Question

True / False

1- The Taylor Rule uses macroeconomic data to determine the optimal federal funds rate of interest.

2- The Fed’s actions during WWI led to double digit deflation in the U.S.

3- A repo transaction means that when the Fed buys a bond, the seller agrees to buy it back at a later date.

4- When the federal funds rate is high, banks will tend to want to hold relatively low levels of reserves.

Answer 1

1. True. The Taylor rule predicts the federal interest rule by taking into account the inflation rate and the unemployment rate.

2. False. During WW1 there was inflation mainly because most of the government spending in war, and the supply was less on consumer products due to the pessimism. The fed in fact took up measures to reduce the inflation rate.

3. True. Usually the seller sells the bond overnight and agrees to buy back the following day.

4. False. Due to higher fed rates, banks are unable to keep their reserves in balance. Therefore they would want to hold on to more reserves to ensure the dearth of lending caused in this scenario

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