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 should the Fed pursue, and what is the likely effect on the federal funds rate?

Accepted Answer

Contractionary monetary policy; raise the federal funds rate

Question 3

Why do policymakers in most countries pursue price stability as a primary goal?

Accepted Answer

Because rising prices erode the value of money as a medium of exchange and a store of value

Question 4

Which tool does the Fed primarily use to control the federal funds rate in a scarce-reserves regime?

Accepted Answer

Adjusting the supply of reserves through open market operations

Question 5

What is the federal funds rate?

Accepted Answer

The interest rate banks charge each other for overnight loans

Question 6

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

Accepted Answer

Quantitative easing

Question 7

Which of the following best describes the effect of an expansionary monetary policy on the AD-AS model when the economy is in a recession?

Accepted Answer

The aggregate demand curve shifts to the right, increasing both the price level and real GDP

Question 8

Which of the following is a direct result of the Fed buying long-term Treasury securities during quantitative easing?

Accepted Answer

The prices of long-term securities rise and their yields fall

Question 9

Suppose the Fed raises 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 rise

Question 10

Which of the following statements about the Fed's ability to eliminate recessions is most accurate?

Accepted Answer

The Fed can make recessions milder and shorter, but cannot completely eliminate them

Question 11

Which of the following best explains why the Fed does not target the money supply as its main policy instrument?

Accepted Answer

The relationship between the money supply and real GDP has become unstable

Question 12

If the Fed sells Treasury securities in the open market, what is the expected effect on the money supply and interest rates?

Accepted Answer

The money supply decreases and interest rates rise

Question 13

Which of the following is a reason why the Fed's forecasts of economic variables are important for monetary policy?

Accepted Answer

Accurate forecasts allow the Fed to set policy that anticipates future economic conditions

Question 14

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

Accepted Answer

Price stability and high employment

Question 15

What is the main purpose of forward guidance as a monetary policy tool?

Accepted Answer

To signal the Fed's intent to keep the federal funds rate near zero for a prolonged period

Question 16

Which of the following is a likely effect of a contractionary monetary policy?

Accepted Answer

Aggregate demand shifts to the left, reducing inflationary pressures

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

The equilibrium interest rate will rise

Question 18

Which of the following best describes the effect of lower U.S. interest rates on net exports?

Accepted Answer

Lower U.S. interest rates reduce the exchange rate, causing net exports to rise

Question 19

Which of the following is a direct effect of the Fed making discount loans available to banks during a financial crisis?

Accepted Answer

It eases liquidity problems and increases confidence in banks

Question 20

Suppose the Fed implements an expansionary monetary policy to prevent real GDP from falling below potential GDP. What is the likely effect on the inflation rate and real GDP?

Accepted Answer

The inflation rate will be higher and real GDP will be higher

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

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