Exam 14: Monetary Policy

Within the market for reserves, an increase in the quantity of reserves results in a

The Fedʹs goals include

ʺAs the Fed Chases Inflation, Critics Shout, ʹFaster!ʹ ʺFor weeks, the Fed has broadcast its intention to raise interest rates glacially.ʺ The Fed was moving slowly, according to an economist because ʺ... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check.ʺ The Fed, recognizing that the economy was improving stated it planned to ʺrespond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.ʺ Other economists disagree with the Fedʹs restrained policy as a ʺmistakeʺ Www.nytimes, 7/1/2004 The goal of the Fedʹs policy in 2004 was to decrease

-The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market sale of government securities that changes the quantity of reserves by $100 billion, then the federal funds rate will___________ .

Long-term interest rates are ___________ than short-term because long-term loans are ___________than short-term loans.

Ben Bernanke has been more precise than his predecessor, suggesting a core inflation rate of___________ per year is the same as price stability.

If the Fed wants to decrease the quantity of money, it can

In an effort to address the troubled economy, ...ʺFor the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn.ʺ Rates have not been this low ʺ... since 2003, when the economy was growing at a snailʹs pace. The ʺinterest ratesʺ the Fed is cutting is the__________ .

A decrease in the supply of loanable funds decreases the real interest rate.

The Fed targets the 30-year bond rate as its monetary policy instrument.)

ʺAs the Fed Chases Inflation, Critics Shout, ʹFaster!ʹ ʺFor weeks, the Fed has broadcast its intention to raise interest rates glacially.ʺ The Fed was moving slowly, according to an economist because ʺ... the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check.ʺ The Fed, recognizing that the economy was improving stated it planned to ʺrespond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.ʺ Other economists disagree with the Fedʹs restrained policy as a ʺmistake.ʺ Www.nytimes, 7/1/2004 By increasing the federal funds target, the Fed will___________ reserves and __________the quantity of money.

Suppose that initially real GDP equals potential GDP. Then a decrease in aggregate demand occurs. According to the Taylor rule, the Fed should____________ the federal funds rate by ____________government securities in the open market.

If the Fed lowers the federal funds rate so that the exchange rate falls, then imports and exports __________.

What is the effect of lowering the interest rate on net exports? Explain your answer.

If the demand for reserves is unchanged, an increase in the quantity of reserves will

If the Fed is concerned with recession it will __________the federal funds rate in order to__________ aggregate demand.

Monetary policy is controlled by

Suppose in the money market the equilibrium interest rate is 5 percent and quantity of money demanded and supplied are both equal to $2 trillion dollars. If the Fed increases the quantity of money, what is the effect on the interest rate?

The Fed buys U.S. government securities from banks in order to

Uncertainty about monetary policy