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


A) 1 percent
B) 6 percent
C) 5 percent
D) 4 percent

Correct Answer

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By using open market operations, the Federal Reserve


A) controls banksʹ demand for reserves, thereby keeping the federal funds rate equal to its target.
B) adjusts the supply and demand of reserves to keep the federal funds interest rate equal to its target.
C) adjusts the supply of reserves to keep the federal funds interest rate equal to its target.
D) adjusts the demand of reserves to keep bank rates in line with the federal funds rate target.

Correct Answer

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When the Federal Reserve lowers the federal funds rate, in the short run


A) the aggregate demand curve shifts rightward.
B) banks decrease the quantity of loans they make.
C) the economy moves along a given aggregate demand curve.
D) the long-run aggregate supply curve shifts leftward.

Correct Answer

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In the aggregate demand/aggregate supply framework, lowering the federal funds rate has what short -run effects on real GDP?

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In the aggregate demand/aggregate supply...

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According to the AS/AD model, in the short run an increase in the federal funds rate will


A) decrease the price level but leave real GDP unchanged.
B) decrease the price level and decrease real GDP.
C) increase the price level and decrease real GDP.
D) decrease real GDP but leave the price level unchanged.

Correct Answer

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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.ʺ The Fedʹs rates cuts will initially impact__________and eventually __________.


A) bank reserves; real GDP
B) the money supply; bank reserves
C) investment; the real interest rate
D) bank reserves; government spending

Correct Answer

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The key goal of monetary policy is to


A) reverse the productivity growth slowdown
B) lower taxes
C) keep the budget deficit small and/or the budget surplus large.
D) maintain low inflation

Correct Answer

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In the short run, the Fedʹs actions to fight inflation shift the aggregate demand curve leftward.

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

Correct Answer

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The Fed should buy government securities...

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To determine whether the goal of stable prices is being achieved, the Federal Reserve monitors the___________ but uses as its operational guide the ___________.


A) CPI; core inflation rate
B) core CPI; core inflation rate
C) GDP price deflator; CPI
D) core inflation rate; CPI inflation rate

Correct Answer

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The central bank of Cobra sells securities in an open market operation. In the short run, aggregate demand__________ , real GDP__________ , and the price level __________.


A) decreases; decreases; falls
B) does not change; decreases; rises
C) increases; increases; rises
D) does not change; increases; falls

Correct Answer

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The key aim of monetary policy is to


A) change tax rates to boost saving.
B) change tax rates to boost investment.
C) change government spending to spur innovation.
D) maintain price stability

Correct Answer

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If the Fed fears inflation it will undertake an open market____________ of securities, the federal funds rate will ____________and the long-term real interest rate will____________ .


A) sale; rise; fall
B) purchase; fall; rise
C) sale; rise; rise
D) purchase; rise; fall

Correct Answer

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An open market sale of government securities by the Federal Reserve shifts the ___________reserves curve___________ .


A) demand for; rightward
B) supply of; leftward
C) demand for; leftward
D) supply of; rightward

Correct Answer

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In the market for bank reserves, if the federal funds rate target is higher than the federal funds rate, the Fed will take action to ___________reserves.


A) decrease the supply of
B) increase the demand for
C) increase the supply of
D) decrease the demand for

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


A) leftward; leftward
B) rightward; rightward
C) leftward; rightward
D) rightward; leftward

Correct Answer

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ʺWhen the Fed is concerned with inflation, it buys government securities.ʺ Is the previous statement correct or incorrect? Explain your answer.

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The statement is incorrect. When the Fed...

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Currently the Fed targets


A) both the monetary base and the federal funds rate simultaneously.
B) the exchange rate.
C) the price level.
D) the federal funds rate.

Correct Answer

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In the short run, the Fedʹs actions to fight an inflationary gap shift the


A) short-run aggregate supply curve rightward.
B) aggregate demand curve leftward.
C) aggregate demand curve rightward.
D) short-run aggregate supply curve leftward.

Correct Answer

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If the Fed lowers the federal funds rate, the Fedʹs goal is to


A) decrease the inflation rate as firms produce more goods and services.
B) increase aggregate demand.
C) increase aggregate supply.
D) decrease aggregate supply.

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