Question

3. Fed is split over time of rate rise

In October​ 2009, the Fed was forecasting that unemployment will average 9.8 percent in 2010 and said the federal funds rate will remain​ "exceptionally low" for​ "an extended​ period." But some officials were beginning to worry about unwinding the​ $2 trillion in special credits that have boosted the monetary base and to wonder if the interest rate might need to start rising soon.

Describe the time lags in the operation of monetary policy and explain why they pose a challenge for the Fed in deciding when to start raising the federal funds rate target in a recession.

The time lag between the implementation of monetary policy and the resulting change in the inflation rate is approximately​ ______.

This poses a challenge for the Fed in deciding when to start raising the federal funds rate target in a recession because​ ______.

A. 1​ year; if the Fed raises the federal funds rate too​ soon, it could lengthen the recession

B. 2​ years; if the Fed raises the federal funds rate too​ soon, it could lengthen the recession

C. 2​ years; fiscal policy has a shorter lag time and monetary policy and fiscal policy are always coordinated

D. a few​ months; fiscal policy has a shorter lag time and monetary policy and fiscal policy are always coordinated

E. a few​ months; Congress must agree on monetary policy and they are not always in Washington when these decisions must be made

4. Fed is open to changing bond policy

Fed policymakers signaled for the first time that they could increase or decrease stimulation of the economy in the​ future, but not now.

What are the ripple effects and time lags that the Fed must consider in deciding when to increase or decrease stimulation of the​ economy?

Choose the statement that is correct.

A. When the Fed raises the federal funds​ rate, the inflation rate decreases about two years later.

B. When the Fed raises the federal funds​ rate, other​ short-term interest rates rise a few weeks later.

C. When the Fed lowers the federal funds​ rate, the exchange rate falls a few weeks later.

D. When the Fed raises the federal funds​ rate, the quantity of money decreases on the same day.

E. When the Fed lowers the federal funds​ rate, the supply of loanable funds increases up to a year later.

5. The U.S. economy is at full employment when strong economic growth in Asia increases the demand for​ U.S.-produced goods and services.

The Fed​ ______ face a tradeoff in the short run because​ ______.

A. does​ not; it will move both real GDP and the price level back to their desired levels

B. does​ not; it is impossible to decrease real GDP and the price level simultaneously

C. ​does; it must increase real GDP and decrease the price level simultaneously

D. does; it must decrease real GDP and increase the price level simultaneously

E. does​ not; a tradeoff is a​ long-run phenomena

6. The three ways in which the U.S. fiscal imbalance might be successfully addressed are​ _______.

A. raising income​ taxes, raising Social Security​ taxes, and cutting Social Security benefits

B. keep borrowing by selling government​ bonds, cutting Social Security​ benefits, and eliminate the Affordable Care Act

C. eliminating the generational​ imbalance, cutting other government​ spending, and raising Social Security taxes

D. raising income​ taxes, cutting other government​ spending, and keep borrowing by selling government bonds

7. Fiscal policy is the use of the federal budget to​ _______.

A. achieve the macroeconomic objectives of positive economic growth and zero unemployment

B. finance government activities

C. achieve the macroeconomic objectives of high and sustained economic growth and full employment

D. keep interest rates low and steady

8. A cut in the income tax rate​ ________ the tax wedge and​ ________ employment,​ saving, and investment.

A. does not​ change; increases   B. increases; increases C. ​decreases; does not change D. increases; decreases E. decreases; increases

9. Read Eye on Fiscal Stimulus.

How big was the fiscal stimulus package of​ 2008-2009, how many jobs was it expected to​ create, and how large was the multiplier implied by that​ expectation?

Did the stimulus​ work?

The fiscal stimulus package of 2008–2009 was​ ___？____.

The fiscal stimulus package of 2008–2009 was expected to create​ ____？___ jobs. The multiplier implied by that expectation is​ ___？____.

The stimulus​ _______ the expectations of the Obama administration because​ _______.

A. did not​ meet; Congress failed to spend all of the fiscal stimulus

B. met; 650,000 jobs were created by using a combination of discretionary and automatic fiscal policy

C. ​met; the multiplier was much smaller than 1.6

D. did not​ meet; the multiplier was much smaller than 1.6

Answer 1

Question 3

Fed conducts monetary policy to stabilize the economy.

Fed targets federal funds rate to influence money supply in the economy which in result bring changes in interest rate, aggregate demand, output, and inflation rate.

However, impact of policy actions taken by the Fed on these elements take different amount of time to show result with respect to these elements.

For instance, any change in monetary policy take at least two years to show its impact on inflation rate.

Such long time lag creates dilemma for Fed with respect to change in federal funds rate.

If Fed increases federal funds rate too soon while fighting recession then this step can lengthen the recession as impact on inflation may not be visible for considerable period of time.

Hence, the correct answer is the option (B).

Question 4

Fed policymakers while deciding the increase or decrease in stimulation of the economy have to take into account the impact of policy on interest rate, quantity of money in economy, loans to be made by the banking system, and response of inflation rate.

All these elements behave in different manner and take different time period.

Fed can impact interest rate in quick fashion but it may take one year for Fed action to reflect on the quantity of money in economy and may take two years for Fed action to reflect on inflation.

Thus,

When the Fed raises the federal funds rate, the inflation rate decreases about two years later.

hence, the correct answer is the option (A).