Question 1

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

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 to restore equilibrium?

Accepted Answer

Raise the target for the federal funds rate

Question 3

The federal funds rate is best defined as:

Accepted Answer

The interest rate banks charge each other for overnight loans

Question 4

If the Fed wants to increase aggregate demand when the federal funds rate is at the zero lower bound, which policy tool is most appropriate?

Accepted Answer

Quantitative easing

Question 5

Which equation 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 6

Which of the following best describes the effect of an expansionary monetary policy on the AD-AS model?

Accepted Answer

Shifts the aggregate demand curve to the right

Question 7

During the 2007-2009 financial crisis, why did the Fed provide discount loans to investment banks, a departure from its usual practice?

Accepted Answer

To ease liquidity problems and stabilize financial markets

Question 8

If 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 9

Which of the following statements about the dual mandate of the Fed is correct?

Accepted Answer

It refers to the goals of high employment and price stability

Question 10

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

Accepted Answer

The equilibrium federal funds rate will increase

Question 11

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

Accepted Answer

Because changes in money demand can shift the equilibrium interest rate if the money supply is fixed

Question 12

If the Fed pursues contractionary monetary policy, which of the following is most likely to occur in the short run?

Accepted Answer

Aggregate demand shifts to the left, decreasing real GDP

Question 13

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 14

Which of the following best describes the effect of quantitative easing on long-term interest rates?

Accepted Answer

It decreases long-term interest rates by increasing the price of securities

Question 15

Suppose the Fed wants to prevent real GDP from falling below potential GDP. If it succeeds, what will happen to the inflation rate and unemployment rate compared to taking no action?

Accepted Answer

Inflation rate will be higher; unemployment rate will be lower

Question 16

Which of the following is a plausible reason why the relationship between the money supply and real GDP has weakened since the 1980s?

Accepted Answer

Financial innovation has changed how money is used

Question 17

If the Fed targets the money supply and the demand for money increases, what will happen to the equilibrium interest rate?

Accepted Answer

It will increase

Question 18

Which of the following best describes the effect of a housing market bubble bursting on the financial system?

Accepted Answer

It leads to higher default rates and losses for banks holding these securities

Question 19

Which of the following is a direct effect of lower U.S. interest rates on net exports?

Accepted Answer

They reduce the value of the dollar, increasing net exports

Question 20

Which of the following best explains why a highly leveraged investment is riskier for the investor?

Accepted Answer

A small change in asset value leads to a large change in the investor's equity

Federal Reserve, Monetary Policy, and Aggregate Demand & Supply: Study Notes for Principles of Macroeconomics

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