Question 1

Which of the following is NOT a primary monetary policy goal of the Federal Reserve?

Accepted Answer

Reducing income inequality

Question 2

Suppose the Federal Reserve wants to decrease the money supply. Which of the following actions would it most likely take?

Accepted Answer

Sell Treasury securities on the open market

Question 3

If the Federal Reserve lowers the federal funds rate, what is the most likely short-run effect on aggregate demand?

Accepted Answer

Aggregate demand shifts to the right

Question 4

Which of the following best describes the 'lender of last resort' function of the Federal Reserve?

Accepted Answer

Providing liquidity to financial institutions during crises

Question 5

During a liquidity trap, why might traditional monetary policy become ineffective?

Accepted Answer

Banks are unwilling to lend even at very low interest rates

Question 6

Which equation best represents the opportunity cost of holding money?

Accepted Answer

$$Opportunity\ Cost = Interest\ Rate$$

Question 7

If the Federal Reserve raises the interest rate on reserve balances, what is the likely effect on the money supply?

Accepted Answer

The money supply decreases

Question 8

Which of the following components of aggregate demand is most sensitive to changes in interest rates?

Accepted Answer

Gross investment spending

Question 9

Suppose the Fed implements an expansionary monetary policy. Which sequence of events is most likely to occur?

Accepted Answer

Money supply increases → Interest rates fall → Investment rises → Real GDP rises

Question 10

Which tool is considered the Federal Reserve’s primary monetary policy target?

Accepted Answer

The federal funds rate

Question 11

If the Fed wants to combat inflation, which of the following actions is it most likely to take?

Accepted Answer

Sell government securities

Question 12

Which of the following best explains why the money demand curve slopes downward?

Accepted Answer

Lower interest rates decrease the opportunity cost of holding money

Question 13

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

Accepted Answer

The price of Treasury securities rises

Question 14

If the Fed lowers the discount rate, what is the most likely effect on bank lending and the money supply?

Accepted Answer

Bank lending increases and the money supply expands

Question 15

Which of the following statements about the federal funds rate is correct?

Accepted Answer

It is determined by supply and demand in the overnight lending market

Question 16

Suppose the U.S. interest rate rises relative to foreign interest rates. What is the likely effect on the exchange rate and net exports?

Accepted Answer

The dollar appreciates and net exports fall

Question 17

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

Accepted Answer

High employment and price stability

Question 18

If the Fed raises the interest rate on reserve balances, what is the likely effect on banks’ willingness to lend?

Accepted Answer

Banks will be less willing to lend

Question 19

Which of the following is NOT a tool of monetary policy used by the Federal Reserve?

Accepted Answer

Setting income tax rates

Question 20

Suppose the economy is experiencing real GDP above potential GDP and rising inflation. Which monetary policy should the Fed pursue?

Accepted Answer

Contractionary monetary policy

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

Study Guide - Practice Questions