - M). If $$the Fed lowers interest rates, which components of aggregate demand are most directly affected?

Accepted Answer

Consumption ($$C$$), investment ($$I$$), and net exports ($$(X-M))$$

Question 6

A central bank faces the zero lower bound on interest rates. Which tools is it most likely to use to stimulate the economy?

Accepted Answer

Quantitative easing and forward guidance

Question 7

If the Federal Reserve sells government bonds in the open market, what is the immediate effect on the money supply and interest rates?

Accepted Answer

Money supply decreases and interest rates increase

Question 8

Which of the following best explains why the Fed's influence on long-term interest rates is less direct than its influence on short-term rates?

Accepted Answer

Long-term rates depend on expectations about future short-term rates and inflation

Question 9

Suppose the economy is experiencing an inflationary gap, with real GDP above potential GDP. What is the most appropriate monetary policy response?

Accepted Answer

Contractionary monetary policy: increase interest rates

Question 10

Which of the following is an example of a recognition lag in monetary policy?

Accepted Answer

The time between the onset of a recession and when policymakers realize the economy is in recession

Question 11

If the Federal Reserve lowers the interest rate on overnight reverse repurchase agreements (ONRRP), what is the likely effect on the lower bound of the federal funds rate?

Accepted Answer

The lower bound of the federal funds rate will decrease

Question 12

Which of the following best describes the effect of an expansionary monetary policy on the aggregate demand and real GDP in the short run?

Accepted Answer

Aggregate demand shifts right, and real GDP increases

Question 13

A bank is deciding whether to lend its excess reserves to another bank overnight or keep them at the Fed. If the federal funds rate rises above the interest rate on reserve balances (IORB), what is the opportunity cost of holding excess reserves?

Accepted Answer

The opportunity cost increases

Question 14

Which of the following is a direct result of the Fed buying government bonds in the open market?

Accepted Answer

Increase in the money supply

Question 15

Suppose the Fed signals that it intends to keep the federal funds rate near zero for an extended period. What is this policy tool called?

Accepted Answer

Forward guidance

Question 16

If the Fed increases the discount rate, what is the most likely immediate effect on bank borrowing from the Fed and the money supply?

Accepted Answer

Bank borrowing decreases and the money supply decreases

Question 17

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

Accepted Answer

Full employment and price stability

Question 18

In the context of monetary policy lags, which lag refers to the time between the implementation of a policy and its effect on the economy?

Accepted Answer

Impact lag

Question 19

If the Fed wants to lower the equilibrium federal funds rate in a scarce-reserves regime, which action should it take?

Accepted Answer

Increase the supply of reserves

Question 20

Which of the following scenarios would most likely lead the Fed to use contractionary monetary policy?

Accepted Answer

Real GDP is above potential GDP and inflation is rising

Federal Reserve and Monetary Policy: Chapter 15 Study Notes

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