Exam 14: Monetary Policy

In December, the Bank of England reduced interest rates by another 50 basis points a basis point is 0)01 percentage point) after it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists ʺ... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,ʺ...while others ʺ...saw a bigger 75 point cutʺ...or ʺa 100 basis point move.ʺ Reuters,11/27/2008 In order to__________ , the Bank of Englandʹs rate cut must__________ .

Monetary policy affects real GDP by

If the federal funds rate is below the Fed target, the Fed will conduct an open market sale to increase the federal funds rate to the desired level.

Which of the following is a problem in pursuing monetary policy?

Which of the following is NOT a short-run effect of a decrease in the federal funds rate?

The Federal Reserve fights recession via open market operations, the supply of loanable funds curve shifts __________ and the aggregate demand curve shifts__________ .

The less sensitive to the interest rate are consumption expenditure and investment, the smaller is the shift in the AD curve when the Fed changes the federal funds rate.

The core inflation rate, measured by the core PCE deflator, measures changes in the

Federal Reserve Chairman Ben Bernanke has defined price stability as occurring when core inflation is

The ripple effects that occur when the Fed changes the federal funds rate include__________ .

If the Fed wants to lower the federal funds rate, it can

If the Fed wanted to stimulate the economy to limit the effects of a recessionary gap, then it should__________ the federal funds rate in order to__________ the real interest rate and thereby__________ investment.

Open market purchases by the Federal Reserve System the Fed)

Price level stability

If the Fed sells U.S. government securities,

Ben Bernanke has suggested that a core inflation rate of ___________is the equivalent of price stability.

Federal Reserve monetary policy 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 As a result of the Fedʹs policy, which of the rates will increase?

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

Explain how the Fedʹs response to inflation works its through the economy to ultimately affecting real GDP and the price level.