Question 1

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

Accepted Answer

Balanced federal budget

Question 2

Suppose the Federal Reserve wants to stimulate the economy during a recession. Which of the following actions is it most likely to take?

Accepted Answer

Lower the interest rate on reserve balances (IORB)

Question 3

If the Fed sets the interest rate on overnight reverse repurchase agreements (ONRRP) at 5.40%, what is the effect on the federal funds rate?

Accepted Answer

It sets a floor for the federal funds rate

Question 4

Which of the following best describes quantitative easing?

Accepted Answer

The Fed buys long-term securities to lower long-term interest rates and increase aggregate demand

Question 5

According to the Taylor Rule, which of the following variables is NOT directly included in the formula for the target federal funds rate?

Accepted Answer

The unemployment rate

Question 6

If the Fed increases the money supply, what is the expected effect on the short-term nominal interest rate, according to the money market model?

Accepted Answer

The short-term nominal interest rate will fall

Question 7

Which of the following is a likely consequence if the Fed keeps interest rates too low for too long after a recession has ended?

Accepted Answer

High inflation and a more severe next recession

Question 8

What is the main reason the Fed abandoned targeting the money supply (M1 or M2) as its primary policy tool?

Accepted Answer

The relationship between the money supply and real GDP growth broke down

Question 9

During the 2007–2009 financial crisis, the Fed extended discount loans to which type of institution for the first time?

Accepted Answer

Investment banks

Question 10

Suppose the Fed wants to reduce inflation that is above its target. Which of the following policies is it most likely to implement?

Accepted Answer

Contractionary monetary policy

Question 11

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

Accepted Answer

The two are linked through the money demand curve, which the Fed does not control

Question 12

If the Fed uses forward guidance during a recession, what is it trying to achieve?

Accepted Answer

Convince markets that interest rates will remain low in the future to stimulate investment and consumption

Question 13

Which of the following is a criticism of inflation targeting as a monetary policy strategy?

Accepted Answer

It reduces the Fed’s flexibility to address other policy goals

Question 14

Suppose the Fed is operating in an ample-reserves regime. Which tool is most effective for raising the federal funds rate?

Accepted Answer

Raising the interest rate on reserve balances (IORB)

Question 15

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

Accepted Answer

Price stability and high employment

Question 16

If the Fed buys $10 billion in long-term Treasury securities, what is the most likely immediate effect on the banking system?

Accepted Answer

Bank reserves increase, leading to lower interest rates

Question 17

Which of the following is a real-world example of a bubble as described in the study materials?

Accepted Answer

The U.S. housing market in the mid-2000s

Question 18

Which price index does the Fed primarily use to estimate long-run inflation trends?

Accepted Answer

Core Personal Consumption Expenditures (core PCE)

Question 19

Suppose the output gap is negative and the inflation gap is also negative. According to the Taylor Rule, what should happen to the federal funds target rate?

Accepted Answer

It should be set below the equilibrium real federal funds rate

Question 20

Which of the following best describes the effect of a contractionary monetary policy in the dynamic aggregate demand and aggregate supply model?

Accepted Answer

It reduces real GDP and inflation compared to what would have occurred without the policy

Monetary Policy: Tools, Goals, and Economic Impact

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