ch14 - ch14 Student: _ 1. In the AS/AD model, an increase...

ch14
Student: ___________________________________________________________________________
1. In the AS/AD model, an increase in the money supply causes an increase in the interest rate and an increase
in investment spending.
True False
2. A contractionary monetary policy decreases the money supply and the interest rate, which decreases
investment and output.
3. The Fed's duties include acting as a lender of last resort and supervising or regulating a variety of financial
institutions.
4. The three tools of monetary policy are open market operations, setting prices, and setting the velocity of
money.
5. An increase in the federal funds rate is a signal that the Fed wants a tighter monetary policy.
True False
6. The Federal funds rate is the rate banks charge one another for overnight loans.
7. A decrease in the Federal funds rate is an indication that monetary policy is expansionary. 8. The Taylor Rule relates changes in the money supply to changes in interest rates.
9. The art of monetary policy is acting in accordance with the Taylor Rule.
True False
10. According to the Taylor Rule, if current inflation is 2.5 percent, the target inflation rate is 2 percent, and
output is 1 percent above potential, the Fed will target the Federal funds rate at 5.25 percent.
11. The Fed targets the interest rate by adjusting the money demand so that its targeted interest rate will
equalize the supply and demand for money.

12. The difference between a standard and an inverted yield curve is that when the yield curve is inverted, the
longer term bond pays a lower interest rate than a short-term bond.
13. The Federal Reserve has control over the long term interest rate.
True False
14. It would be practical for the Fed to buy bonds even when the Fed funds rate is zero.
15. Who determines U.S. monetary policy? 16. Monetary policy is one of the two main macroeconomic tools governments use to control the aggregate
economy, the other being:
17. Which of the following is not directly affected by monetary policy?
A. The money supply.
B. The banking system.
C. The availability of credit.
D. The budget deficit.
18. Monetary policy directly affects: