Foundations of Macroeconomics, 7e (Bade/Parkin)
Chapter 17 Monetary Policy
17.1 How the Fed Conducts Monetary Policy
1) The main goals of monetary policy include all of the following EXCEPT
A) keeping the long term nominal interest rate equal to the real interest rate plus the
inlation rate.
B) keeping the inlation rate low.
C) keeping the unemployment rate close to the natural unemployment rate.
D) attaining the maximum sustainable growth of potential GDP.
E) keeping the long-term interest rate at a moderate level.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
2) Which of the following is a monetary policy goal?
i. keeping the inlation rate low
ii. attaining maximum employment
iii. keeping the long-term interest rate at a moderate level
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
1
3) Monetary policy goals include
i. maximum employment.
ii. stable prices.
iii. moderate long-term interest rates.
A) i only
B) ii only
C) i and iii only
D) i and ii only
E) i, ii, and iii
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
4) Which of the following is NOT a monetary policy goal?
A) keeping long-term interest rates moderate
B) keeping a high exchange rate for the dollar
C) promoting maximum employment
D) maintaining stable prices
E) All of the above are monetary policy goals.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
5) The Federal Reserve monetary policy goals of maximum employment means
A) a zero percent unemployment rate.
B) a zero percent natural unemployment rate.
C) aiming for an amount of employment that exceeds full employment.
D) keeping the unemployment rate close to the natural unemployment rate.
E) cyclical unemployment should not necessarily be minimized.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
2
6) The output gap is the
A) percentage deviation of real GDP from potential GDP.
B) diference between actual inlation and core inlation.
C) percentage increase in the growth rate of real GDP minus the unemployment rate.
D) diference in graduation levels between high school and college.
E) percentage increase in the growth rate of real GDP.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
7) When real GDP is less than potential GDP, there is ________ which leads the
unemployment rate to ________.
A) an inlationary gap; rise
B) a recessionary gap; decline
C) a recessionary gap; remain at the natural level
D) an inlationary gap; remain at the natural level
E) a recessionary gap; rise
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
8) When real GDP is greater than potential GDP, there is ________ which leads the inlation
rate to ________.
A) an inlationary gap; rise
B) a recessionary gap; remain stable
C) a recessionary gap; rise
D) an inlationary gap; fall
E) a recessionary gap; fall
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
3
9) When the output gap is positive, it represents ________ gap, and when it is negative, it
represents ________ gap.
A) a recessionary; an inlationary
B) an inlationary; an employment
C) an inlationary; a recessionary
D) an employment; an unemployment
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
10) To determine whether the goal of stable prices is being achieved, the Federal Reserve
monitors
A) the core GDP delator inlation rate.
B) the CPI.
C) the producer price index.
D) the core PCE delator inlation rate.
E) the GDP price delator.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
11) The core inlation rate measures changes in the
A) price of only two consumer goods: food and fuel.
B) prices of all consumer goods.
C) prices of consumer goods except food and fuel.
D) prices of consumer goods except health care.
E) prices of all the “core” goods and services a typical family buys.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
4
12) To determine whether the goal of stable prices is being achieved, the Federal Reserve
monitors the ________; to determine whether the goal of maximum employment is being
achieved, the Federal Reserve monitors ________.
A) core CPI inlation rate; the natural unemployment rate
B) CPI; the gap between nominal GDP and real GDP
C) core GDP delator inlation rate; the natural unemployment rate
D) core PCE delator inlation rate; the output gap
E) GDP price delator; real GDP
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
13) Control of monetary policy rests with
A) Congress.
B) the President.
C) the Federal Reserve.
D) the Comptroller of the Currency.
E) the U.S. Treasury.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
14) In the United States,
A) Congress must approve monetary policy changes.
B) Congress initializes changes in monetary policy and the Fed approves the changes.
C) the Federal Reserve sets monetary policy.
D) the Federal Reserve sets monetary and iscal policies.
E) the President initializes changes in monetary policy and the Fed approves the changes.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
5
15) Which of the following statements are correct?
i. The Federal Reserve’s monetary policy must be approved by the President of the United
States .
ii. The Federal Reserve Board of Directors meets approximately every six months to
review the state of the economy and determine monetary policy.
iii. The Federal Reserve has determined it will use the monetary base as its policy
instrument.
A) i and ii
B) ii only
C) i only
D) iii only
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
16) Which of the following statements are correct?
i. Congress does not play a role in making monetary policy decisions.
ii. The FOMC meets eight times a year to make monetary policy decisions.
iii. The President of the United States appoints members of the Board of Governors and
the Chairman of the Board of Governors, but the President has little other formal authority
over monetary policy.
A) i, ii, and iii
B) i,and ii
C) ii only
D) i and iii
E) ii and iii
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
17) Monetary policy decisions are made by the
A) Federal Reserve Economic Committee.
B) Federal Open Market Committee.
C) Council of Economic Advisors.
D) Congress of the United States.
E) U.S. Mint.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
6
18) The FOMC is the
A) report the Fed gives to Congress twice a year.
B) group within the Fed that makes monetary policy.
C) report that summarizes the economy across Fed districts.
D) name of the meeting the Fed has with Congress twice a year.
E) interest rate the Fed most directly inluences.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
19) The federal funds rate is
A) the interest rate banks charge each other on overnight loans.
B) the interest rate on the 3-month Treasury bill.
C) another name for the real interest rate.
D) the interest rate on the 30-year treasury bond.
E) also known as the prime rate.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
20) Which of the following is a potential monetary policy instrument for the Fed?
A) federal funds rate
B) loanable funds
C) inlation rate
D) real interest rate
E) proit rates
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
7
21) The interest rate banks charge each other on loans of reserves is called the
A) federal funds rate.
B) coupon rate.
C) required reserve rate.
D) discount rate.
E) real interest rate.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
22) The federal funds rate is ________ of the Fed.
A) a technique
B) a monetary policy rule
C) an objective
D) the monetary policy instrument
E) a goal
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
23) The monetary policy instrument the Federal Reserve chooses to use is the
A) discount rate.
B) federal funds rate.
C) monetary base.
D) lexible exchange rate.
E) ixed exchange rate.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
8
24) The monetary policy instrument the Federal Reserve chooses to use is the
A) quantity of money.
B) exchange rate.
C) monetary base.
D) federal funds rate.
E) required reserves rate.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
25) Which of the following are policy instruments available to the Fed as it tries to achieve
its macroeconomic goals?
i. government expenditure on goods and services and taxes
ii. the government budget deicit or surplus
iii. changes in the federal funds rate
A) i and ii
B) iii only
C) i and iii
D) ii and iii
E) ii only
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
26) Currently the Fed targets
A) both the monetary base and the federal funds rate simultaneously.
B) the exchange rate.
C) the inlation rate
D) the federal funds rate.
E) the price level.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
9
27) An instrument rule is based on ________ of the economy while a targeting rule is based
on ________ of the economy.
A) the current state; a forecast
B) the current state; the previous state
C) a forecast; the current state
D) the previous state; the current state
E) a forecast; the previous state
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
28) The Taylor rule is an example of
A) an instrument rule focused on the federal funds rate.
B) a targeting rule focused on the monetary base.
C) an instrument rule based on M1.
D) a targeting rule focused on the federal funds rate.
E) an instrument rule focused on the monetary base.
Skill: Level 1: Deinition
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
29) If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would
A) lower the federal funds rate.
B) reduce tax rates.
C) raise the federal funds rate
D) increase government expenditures.
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
10