Question 1

Which of the following is NOT a goal of the Federal Reserve's dual mandate?

Accepted Answer

Balanced government budget

Question 2

Suppose the Fed observes that the output gap is positive and the inflation rate is above its comfort zone. What is the most likely monetary policy action?

Accepted Answer

Raise the federal funds rate to slow inflation

Question 3

If the Fed wants to fight a recession, which sequence of events best describes the transmission mechanism of expansionary monetary policy?

Accepted Answer

Fed buys securities → money supply increases → interest rates fall → aggregate demand rises

Question 4

Which formula correctly expresses the relationship between nominal interest rate, real interest rate, and expected inflation rate?

Accepted Answer

$$i = r + a^*$$

Question 5

A financial innovation makes it easier to switch between money and interest-bearing assets. What is the likely effect on the demand for money curve?

Accepted Answer

The demand for money curve shifts leftward

Question 6

If the price level increases by 10%, what happens to the nominal quantity of money demanded?

Accepted Answer

It increases by 10%

Question 7

Which statement best describes the Fed's operational guide for measuring inflation?

Accepted Answer

The Fed uses the core PCE deflator, excluding food and fuel

Question 8

In the federal funds market, what happens to the quantity of reserves demanded when the federal funds rate increases?

Accepted Answer

It decreases

Question 9

Which of the following best explains why the price of a bond and its interest rate are inversely related?

Accepted Answer

As bond prices rise, the fixed coupon payment represents a lower yield

Question 10

Suppose the Fed sets the interest rate on reserves at 1.5% and the discount rate at 2.0%. What is the width of the interest rate corridor?

Accepted Answer

$$0.5\%$$

Question 11

If the unemployment rate is below the natural rate, what is the likely effect on wage rates and inflation?

Accepted Answer

Wage rates rise and inflation may increase

Question 12

Which of the following is a limitation of monetary policy compared to fiscal policy?

Accepted Answer

Monetary policy has a long outside lag and its effects are indirect

Question 13

What is the effect of an increase in real GDP on the demand for money curve?

Accepted Answer

The demand for money curve shifts rightward

Question 14

In the long run, if the Fed increases the quantity of money by 10%, what happens to the price level and real GDP?

Accepted Answer

The price level rises by 10%, real GDP remains unchanged

Question 15

Which of the following is the Fed's main policy instrument for conducting monetary policy?

Accepted Answer

Federal funds rate

Question 16

At the Zero Lower Bound (ZLB), which tools does the Fed use to implement monetary policy?

Accepted Answer

Quantitative Easing and Forward Guidance

Question 17

If the Fed decreases the quantity of money, what is the immediate effect on bond prices and interest rates?

Accepted Answer

Bond prices fall and interest rates rise

Question 18

Which of the following best describes money market equilibrium?

Accepted Answer

The quantity of money demanded equals the quantity of money supplied

Question 19

Which of the following would shift the demand for money curve to the right?

Accepted Answer

An increase in real GDP

Question 20

If the Fed pays interest on reserves held at the Fed, what effect does this have on the federal funds rate?

Accepted Answer

It sets a floor for the federal funds rate

Monetary Policy and the Federal Reserve System: Principles of Macroeconomics Study Notes

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