Question

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

Answer 1

Question 1

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).

Question 2

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).