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Exam 11: Stabilizing the Economy: The Role of the Fed

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Question 81

Multiple Choice

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If aggregate spending in an economy can be written as Y = 15,000 + 0.6Y - 20,000r, and potential output equals 34,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

A) 7 percent
B) 3 percent
C) 6 percent
D) 5 percent

E) A) and B)
F) All of the above

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Question 82

Multiple Choice

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According to the Taylor rule, the Federal Reserve lowers the real interest rate as the output gap ____ or the inflation rate ______.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

E) A) and B)
F) A) and C)

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Question 83

Multiple Choice

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One problem with using monetary policy to address "bubbles" in asset markets is that:

Because the Fed determines the money supply, the:

According to the Taylor rule, if inflation equals 3 percent and there is an expansionary gap equal to 3 percent of potential output, the Fed will set a real interest rate of ____ percent and a nominal interest rate of ____ percent.

A higher real interest rate ______ investment spending and ______ consumption spending.

If the Federal Reserve wants to increase the money supply, it should:

During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must ______ the money supply, which will put ______ pressure on nominal interest rates.

Any target value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______.

A policy reaction function describes how the action a policymaker takes depends on:

The following table shows Alex's estimated annual benefits of holding different amounts of money. How much money will Alex hold if the nominal interest rate is 6 percent? (Assume she wants her money holdings to be in multiples of $100.)

If the Fed's policy reaction function equals r = .02 + $\pi$ , where r is the real interest rate, $\pi$ is the inflation rate. When the inflation rate is zero, then the real interest rate will:

Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.

The benefit of holding money is _______, while the opportunity cost of holding money is _______.

A bank is able to make new loans equal to:

Refer to the figure below where the nominal interest rate equals 6% and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 10%, it must conduct open market _____ to set the money supply at _____.

The following table shows Jay's estimated annual benefits of holding different amounts of money. How much money will Jay hold if the nominal interest rate is 6 percent? (Assume he wants his money holdings to be in multiples of $100.)

If the quantity supplied of money exceeds the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will ______ their loans based on current deposits, and the money supply will _____.

Refer to the figure below. Based on the diagram, the nominal interest rate equals ______ and the money supply equals ____.