Q&A Hero

Q: What is quantitative easing? What was the Fed's objective in implementing quantitative easing?

Q: A system in which the central bank attempts to achieve a certain rate of change in the overall price level within some period is referred to asa. disinflation equilibrium. b. deflation.c. inflation targeting.d. rational expectations trapping.

Q: What is a matched sale-purchase transaction (also known as a reverse repo)?

Q: What is the difference between defensive and dynamic open market operations?

Q: Suppose the federal funds rate is 6 percent. If the output gap increases by 2 percentage points and the weight on output gap is 0.6, by how much should the federal funds rate increase according to the Taylor rule if all other variables remain unchanged?a. It should increase by 0.4 percentage points. b. It should increase by 0.6 percentage points. c. It should increase by 2 percentage points.d. It should increase by 1.2 percentage points.

Q: New Zealand was the first country to implement a system of a. disinflation.b. deflation.c. inflation targeting. d. expectations traps.

Q: What was the approximate peak amount of borrowing from the Fed during the Financial Crisis of 2007-2009? A) $2 billion B) $100 billion C) $270 billion D) $1 trillion

Q: The Fed pledged to continue QE3 until: A) inflation got out of control B) real GDP and employment returned to more normal levels C) the financial crisis was over D) it was time to begin QE4

Q: Taylor's rule implies that monetary policy should have been easier than the Fed's actual policy in thea. 1950sb. 1960s c. 1970s d. 1980s

Q: If the Fed follows the Taylor rule and actual inflation is below the inflation target set by the Fed,a. the Fed should reduce the nominal federal funds rate.b. the Fed should reduce the supply of money.c. the Fed should charge a higher tax rate.d. the Fed should spend lesser money.

Q: The third round of quantitative easing, announced in September 2012, was focused on purchases of: A) short-term Treasury bills B) long-term Treasury notes C) long-term Treasury notes and sales of short-term Treasury bills D) mortgage-backed securities

Q: What was the goal of Operation Twist? A) to reduce long-term interest rates and increase short-term interest rates B) to reduce short-term interest rates and increase long-term interest rates C) to reduce both short-term and long-term interest rates D) to increase both short-term and long-term interest rates

Q: Suppose the Fed follows the Taylor rule. Which of the following is likely to happen if the Fed overestimates potentialoutput?a. The inflation rate will rise.b. The federal funds rate will fall.c. The money supply will decrease.d. The income tax rates will increase.

Q: Suppose the economy is thought to be 1 percent below potential (i.e., the output gap is −1 percent), when potential output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year. The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each. The federal funds rate is 8.5 percent. What is the inflation target?a. 0 percent b. 1 percent c. 2 percent d. 3 percent

Q: How did Operation Twist affect the monetary base? A) reduced B) increased C) no change D) indeterminate

Q: Suppose the economy is thought to be 5 percent below potential (i.e., the output gap is −5 percent), when potential output grows 3 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 6 percent over the past year. The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each. The inflation target is 1 percent. What should the federal funds rate be?a. 4 percent b. 6 percent c. 8 percent d. 9 percent

Q: What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion worth of long-term securities while selling $400 billion worth of short-term securities? A) Operation Go Long B) Operation Twist C) QE2 D) QE3

Q: The benchmark default-free interest rate of the financial system is generally considered to be: A) the federal funds rate B) the interest rate on the 10-year Treasury note C) the discount rate D) the 30-year fixed rate mortgage

Q: Suppose the economy is thought to be 1 percent below its potential output (i.e., the output gap is −1 percent). The potential output is growing at 4% a year. Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year. The equilibrium real fed funds rate is 3 percent, the weight on the output gap is 0.75 and the weigh on the inflation gap is 0.25. The inflation target is 1 percent. What should the federal funds rate be?a. 7 percentb. 8 percentc. 9 percentd. 10 percent

Q: Suppose the Fed has set the federal funds rate at 4.5 percent using the Taylor rule. If the inflation rate increases by1 percentage point and the weight on inflation gap is 0.5, all other variables remain unchanged, the federal funds rate shoulda. decrease to 3.5 percent. b. decrease to 4 percent.c. increase to 5.5 percent. d. increase to 5 percent.

Q: Which of the following is NOT an accurate description of open market operations prior to 2008? A) It was used to affect the market for bank reserves. B) It was used to control the federal funds rate. C) It involved buying and selling of short-term Treasury securities. D) It involved buying and selling long-term securities.

Q: Which of the following statements accurately describes the Fed's control of discount policy? A) It controls discount policy more completely than it controls open market operations. B) It must abide by discount rates set by Congress. C) It controls discount policy less completely than it controls open market operations. D) It controls discount policy completely, just as it controls open market operations.

Q: Suppose the economy is thought to be 1 percent below potential (i.e., the output gap is −1 percent), when potential output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year. The equilibrium real federal funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each. The inflation target is 1 percent. What should the federal funds rate be?a. 4 percentb. 6 percentc. 8 percentd. 12 percent

Q: The Fed tends not to use discount policy as its principal tool in influencing the money supply since A) discount loans do not affect the money supply. B) it does not have as much control over discount loans as it has on open market operations. C) it is prohibited from doing so by an act of Congress. D) it prefers to use reserve requirements.

Q: If the potential output of an economy is worth $440 billion and the actual output during a particular year was $435billion, the output gap isa. -­1.14 percentb. 2.2 percentc. -­5 percentd. 1.1 percent

Q: Which of the following statements concerning seasonal credit is true? A) It tends to have a lower interest rate than federal funds. B) It has become increasingly more important in recent years. C) Only firms receiving secondary credit are eligible to receive seasonal credit. D) Improvements in credit markets have reduced the need for a seasonal credit facility.

Q: If a country's potential output is $100 billion and the output gap is 5%, the country's actual output is a. $500 billion.b. $20 billion. c. $95 billion. d. $105 billion

Q: Primary credit is only a backup source of funds for health banks since A) the primary credit rate is set above the federal funds rate. B) restrictions as to its use limit its benefits. C) the secondary credit rate pays 0.5% more. D) banks must seek funds from other sources prior to requesting a discount loan.

Q: Which equation best represents the Taylor rule?a. i=r*+πT+{w1× [(Y−Y*)/Y*] × 100} + [w2× (π −πT)]b. i=r*+π +{w1× [(Y−Y*)/Y*] × 100} + [w2× (π − πT)]c. i=r+πT+{w1× [(Y−Y*)/Y*] × 100} + [w2× (π −πT)]d. i=r+π +{w1× [(Y−Y*)/Y*] × 100} + (w2× π)

Q: Which terms in the equation for Taylor rule can be influenced by the government through monetary policy?a. Inflation gap and interest-rate spreadb. Unemployment gap and interest-rate spreadc. Interest-rate spread and unemployment gap d. Output gap and inflation gap

Q: Which of the following statements is correct? A) The discount rate is generally above the federal funds rate. B) The discount rate is generally below the federal funds rate. C) The discount rate is generally equal to the federal funds rate. D) There is no general pattern to the relation between the discount rate and the federal funds rate.

Q: Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

Q: Taylor originally picked as the weight on the output gap and as the weight on the inflation gap in his rule. a. 1; 1b. 1; 1/2c. 1/2; 1/2d. 1/2; 1

Q: Discount loans intended for banks that are not financially healthy are called A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

Q: Taylor originally picked____ as the equilibrium real federal funds rate, which was equal to its historical average.a. 1 percentb. 2 percentc. 3 percentd. 4 percent

Q: Discount loans available to health banks which can be used for any purpose are called A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

Q: The rule that is used to set a target for the federal funds rate in response to deviations of real output and inflation from their targets isa. the Taylor rule.b. a nonactivist rule.c. a money-growth rule. d. Mc Cullum's rule.

Q: All of the following statements about secondary credit are true EXCEPT A) they are temporary, short-term loans to satisfy seasonal requirements. B) the secondary credit interest rate is set above the primary credit rate. C) it is intended for banks not eligible for primary credit. D) borrowers of secondary credit are less financially healthy.

Q: The Taylor rule is a. an activist rule.b. a nonactivist rule.c. used to set optimal tax rates.d. used to set the amount of government spending.

Q: Why have economists abandoned the use of money-growth rules in the United States?a. Because the Fed can no longer control the money supply b. Because the velocity growth rate has been too stablec. Because of instability in money demandd. Because money-growth rules are overly activist

Q: Since 1980, discount loans have been available A) only to member banks of the Federal Reserve System. B) only to national banks. C) only to state banks. D) to all depository institutions.

Q: Under an activist rule,a. the growth rate of money supply is greater than the inflation rate.b. monetary policy is allowed to change over the course of the business cycle. c. the growth rate of money supply is lower than the inflation rate.d. monetary policy is not changed over the course of the business cycle.

Q: Which of the following statements is NOT true? A) Each Federal Reserve bank maintains its own discount window. B) Before 1980, the Fed rarely made loans to banks which were not members of the Federal Reserve System. C) Since 1980, all depository institutions have had access to the discount window. D) Each Federal District Bank can charge a different discount rate.

Q: A money-growth rule that responds to the state of the economy is rule. a. a laggingb. a leadingc. a nonactivist d. an activist

Q: The discount window is A) another name for the discount rate. B) the means by which the Fed makes discount loans to banks. C) the spread between the discount rate and the T-bill rate. D) the period each month during which banks are allowed to apply for discount loans.

Q: The Fed can implement open market operations A) more rapidly than changes in reserve requirements, but less rapidly than changes in the discount rate. B) more rapidly than changes in the discount rate, but less rapidly than changes in reserve requirements. C) less rapidly than either changes in the discount rate or changes in reserve requirements. D) more rapidly than either changes in the discount rate or changes in reserve requirements.

Q: A money-growth rule that does not respond to the state of the economy is a rule. a. laggingb. leadingc. nonactivist d. activist

Q: Open market operations A) lack flexibility because only very small purchases or sales may be carried out in any given month. B) lack flexibility because open market purchases cannot easily be offset by subsequent open market sales. C) are more flexible than other policy tools. D) may be carried out only on the third Friday of each month.

Q: If the growth rate of the money supply is 4 percent, the growth rate of velocity of money is 1 percent, and real output growth is 2 percent, what is the inflation rate?a. −3 percent b. −1 percent c. +1 percent d. +3 percent

Q: Which of the following statements is correct? A) The volume of open market operations is determined jointly by the actions of the public, banks, and the Fed. B) The volume of open market operations is determined jointly by the actions of banks and the Fed. C) The volume of open market operations is determined jointly by the actions of the public and the Fed. D) The volume of open market operations is determined solely by the Fed.

Q: If the growth rate of the money supply is 5 percent, the inflation rate is 2 percent, and real output growth is 2 percent, what is the growth rate of the velocity of money?a. −5 percent b. −1 percent c. +1 percent d. +5 percent

Q: If the FOMC's directive indicates a change in monetary policy, the account manager at the Fed's Open Market Trading Desk must A) design dynamic open market operations. B) design defensive open market operations. C) seek approval of the change from the Secretary of the Treasury. D) seek approval of the change from a majority of the presidents of the Federal Reserve district banks.

Q: If the growth rate of velocity is -2 percent, the growth rate of money supply is 7 percent, and the inflation rate is 3 percent, what is the growth rate of real output?a. 1 percent b. 2 percent c. 3 percent d. 4 percent

Q: If velocity of money is 6, the price level is 1.2, and real output is worth $1,100 billion, what is the money supply?a. $65 billionb. $153 billionc. $220 billiond. $5,500 billion

Q: When the staff of the account manager at the Fed's Open Market Trading Desk analyzes forecasts on Treasury deposits and information on the timing of future Treasury sales of securities, what agency does it interact with? A) The Securities and Exchange Commission B) The Treasury's Office of Government Finance C) The Treasury's Office of Federal Reserve Relations D) The Federal Deposit Insurance Corporation

Q: Which of the following statements is correct? A) Dynamic open market operations are carried out to offset fluctuations in the monetary base. B) Defensive open market operations are carried out to change monetary policy. C) The volume of defensive open market operations is much greater than the volume of dynamic open market operations. D) Defensive open market operations are usually carried out through outright purchases or sales.

Q: If the velocity of money is 8.2, the money supply is $223 billion, and real output is $958 billion, what is the price level?a. 0.5 b. 0.8 c. 1.7 d. 1.9

Q: If the velocity of money in an economy is 5, money supply is $350 billion, and the price level is 5, the real output is wortha. $1,750 billion b. $1,200 billion c. $2625 billion d. $5250 billion

Q: Defensive open market transactions A) are aimed at achieving changes in monetary policy. B) are used much less frequently than dynamic open market transactions. C) are used to offset disturbances to the supply or demand for reserves. D) make it easy to deduce the Fed's intentions for monetary policy.

Q: If the money supply is $300 billion, the price level is 1.3, and the real output is 1,300 billion, what is the velocity of money?a. 0.33 b. 3c. 5.63d. 300,000

Q: Dynamic open market operations A) are aimed at achieving changes in monetary policy. B) are used much more frequently than defensive open market transactions. C) are used to offset disturbances to the monetary base. D) make it easy to deduce the Fed's intentions for monetary policy.

Q: Total spending divided by the money supply equals a. the reserve requirement.b. the transactions demand for money. c. the money multiplier.d. the velocity of money.

Q: In a matched sale-purchase transaction, the Fed A) buys securities from a dealer and the dealer agrees to buy them back. B) sells securities to a dealer and the dealer agrees to sell them back. C) buys securities from one dealer and sells the same dollar amount of securities to another dealer. D) sells securities to one dealer and buys the same dollar amount of securities from another dealer.

Q: The equation that says money times velocity equals total spending is known as a. the national income identity.b. purchasing-power parity. c. a covenant.d. the equation of exchange.

Q: A matched sale-purchase transaction is also known as a A) reverse repo. B) discount loan. C) put option. D) federal funds loan.

Q: If a dollar of money is used 5 times in transactions in an economy over the course of a year and the supply of money is $120 billion, what is the volume of total spending in the economy?a. $5 billionb. $600 billion c. $240 billion d. $20 billion

Q: A Federal Reserve repurchase agreement involves A) an agreement by a bank to repay a discount loan on a specific day. B) an agreement by a dealer to buy back securities she has sold to the Fed. C) an agreement between the Fed and the Treasury for the Fed to purchase a specified amount of Treasury securities. D) an agreement by a commercial bank to make a loan to another bank in the federal funds market.

Q: If the account manager does NOT use a Federal Reserve reverse repurchase agreement or a matched sale-purchase transaction in carrying out open market operations, he will use A) an outright purchase or sale. B) a limited-duration purchase or sale. C) an indirect purchase or sale. D) a reverse duration purchase or sale.

Q: The average number of times a dollar of money is used for transactions over the course of a year is referred to as thea. money multiplier. b. velocity of money. c. money growth rate. d. extent of exchange.

Q: If the account manager finds that the current level of bank reserves is greater than the desired level indicated in the most recent directive from the FOMC, he will A) order banks to reduce their reserves. B) order banks to raise their interest rates in an attempt to get them to loan out more of their reserves. C) conduct an open market purchase. D) conduct an open market sale.

Q: Monetarists think thata. money growth is closely related to inflation in the long run. b. money demand is unstable in the long run.c. the central should focus on short run economic fluctuations. d. the central bank should rely on discretionary policy making.

Q: Primary dealers are those A) permitted to trade directly with the Fed. B) who work under the account manager at the Federal Reserve Bank of New York. C) who specialize in selling bonds to small private investors. D) responsible for assuring that interest rates do not decline unless the FOMC has given specific instructions that they decline.

Q: From 1991 to 2001, Argentina established commitment by a. following the Taylor rule.b. following a strict money growth rule. c. establishing a currency board.d. using a system of inflation targeting.

Q: Which of the following is an useful indicator of the stance of monetary policy?a. The income tax rateb. The federal funds ratec. The exchange rated. The rate of unemployment

Q: How does the Open Market Trading Desk conduct its operations? A) directly with private securities dealers on the floor of the New York Stock Exchange B) directly with private securities dealers on the floor of the Federal Reserve Bank of New York C) over-the-counter electronically with private securities dealers D) by sending its buy and sell orders to the U.S. Treasury for execution

Q: The Open Market Trading Desk is A) another name for the Federal Open Market Committee. B) an organization of private traders in government securities. C) the area on the floor of the New York Stock Exchange set aside for bond trading. D) a group of private securities traders that the Fed has selected to participate in open market operations.

Q: People know that the Fed has the incentive to announce that the inflation rate will be 3 percent next year, so people will build 3 percent inflation into their wage negotiations. But then the Fed has the incentive to increase inflation above 3 percent to make the economy grow faster. This type of phenomenon is known asa. inflation targeting. b. time inconsistency. c. McCallum's rule.d. an expectations trap.

Q: The policy directive from the FOMC is carried out by A) the presidents of the district banks. B) the presidents of commercial banks that are members of the Federal Reserve System. C) the account manager at the Federal Reserve Bank of New York. D) private dealers in the bond market.

Q: When the central bank chooses a policy at one date, which leads people to make decisions based on that policy, which then causes the central bank to choose a different policy at a later date, then there is said to bea. irrational expectations. b. time inconsistency.c. a liquidity trap.d. an expectations trap.

Q: Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows atight monetary policy?a. The economy will enter into a recession.b. The level of economic activity will increase.c. The actual inflation rate will rise. d. The federal funds rate will fall.