Exam 26: Monetary Policy

Which of the following correctly describes what the Fed used as monetary targets in the past?

If the Fed orders an expansionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: a. The money supply b. Interest rates c. Investment d. Consumption e. Net Exports f. The aggregate demand curve g. Real GDP h. The price level

Consider the Taylor rule for the target of the federal funds rate. Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 3 percent, the current inflation rate is 3 percent, real GDP equals potential real GDP, and the weights are 1/2 for the inflation gap and the output gap. Using the Taylor rule, what does the target for the federal funds rate equal? Next, if the Federal Reserve lowered the target for the inflation rate to 1 percent, how much would the target for the federal funds rate change?

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.

Monetarists think that the Fed should use ________ as a target when conducting monetary policy.

Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.

Which of the following characterizes the Fed's ability to prevent recessions?

Mortgage lenders often resell mortgages in secondary markets. How might this make lenders act differently than if they intended to hold the mortgages themselves?

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed responded?

Figure 26-14 -Refer to Figure 26-14. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Figure 26-1 -Refer to Figure 26-1. In the figure, the money demand curve would move from Money demand₁ to Money demand₂ if

In June 2017, the Federal Open Market Committee raised the target for the federal funds rate to a range of 1.00 to 1.25 percent. To keep the federal funds rate in this target band, the Fed set the interest rate it pays on bank reserves to

Article Summary With global borrowing costs so low, economic analysts are warning that central banks need to be prepared to set negative interest rates during the next economic downturn. Several central banks in Europe set negative interest rates in 2014, as did the Japanese central bank in 2016, in an attempt to spur lending. The global market value of negative-yielding bonds rose to $8.6 trillion in mid-2017 due to low inflation and increased perceptions of geopolitical risk. The current U.S. economic expansion is the third longest since the 19th century, and credit markets are showing signs of reaching a cyclical peak. According to Harvard professor Kenneth Rogoff, low interest rates this late in an economic cycle are unprecedented, noting that the Fed cut interest rates by an average of 5.5 percentage points in the nine recessions since the 1950s, and this would be impossible today without negative interest rates. -Refer to the Article Summary. Implementing a negative interest rate policy, as is discussed in the article summary, would be designed to ________ the price level and ________ real GDP.

Figure 26-7 -Refer to Figure 26-7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the basic AD-AS model in the figure above, this situation would be depicted as a movement from

Which of the following statements about inflation targeting is true?

To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks.

By the 2000s, investment banks had become significant participants in the secondary market for mortgages.

Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Fed listed in the textbook.