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  1. If the Fed lowers the federal funds rate using an open market sale, what will be the effect on other interest rates? The exchange rate? Money and bank loans? Long-term real interest rate? Expenditure plans? Aggregate demand?

  1. What limits the Fed's ability to steer the economy to avoid both recession and inflation?

  1. Why is there a difference between the short-run and long-run effects from an increase in the quantity of money?

  1. Why must the Fed decide to target either the interest rate or the monetary base? Why can't the Fed determine acceptable values for both and then use open market operations to hit both targets?

  1. What are the benefits of using rules to conduct monetary policy?

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Related questions

In a speech in 2017, Fed Chair Janet Yellen described the long-run federal funds rate that is consistent with achieving the Fed's mandate of high employment and price stability as the "neutral rate," which she estimates to be about 3 percent. Yellen noted that: "Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road long dash either too much inflation, financial instability, or both. In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession."

Source: Janet Yellen, "The Goals of Monetary Policy and How We Pursue Them," Speech at the Commonwealth Club, San Francisco, California, January 18, 2017.

Why is it potentially a problem for the Fed to "wait too long" to raise its target for the federal funds rate? Can't the Fed just wait until inflation increases and begin to slowly increase the target at that time?

A. Monetary policy works with a lag that can be up to 18 months.

B. Prices change slowly due to menu costs.

C. Legislation takes time to implement.

D. Consumers are irrational.

Why might interest rates that are too low lead to financial instability?

A. Interest rates that are too low could result in higher unemployment.

B. Rates that are too low could lead to speculative bubbles in stocks and other financial assets.

C. Low-interest rates could lead to deflation.

D. Rates that are too low could lead to a situation of hyperinflation.

Why might the Fed rapidly increasing its target for the federal funds rate push the economy into recession?

A. In this situation, increasing the target for the federal funds rate increases aggregate demand by increasing investment.

B.A rapidly increasing federal funds rate target would decrease employment by lowering wages.

C.The Fed rapidly increasing its federal funds' rate target increases unemployment by increasing net exports.

D.Increasing the target for the federal funds rate decreases GDP by reducing consumption.

Each Federal Reserve Bank is

Answer

a corporation.

a government owned enterprise.

a government subsidized entity.

a government-sponsored enterprise.

A transaction in which the Fed agrees to buy a security one day and sell it back the next day is

Answer

an overnight securitization operation.

a repurchase agreement.

a legal tender.

a rebate sale.

The Federal Reserve document that states the goals of the FOMC and the target for the federal funds rate is known as the

Answer

Directive.

Beige

book.

Bluebook.

Green book.

How long is the normal term in office for a Governor of the Federal Reserve Board?

Answer

Five years

Seven years

Fourteen years

Life

The federal funds rate is the interest rate on

Answer

loans to banks from the Fed.

loans by banks to the Fed.

short-term loans between banks.

Treasury bills.

Expenditures of each Federal Reserve Bank are approved by

Answer

the U.S. Senate.

the President of the United States.

the U.S. Treasury Department.

the Federal Reserve Board of Governors.

Federal Reserve Banks pay for their central banking operations through

Answer

government tax revenue.

interest on the securities they own.

fees charged to banks that use their services.

dividends paid by local banks.

When the Fed engages in open-market operations, the transactions are conducted by

Answer

the Open Market Desk at the Federal Reserve Bank of New York.

the Open Market Desk at the Federal Reserve Board in Washington, D.C.

the National Bureau of Economic Research.

the Federal Open Market Committee.

In 2006, Chairman Greenspan left the Fed because

Answer

President Bush wanted him to resign.

he reached mandatory retirement age.

his term as Governor expired.

his term as Chairman expired.

The Federal Reserve publication that discusses forecasts for the economy is known as the

Answer

Redbook.

Beigebook.

Bluebook.

Greenbook.

The FOMC directive

Answer

describes forecasts for the economy.

states the target for the federal funds rate.

discusses the regional economies around the country.

shows the Fed's balance sheet.

The chairman of the Federal Reserve Board who reduced the inflation rate from over 10 percent to about 3 percent in the early 1980s was

Answer

Arthur Burns.

G. William Miller.

Paul Volcker.

Alan Greenspan.

Which Fed chairman ensured the independence of the Federal Reserve in the 1950s?

Answer

William McChesney Martin

Arthur Burns

Paul Volcker

G. William Miller

There are ____ Federal Reserve Banks.

Answer

seven

ten

twelve

fifteen

Purchases and sales of government securities in the secondary market are known as

Answer

discount borrowing and lending.

federal funds purchases and sales.

discounting.

open-market operations.

The monetary base can be divided into

Answer

currency plus transactions deposits.

vault cash plus reserves held at the Fed.

required clearing balances plus currency.

reserves plus currency.

The Fed does not generally change reserve requirements to affect the money supply because

Answer

the impact is too large.

the Fed needs the approval of Congress to do so.

it's not legal for the Fed to do so.

the Fed needs the approval of the President of the United States to do so.

The Fed has decided to tighten monetary policy, so it decreases the money supply through

Answer

defensive open-market operations.

dynamic open-market operations.

reduced discount loans for profit.

reduced discount loans for business needs.

A haircut is

Answer

the extra collateral the Fed requires above the value of a discount loan.

the extra principal a commercial bank requires the Fed to pay when making a discount loan.

the difference between what an investor pays for a bond and what the investor sells the bond for.

expected personal grooming for a member of the Board of Governors.

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals

Answer

the Fed's capital stock.

discount loans.

the monetary base.

required clearing balances.

The extra collateral the Fed requires above the value of a discount loan is known as

Answer

the term premium.

a haircut.

a covenant.

secondary credit.

Currency held by the nonbank public plus banks' reserves equals

Answer

the Fed's capital stock.

discount loans.

the monetary base.

required clearing balances.

The money supply divided by the monetary base equals

Answer

the reserve ratio.

velocity.

high-powered money.

the money multiplier.

The main liability on the Federal Reserve's balance sheet is

Answer

discount loans.

securities.

monetary base.

capital.

A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan. Such a loan is known as

Answer

a no documentation discount loan.

a haircut.

a covenant.

a primary credit discount loan.

If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the

Answer

federal funds rate decreases.

primary credit discount rate decreases.

primary credit discount rate increases.

federal funds rate increases.

In November and December, people use more currency than usual, so the Fed increases the money supply through

Answer

defensive open-market operations.

dynamic open-market operations.

discount loans for profit.

discount loans for business needs.

Reserves held by banks at the Fed that earn implicit interest payments in the form of earnings credits for Fed services are known as

Answer

required clearing balances.

reserve requirements.

excess reserves.

non-transaction deposits.

Required clearing balances

Answer

pay interest in the form of earnings credits.

count as reserves and can be used to meet reserve requirements.

pay interest equal to the federal funds rate minus one percent.

are required to be held against transactions deposits.

1) What policy rule do monetarists believe the Fed should follow? What are the major assumptions underlying this policy prescription?

2) What average annual inflation rate would a monetarist expect if the Fed maintained a growth rate of M2 = 10% per year for a three year period? (Assume that the monetarist felt that the long run average growth rate of RGDP was 3%)

3) Why would you expect the velocity of circulation of a monetary aggregate such as M1 or M2 to rise during periods of high interest rates and to decline during periods of low interest rates?

4) Suppose that long term interest rates in the economy were increasing due to strong economic growth and demand for loans in the world economy. Meanwhile suppose that the Fed was holding down its federal funds rate target. What would probably be happening to M2 velocity? Explain your answer.


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