Exam 14: Monetary Policy

Suppose that the inflation rate is 3 percent and the output gap is -1 percent. Assuming that the equilibrium real interest rate is 2 percent, what target should the Fed set for the federal funds rate, if the Taylor rule is used?

Suppose that the market for reserves is in equilibrium and then the Federal Reserve decreases the quantity of reserves by $2 billion. The federal funds rate will ________ and the supply of loanable funds will ________.

In 2012, U.S. core inflation was 2.1 percent. This inflation rate

In November 2008, the Reserve Bank of India (RBI) lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent. The Economist, 11/6/2008 In its attempt to change real GDP, which of following sequences CORRECTLY describes the transmission of RBI's monetary policy? I. The real interest rate falls. II. The money supply increases. III. Bank reserves increase. IV. Supply of loanable funds increases. V. Aggregate demand increases.

In September 2012 the Fed announced that because of weak labor market conditions, it would ________ $40 billion of mortgage backed securities per month. Critics of the action said that banks have ________ excessive reserves so the action would be futile.

To lower the federal funds rate, the Federal Reserve could

In the short run, if the Fed wants to fight a recession, should it buy or sell government securities? Why?

If the Fed lowers the federal funds rate, the first effect in an AS/AD figure is a ________ shift of the ________ curve.

Price level stability

"As the Fed Chases Inflation, Critics Shout, 'Faster!'" "For weeks, the Fed has broadcast its intention to raise interest rates glacially." The Fed was moving slowly, according to an economist because "...the declining price of oil, economic fundamentals, including productivity and global competition, will keep inflation in check." The Fed, recognizing that the economy was improving stated it planned to "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability." Other economists disagree with the Fed's restrained policy as a "mistake." www.nytimes, 7/1/2004 As a result of the Fed's policy, which of the rates will increase?

In the short run, a rise in the federal funds rate ________ the price level and ________ real GDP.

The Taylor Rule states that the

If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rises and the quantity of money decreases.

When the Fed lowers the federal funds rate, it increases reserves and increases the quantity of deposits and loans created.

Uncertainty about monetary policy

In an effort to address the troubled economy, ..."For 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." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 These rate cuts are designed to

In an effort to address the troubled economy, ..."For 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." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 The Fed's rates cuts will initially impact ________ and eventually ________.

When the Federal Reserve increases the Federal funds rate

When the Federal Reserve fights inflation via open market operations, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________.

During the financial crisis of 2008-2009, the Fed was concerned about