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Exam 14: The Federal Reserve and Monetary Policy

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Question 21

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All else constant, if the GDP in an economy increases then:

A) the quantity demanded for money decreases.
B) demand for money increases.
C) the quantity demanded for money increases.
D) demand for money decreases.

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Question 22

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An appreciation of the U.S. dollar will likely cause U.S. net exports to _______ and U.S. real GDP to _______.

A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase

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Question 23

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Explain how an open market purchase can increase net exports and real GDP.

Explain what effect a reduction in the U.S. interest rate would have on the exchange rate.

Figure 14.1 -Refer to Figure 14.1. Which of the following events can not cause a movement from Point E to Point A?

Which of the following is not a motive for holding money?

Identify the time lags that are associated with stabilization policies.

Which of the following pairs of events will definitely lead to an increase in the equilibrium interest rate?

Figure 14.3 -Refer to Figure 14.3. The money market will be in equilibrium at an interest rate of:

MAKING THE FEDERAL RESERVE MORE TRANSPARENT What are the advantages and disadvantages of the Federal Reserve becoming more transparent about its actions and decisions and disclosing more information to the public? In recent years, the Fed has gradually become more open in its deliberations. For many years, the Fed would not even say if it had changed interest rates. These policies began to change slowly in the 1990s. Starting in 2000, after each FOMC meeting the Fed announces its target for the federal funds rate and makes a brief statement explaining its actions. But should the Fed go further in describing its intended future policies? There was enough interest on this very topic for the FOMC to hold a special meeting—the first since 1979—to discuss the issue. Some members of the FOMC, including the current chairman Ben Bernanke, believed that the financial markets needed more information so that they would have a clearer idea of what future Fed policy—and short-term interest rates—were likely to be. Other members, including William Poole, the president of the St. Louis Federal Reserve Bank, disagreed. Poole felt that the financial markets understood the implicit rules that the Fed followed and that issuing a more complex public statement would just confuse matters. The special meeting did not lead to any dramatic change in the Fed’s communication policies. But now the members of the FOMC participate in drafting statements. The Fed clearly recognizes that its statements may be just as important as its actions. -According to the application, the Federal Reserve started announcing its targeted federal funds rate only after:

Which of the following is the tool most used by the Fed to control the money supply in the US?

Figure 14.6 -Refer to Figure 14.6. If the money supply increases from

An increase in the money supply will cause an increase in interest rates, and an increase in investment.

Which of the following represents an action by the Federal Reserve that is designed to increase the money supply?

Recall Application 2, "Rising Interest Rates During an Economic Recovery," to answer the following questions: -According to the application, an economy that is experiencing a recession (and hence, a lower income) is usually associated with lower interest rates because:

Explain how each of the following policy actions by the Federal Reserve would affect the quantity of money supplied: (a) a decrease in the required reserve ratio (b) an increase in the discount rate (c) the Fed purchases government bonds from the public

A depreciation of a country's currency is likely to decrease its GDP.

The Fed's efforts to stimulate and make the economy grow require that the Fed:

An increase in the price level in the United States relative to the price level in Mexico will cause an appreciation of the dollar against the peso.

Explain how an open market purchase will affect bond prices.