Chapter 15: Quiz Answers -- The Federal Reserve and Monetary Policy

1. The name of the committee which conducts monetary policy is
   F.O.M.C. (Federal Open Market Committee) The FOMC includes representatives from the Board of Governors and from the District banks.

2. A possible reason that the Federal Reserve might raise interest rates in the economy is that
   all of the above. By raising interest rates, the Fed hopes to slow the economy's growth rate and ease pressures on inflation.

3. The current chairperson of the Federal Reserve is
   Ben Bernanke. Alan Greenspan retired in January, 2006.

4. Suppose the U.S. economy had inflation of 2.7 percent and unemployment of 9 percent. The best monetary policy in this scenario is
   an open market purchase. The modest inflation combined with high unemployment call for expansionary monetary policy. Such policy is carried out with an open market purchase.

5. Given a required reserve ratio of 10 percent, if the Fed performed an open market sale of $1,000, by how much could the money supply change?
   -$10,000 Assuming the open market sales is conducted by selling government securities to banks, bank now have $1,000 fewer reserves and, hence, $1000 fewer loanable funds than before the monetary policy action. Recall that the change in the money supply is 1/RRR times the initial change in excess reserves, or 10 x -$1,000, so the maximum change in the money supply is -$10,000.

6. Suppose the Federal Reserve wishes to prevent the economy from going into recession. What action should it take?
   All of the above.

7. The difference between the discount rate and the federal funds rate is
   the discount rate is the interest rate that the Federal Reserve charges for loans, while the federal funds rate is the interest rate that one bank charges another bank for borrowing funds. This point can be confusing because the Federal Reserve indirectly sets the fed funds rate via open market operations.

8. Monetary policy primarily affects which component of Aggregate Demand?
   investment Monetary policy can also affect consumption, but the biggest impact typically falls on investment.

9. Expansionary monetary policy injects reserves into the banking system, which shifts the supply of loanable funds to the right, lowering interest rates and stimulating Aggregate Demand.
   True. This is an accurate description of the monetary transmission mechanism.

10. The F.O.M.C. consists of the 12 District Bank Presidents.
    False. The F.O.M.C. consists of twelve members: the seven Governors from the Board plus five Presidents of the District banks that rotate on and off the committee over time.