Question

Monetary Policy

1. If the economy is operating below full employment, should the Federal Reserve engage in expansionary or contractionary monetary policy to bring the economy back to full employment?

2. When the economy has a positive GDP gap, then

		potential output exceeds actual output
		potential output equals actual output
		potential output is less than actual output
		There is not enough information.

3. If the economy has a positive GDP gap, should the Federal Reserve engage in expansionary or contractionary monetary policy?

4. Monetary policy falls under the watchful eye of the _______________.

5. There are ____ district Federal Reserve Banks.

6. _________ is the chairperson of the Federal Reserve Board of Governors. (You need to know his full name. You need to be able to spell it correctly.)

7. True or False . An increase in the reserve requirement ratio causes the money multiplier to increase.  

8. Think about the loanable funds market. If the Federal Reserve engages in an open market purchase of government, the supply curve  and the real interest rate .

9. Think about the loanable funds market. If the Federal Reserve engages in an open market sale of government, the supply curve  and the real interest rate .

10. When the Federal Reserve engages in an open market sale, this pushes the interest rate  and the aggregate demand curve shifts to the .

11. The Federal Reserve is attempting to increase the aggregate demand curve to fight a recession. Which of the following would accomplish their goal? Check all that apply.

		Increase the reserve requirement.
		Decrease the reserve requirement.
		Sell government securities.
		Buy government securities.
		Increase income tax rates
		decrease income tax rates

12. The Federal Reserve is attempting to decrease the aggregate demand curve to fight inflation. Which of the following would accomplish their goal? Check all that apply.

		Increase the reserve requirement.
		Decrease the reserve requirement.
		Sell government securities.
		Buy government securities.
		increase income tax rates
		decrease income tax rates

13. Assume that the bank currently has excess reserves of zero, and the required reserve ratio is 10%.  If the Fed buys $150 million, the amount of new loans that the bank can make initially increases by _______ million. Be exact.

14. True or False. If the economy is currently operating at potential GDP, an open market purchase of government securities by the Federal Reserve Board will put upward pressure on prices.

15. Assume that the bank currently has excess reserves of zero, and the required reserve ratio is 20%.  If the Fed sells $120 million of government securities to JeffCo Bank, the amount of loans that the bank can make decreases initially  by _______ million. Be exact.  

16. Use the Taylor Rule to find the federal funds rate (FFR).

Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 2% and GDP is currently growing at 3%?  

Answer: _____%

17. Use the Taylor Rule to find the federal funds rate (FFR).

Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 2% and GDP is currently growing at 1%?  

Answer: _____%

18. Use the Taylor Rule to find the federal funds rate (FFR).

Assume that the Fed has a target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should they set if the current inflation rate is 5% and GDP is currently growing at 1%?   This is an example of stagflation where the economy experiences inflation with slow growth.

Answer: _____%

19. When the Fed used quantitative easing to combat the Great Recession, they purchased assets from bank balance sheets. What did the Fed think that banks would do in response? Explain why you believe this outcome would occur.

Answer 1