1. The Federal Reserve Act says that the Fed must try to achieve ______.
A. a balanced budget
B. maximum employment, stable prices, and moderate long-term interest rates
C. a stable U.S. dollar on foreign exchange markets and moderate long-term and short-term interest rates
D. an economic environment in which investment in U.S. stock and money markets is encouraged
The Federal Reserve Act says that the Fed must use ______ to achieve its objectives.
A. bank reserves B. commercial banks C. laws passed by Congress D. the long-term growth of the monetary and credit aggregates
2. When the Fed raises the federal funds rate, short-term interest rates _______.
A. rise, the quantity of money decreases, and the inflation rate falls within a year
B. and the long-term interest rate rise, expenditure decreases, and the inflation rate falls within a few weeks
C. rise a few weeks later, which encourages consumers and businesses to cut expenditure and the inflation rate falls
D. rise immediately, but it takes about two years for the inflation rate to fall
3. Fed is split over time of rate rise
In October 2009, the Fed was forecasting that unemployment will average 9.8 percent in 2010 and said the federal funds rate will remain "exceptionally low" for "an extended period." But some officials were beginning to worry about unwinding the $2 trillion in special credits that have boosted the monetary base and to wonder if the interest rate might need to start rising soon.
Describe the time lags in the operation of monetary policy and explain why they pose a challenge for the Fed in deciding when to start raising the federal funds rate target in a recession.
The time lag between the implementation of monetary policy and the resulting change in the inflation rate is approximately ______.
This poses a challenge for the Fed in deciding when to start raising the federal funds rate target in a recession because ______.
A. 1 year; if the Fed raises the federal funds rate too soon, it could lengthen the recession
B. 2 years; if the Fed raises the federal funds rate too soon, it could lengthen the recession
C. 2 years; fiscal policy has a shorter lag time and monetary policy and fiscal policy are always coordinated
D. a few months; fiscal policy has a shorter lag time and monetary policy and fiscal policy are always coordinated
E. a few months; Congress must agree on monetary policy and they are not always in Washington when these decisions must be made
4. Fed is open to changing bond policy
Fed policymakers signaled for the first time that they could increase or decrease stimulation of the economy in the future, but not now.
What are the ripple effects and time lags that the Fed must consider in deciding when to increase or decrease stimulation of the economy?
Choose the statement that is correct.
A. When the Fed raises the federal funds rate, the inflation rate decreases about two years later.
B. When the Fed raises the federal funds rate, other short-term interest rates rise a few weeks later.
C. When the Fed lowers the federal funds rate, the exchange rate falls a few weeks later.
D. When the Fed raises the federal funds rate, the quantity of money decreases on the same day.
E. When the Fed lowers the federal funds rate, the supply of loanable funds increases up to a year later.
5. The U.S. economy is at full employment when strong economic growth in Asia increases the demand for U.S.-produced goods and services.
The Fed ______ face a tradeoff in the short run because ______.
A. does not; it will move both real GDP and the price level back to their desired levels
B. does not; it is impossible to decrease real GDP and the price level simultaneously
C. does; it must increase real GDP and decrease the price level simultaneously
D. does; it must decrease real GDP and increase the price level simultaneously
E. does not; a tradeoff is a long-run phenomena
6. The three ways in which the U.S. fiscal imbalance might be successfully addressed are _______.
A. raising income taxes, raising Social Security taxes, and cutting Social Security benefits
B. keep borrowing by selling government bonds, cutting Social Security benefits, and eliminate the Affordable Care Act
C. eliminating the generational imbalance, cutting other government spending, and raising Social Security taxes
D. raising income taxes, cutting other government spending, and keep borrowing by selling government bonds
7. Fiscal policy is the use of the federal budget to _______.
A. achieve the macroeconomic objectives of positive economic growth and zero unemployment
B. finance government activities
C. achieve the macroeconomic objectives of high and sustained economic growth and full employment
D. keep interest rates low and steady
8. A cut in the income tax rate ________ the tax wedge and ________ employment, saving, and investment.
A. does not change; increases B. increases; increases C. decreases; does not change D. increases; decreases E. decreases; increases
9. Read Eye on Fiscal Stimulus.
How big was the fiscal stimulus package of 2008-2009, how many jobs was it expected to create, and how large was the multiplier implied by that expectation?
Did the stimulus work?
The fiscal stimulus package of 2008–2009 was ___？____.
The fiscal stimulus package of 2008–2009 was expected to create ____？___ jobs. The multiplier implied by that expectation is ___？____.
The stimulus _______ the expectations of the Obama administration because _______.
A. did not meet; Congress failed to spend all of the fiscal stimulus
B. met; 650,000 jobs were created by using a combination of discretionary and automatic fiscal policy
C. met; the multiplier was much smaller than 1.6
D. did not meet; the multiplier was much smaller than 1.6
Federal Reserve Act outlines the objectives that has to be achieved by the Fed.
These objectives are as follows -
1. Fed should conduct monetary policy in such manner that maximum employment can be generated.
2. Fed should work to ensure price stability.
3. Fed should keep long term interest rate moderate.
Hence, the correct answer is the option (B).
When Fed brings change in Federal funds rate then, in that case, such change impacts the short-term interest rate, money supply, and inflation rate as well.
However, impact on short-term interest rate is experienced very quickly. However, it take almost two years to experience the impact on inflation rate.
Hence, the correct answer is the option (D).
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