Question

Question 1

The Federal Reserve considers ideal inflation rate to be

a.

0%

b.

1%

c.

2%

d.

3%

e.	dependent on current unemployment rate

Question 2

The dual mandate given to the Federal Reserve by the Congress in 1978 means that the two goals the Fed focuses on are

a. low employment and low inflation

b. low employment and low output

c. low unemployment and high output

d. low unemployment and low inflation

Question 3

Okun's Law relates

a. the unemployment gap and the inflation rate.

b. the inflation gap and the output gap.

c. the unemployment gap and the output gap. d. unemployment gap and the output gap

Question 4

If the output gap is positive,

a. the unemployment gap is also positive.

b. the inflation gap is negative.

c. the unemployment gap is negative.

d. there is full employment.

Question 5

The sum over time of the loss from square of output gap plus a weight times square of the inflation gap represents the

a. Fed's objective function

b. cost of disinflation.

c. Sharpe ratio

d. Phillips curve.

Question 6

Taylor rule proposes that the federal funds rate should be cut if

a. unemployment gap is positive.

b. unemployment gap is negative.

c. inflation gap is positive.

d. output gap is negative.

Question 7

Now people are living and working much longer than they used to in the developed world. This demographic changes might be one reason currently we have

a. low unemployment rate.

b. high unemployment rate.

c. low output rate.

d. high inflation rate.

e. low inflation rate.

Question 8

If potential Real GDP is $20 trillion and current Real GDP is $22 trillion, then the output gap is

a. 2 trillion

b. - 2 trillion

c. 10%

d. - 10%

e. 9.09%

Question 9

If the natural rate of unemployment is 5.2 percent and the unemployment rate is 4.4 percent, then the unemployment gap is

a. +0.80 percent.

b. +1.54 percent.

c. -1.54 percent.

d. -0.80 percent.

Question 10

When output gap and inflation gap are positive, the Federal Reserve will adopt a/an

a. contractionary fiscal policy.

b. contractionary monetary policy.

c. expansionary monetary policy.

d. expansionary fiscal policy.

Answer 1

Question 1

Controlling inflation is an important policy objective of the Federal Reserve.

From the perspective of Federal Reserve, the ideal inflation rate is 2 percent.

This implies that Fed uses its various policy initiatives to keep inflation rate up to 2 percent.

Hence, the correct answer is the option (c).

Question 2

In 1978, Congress added three important objectives with respect to monetary policy in the Federal Reserve Act.

These three objectives are -

1. Ensuring maximum employment - This implies keeping unemployment low.

2. Keeping prices stable - This implies keeping inflation low.

3. Moderation of long-term interest rates.

First two objectives are also referred to as dual mandate of Federal Reserve.

Hence, the correct answer is the option (d).