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11) A decrease in monetary base ________ the quantity of money, the interest rate ________,
and the quantity of money demanded ________.
A) decreases; rises; decreases
B) decreases; falls; decreases
C) decreases; rises; increases
D) decreases; falls; increases
E) increases; falls; decreases
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
12) When the Fed ________ the federal funds rate, other short-term interest rates ________
and the exchange rate ________.
A) lowers; rise; falls
B) raises; rise; rises
C) raises; fall; rises
D) raises; rise; falls
E) lowers; rise; rises
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
13) If the economy slips into recession, the Fed ________ the federal funds rate, which
________ the short-term interest rate, and ________ the quantity of money.
A) lowers; raises; increases
B) raises; lowers; increases
C) raises; lowers; decreases
D) lowers; lowers; increases
E) lowers; lowers; decreases
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
61
14) Money targeting works when the demand for money curve is ________ and predictable.
Technological change in the banking system has led to ________ and ________ shifts in the
demand for money curve.
A) stable; small; unpredictable
B) stable; large; predictable
C) stable; small; predictable
D) unstable; large; unpredictable
E) stable; large; unpredictable
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
17.6 Essay: How the Fed Conducts Monetary Policy
1) Explain monetary policy goals and discuss any goal conlicts in the long run and the
short run.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
2) Describe the main diference between the core inlation rate and the PCE inlation rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Relective thinking
62
3) Explain the role the Fed, Congress, and the President play in making monetary policy.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
4) Distinguish between monetary policy instruments and goals.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
5) What is the main diference between an instrument rule and a targeting rule? Be sure to
deine each.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
6) What is the Taylor rule and how does it work?
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
7) Explain the diferences between using the monetary base versus federal funds rate as
the monetary policy instrument. Which does the Fed use as its instrument?
instrument. The monetary base is the sum of Federal Reserve notes, coins, and banks'
deposits at the Fed. The federal funds rate is the interest rate banks charge each other to
borrow reserves. If the Fed targets the monetary base, the federal funds rate luctuates to
reach equilibrium. If the Fed targets the federal funds rate, the monetary base luctuates in
response to changes in the demand for it. The Fed cannot target both the monetary base
and the federal funds rate simultaneously. The Fed uses the federal funds rate as its
monetary policy instrument.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
17.7 Essay: Monetary Policy Transmission
1) "The Federal Open Market Committee (FOMC) is the group within the Federal Reserve
that makes monetary policy decisions. The FOMC meets twice a year and each meeting
lasts eight days." Are these two statements correct or incorrect? Why?
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
2) When the Fed lowers the federal funds rate and the real interest rate falls, what happens
to the opportunity cost of investment? What happens to investment?
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Relective thinking
64
3) Discuss how the Fed selling securities in the open market ripples through the diferent
sectors of the economy.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
4) After the Fed raises the federal funds rate, the efects on the economy can take up to two
years before they occur. Is this statement accurate? Lay out the time path of how an
increase in the federal funds rate afects the economy.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
5) List and briely explain the steps in how monetary policy afects real GDP in the AS/AD
model using as your example the case when the Fed eases monetary policy to ight a
recession.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
6) If the Fed wants to close a recessionary gap, should it buy or sell government securities?
Why?
loans increases. The increase in loans increases the supply of loanable funds so the real
interest rate falls. As a result, consumption expenditure, investment, and net exports
increase, which increases aggregate demand. The increase in aggregate demand increases
real GDP, which is the policy required when real GDP is less than potential GDP, that is,
when the economy has a recessionary gap.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
7) When the economy is in recession, does the Fed want to raise the federal funds rate so
as to increase aggregate demand and increase real GDP? Explain your answer.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
8) When would the Fed want to carry out a monetary policy that decreases aggregate
demand?
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
66
9) "When the Fed is concerned with an inlationary gap it buys government securities." Is
the previous statement correct or incorrect? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
10) If there is an inlationary gap, what is the proper monetary policy to restore price
stability? What actions can the Fed undertake to restore price stability?
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
11) How does a rise in the federal funds rate afect aggregate demand, real GDP, and the
price level?
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
67
12) Explain how the Fed's response to inlation works its way through the economy to
ultimately afecting real GDP and the price level.
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
13) In the above igure, is the Fed likely to be afraid that inlation will occur or that a
recession will occur? Discuss the appropriate monetary policy that should be made to
restore the economy to potential GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
68
17.8 Essay: Alternative Monetary Policy Strategies
1) Describe why monetary policy rules are superior to discretionary monetary policy.
Skill: Level 2: Using deinitions
Section: Checkpoint 17.3
Status: Old
AACSB: Written and oral communication
2) Describe inlation targeting rule as a monetary policy. What are its beneits?
Skill: Level 2: Using deinitions
Section: Checkpoint 17.3
Status: Old
AACSB: Written and oral communication
69
