Question

During the Great Recession (2008-2010) , “the portfolio of federal bonds amassed [by the FED] during 2009 will swell…about doubling.” This is in contrast to the FED initial action to the 2007-8 crisis when one asset account was reduced and the funds shifted into another asset account of the FED to meet the liquidity needs of the marketplace:

            a. FED expanded the money supply without expanding either the Loan or Security Portfolio on its balance sheet.

            b. FED forced gold prices to record prices to provide the collateral to print additional money.

            c. FED increased its security holdings associated with US Treasuries, repos, acceptances, foreign securities, and foreign currencies.

            d. FED sold US Treasuries from its portfolio and expanded loans to record high amounts.

In a 2008 article, the FED’s intention to “buy the equivalent of most of the new Treasury debt issued” to maintain an open & active market (stabilize) is referred to as ______________ monetary policy:

            a. defensive (action to maintain achievement of current goals)

            b. offensive (action to change the direction of monetary policy)

            c. reactionary (action taken without clear policy intentions stated)

            d. precautionary (action in expectation of some unknown events)

According to a Nov. 5 2019 article, in 2012 the FED set the inflation target at 2% in a “…symmetric (manner), meaning that the FED is equally unhappy if prices run below or above 2%.” This goal statement further restricts (redefines for the immediate situation) most directly which of these more general goals:

            a. fight inflation by keeping inflation within a + 2% range

            b. fight unemployment by targeting a natural level of 4%

            c. provide real growth to the economy of 3%

            d. provide a flexible money supply to achieve stable prices and full employment.

In a Nov. 5 2019 article it is reported that Esther George, President of the Federal Reserve Bank of Kansas City, opposes the recent (and any further) rate cuts. “Easing policy might lift inflation, but at the cost of further tightening an already hot labor market and perhaps fostering financial imbalances.” She stated. Her opinion will have the most direct impact on national Monetary Policy if which of the following is true:

            a. in her position currently, she is a member of the Board of Governors

b. in her position currently, she is a member of the Federal Advisory Council

            c. in her position currently, she is a Federal Reserve Bank President

            d. in her position currently, she is a voting member of the FOMC.

Answer 1

Answer a) IF one were to read that “the [FED’s] portfolio of federal bonds amassed during 2008 will swell…about doubling.” This is in contrast to the FED’s action to the 2007 crisis when there is a different change on the FED’s balance sheet. We looked at these differences in class using the FED balance sheet postings to Blackboard. Which of the following reflects the contrasting actions best between 2007 crisis & 2008 crisis:

Option a. the FED expanded the money supply without expanding either the Loan or Security Portfolio on its balance sheet.

Answer b)

The statement that “Mr. Friedman argued that the FED could have prevented the [Great] Depression, and he rejected the Keynesian doctrine of using government spending to stimulate demand,” implies that Mr Friedman is:

Option c. in favor of using both fiscal policy and monetary policy simultaneously and in coordination with each other to resolve economic challenges.

Answer c)

Mr. Friedman often “called for limiting the growth of the money supply” since he believed the primary goal of the FED is to:

c. provide a plentiful money supply  

Answer d)

People who fear the FED is “stoking inflation to stimulate the economy” fear:

c. that the FED will not be able to time, recognize and/or control the removal of over-expansionary funds in the system;

Answer e)

Even if the FED is “stoking inflation to stimulate the economy,” it must be because the decision makers are relying on the :

c. Yield Curve Analysis