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 decrease the equilibrium interest rate in the money market. Which action should it take?

Accepted Answer

Buy U.S. Treasury securities in open market operations

Question 3

If the Fed increases the money supply from $$MS_1 to$$ $$MS_2$$, what happens to the equilibrium interest rate, according to the money market model?

Accepted Answer

It falls

Question 4

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

Accepted Answer

Price stability and high employment

Question 5

A decrease in the interest rate will cause which of the following in the money market?

Accepted Answer

An increase in the quantity of money demanded

Question 6

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

Accepted Answer

An increase in real GDP

Question 7

If the Fed wants to reduce inflation that is above its target, which policy is it most likely to implement?

Accepted Answer

Contractionary monetary policy

Question 8

Which of the following is the primary monetary policy target of the Federal Reserve in normal times?

Accepted Answer

The federal funds rate

Question 9

According to the Taylor Rule, which of the following variables does NOT directly affect the Fed’s target for the federal funds rate?

Accepted Answer

The government budget deficit

Question 10

During the 2007–2009 recession, the Fed used quantitative easing. What did this policy involve?

Accepted Answer

Buying long-term securities such as 10-year Treasury notes and mortgage-backed securities

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

Question 12

Suppose the Fed implements expansionary monetary policy when the economy is already at potential GDP. What is the most likely outcome?

Accepted Answer

An increase in the inflation rate

Question 13

Which of the following is a potential drawback of inflation targeting?

Accepted Answer

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

Question 14

What is a liquidity trap?

Accepted Answer

A situation where banks refuse to lend even when interest rates are at or near zero

Question 15

Which of the following best describes the effect of a poorly timed expansionary monetary policy implemented after a recession has already ended?

Accepted Answer

It will likely cause high inflation and make the next recession more severe

Question 16

Which of the following is a reason why the Fed uses the core PCE index to measure inflation?

Accepted Answer

It is less volatile and better estimates long-run inflation

Question 17

If the Fed raises the interest rate it pays on bank reserves, what is the likely effect on the federal funds rate?

Accepted Answer

The federal funds rate will rise, as banks are less willing to lend at lower rates

Question 18

Which of the following best describes the process of securitization in the mortgage market prior to the 2007–2009 financial crisis?

Accepted Answer

Investment banks packaged mortgages into securities and sold them to investors

Question 19

Which of the following is a likely effect of a rightward shift in the aggregate demand curve due to expansionary monetary policy?

Accepted Answer

An increase in real GDP and the price level

Question 20

Which of the following is a reason why the Fed cannot perfectly offset recessions with monetary policy?

Accepted Answer

There are lags in recognizing economic conditions and implementing policy

Chapter 15: Monetary Policy – Study Notes for Macroeconomics

Study Guide - Practice Questions