Partial Credit, End of Chapter 4.11
Partial Credit, End of Chapter 4.11
Partial Credit, End of Chapter 4.11
11
Using the Taylor rule, calculate the target for the federal funds rate for July 2010 using the following information:
Equilibrium real federal funds rate 2
%
Target inflation rate 2%
Current inflation rate 0.9
%
Output gap minus
8
%
The target for the federal funds rate for July 2010 is
negative 1.65
%.
(Enter
your response rounded to two decimal places and include a minus sign if
necessary.)
In your calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How
does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of 0% to
0.25%?
A.
This Taylor rule federal funds rate target
is higher than
the Fed's actual target range.
B.
This Taylor rule federal funds rate target
is lower than
the Fed's actual target range.
Your answer is correct.
C.
This Taylor rule federal funds rate target
fits within
the Fed's actual target range.
What advantages do open market operations have over other policy tools?
(Check
all that
apply.)
A.
They are inexpensive.
B.
Open market operations are easy to implement.
Your answer is correct.
C.
They are under the complete control of the Fed.
Your answer is correct.
D.
They are flexibiible.
What trade-offs does the Fed face, particularly in the short run, in attempting to reach its goals?
A.
In attempting to reach high economic growth, the Fed would pursue contractionary monetary policy, but this policy
could cause higher unemployment.
B.
In attempting to reach high economic growth or high employment, the Fed would pursue expansionary monetary
policy, but this policy could cause higher inflation.
Your answer is correct.
C.
In attempting to reach high employment, the Fed would pursue expansionary monetary policy, but this policy could
cause lower economic growth.
D.
In attempting to reach high economic growth, the Fed would pursue expansionary monetary policy, but this policy
could cause higher unemployment.
If you owned a firm that did business internationally, why would excess fluctuations in the foreign exchange value
of the dollar make planning for business and financial transactions more difficult?
(Check
all that
apply.)
A.
They make it difficult to know the cost of domestic intermediate goods.
B.
They make it difficult to know the cost of imported intermediate goods.
Your answer is correct.
C.
They make it difficult to know the dollar value of foreign assets.
Your answer is correct.
D.
They make it difficult to know the cost of your products abroad.
Explain the effect on the demand for reserves or the supply of reserves of the following Fed policy action:
Upper A decrease in the required reserve ratio
.
A.
This would
increase the supply of reserves
.
B.
This would
lower the interest rate at which the demand curve becomes horizontal
.
Your answer is not correct.
C.
This would
raise the interest rate at which the demand curve becomes horizontal
.
D.
This would
decrease the demand for reserves
.
correct, End of Chapter 1.6
A columnist in the Wall Street Journal has argued in favor of changing the Fed's dual mandate to a single mandate
of price stability: "When an economy gets weak enough, extraordinary easing measures can be justified as the
necessary battle against potentially highly damaging deflation rather than to reduce unemployment."
Source: Neal Lipschutz, "Should Fed Chairman Have a Single Term, Single Mandate?" Wall Street
Journal,
September 27, 2012.
Deflation would be "potentially highly damaging" because of all of the following EXCEPT?
A.
It would further reduce demand and output below the natural rate and could have extreme recessionary impacts.
B.
It would increase the cost of labor for firms in real terms, making it more costly for firms to produce.
C.
It would raise the costs of paying back loans, making it more difficult for debtors to spend.
D.
It would make prices fall, so goods would become less expensive.
Your answer is correct.
The term "extraordinary easing measures" refers to
A.
the Fed using general open market operations to increase reserves.
B.
the Fed selling government securitites to banks and financial institutions.
C.
the Fed using all possible methods to engage in quantative easing.
Your answer is correct.
D.
All of the above.
"Extraordinary easing measures" would end deflation by greatly
increasing
aggregate demand and thus pushing prices
upward
.
Which of the following is NOT a supportive argument that the Fed's dual mandate should be replaced with a single
mandate of price stability?
A.
Having a dual-mandate can lead to problematic policies and central bank created bubbles as the unemployment goal
often is counter to the price stability goal.
B.
Monetary policy has been shown to be effective at affecting inflation in both the short-run and the long-run, while
estimation on the effectiveness monetary policy impacts on employment and output have been mixed.
C.
Countries in which the central bank has one primary goal of price stability have been shown to have lower and more
consistently stable inflation than countries that do not have the one goal of price stability.
D.
Monetary policy can sometimes be used to stimulate the economy quickly in times of large decreases in demand
which can reduce unemployment in the economy.
The following appeared in a feature in the New York Times that provides an overview of the Federal Reserve
System:
"The federal funds rate is set by the Fed's Open Market Committee, composed of the chairman, the six other
governors, and five of the 12 regional bank presidents, on a rotating basis."
Source: "Federal Reserve System," New York
Times,
August 27, 2010.
Do you agree that the federal funds rate is set by the FOMC?
A.
Disagree. The federal funds rate is actually determined by the demand for and supply of reserves. The FOMC only
sets a target for the federal funds rate.
Your answer is correct.
B.
Agree. The FOMC first announces a target for the federal funds rate, then sets the rate at its target.
Achieving the goal of price stability with low and steady inflation allows the Fed to achieve other goals, such as
stable interest rates and stable foreign exchange rates. If the Fed fails to achieve low and steady inflation, why will it
be hard to achieve stable interest rates?
A.
Because low inflation leads to tremendous increases of nominal interest rates.
B.
Because the real interest rate includes an inflation premium.
C.
Because high inflation leads to tremendous decreases of nominal interest rates.
D.
Because the nominal interest rate includes an inflation premium.