SOLVED

27) Reserve targets and federal funds targets are compatible when the Federal Reserve wants to A) lower interest rates and expand reserves. B) raise interest rates and the money supply. C) raise interest rates and reserves. D) contract interest rates and reserves. 28) Federal funds rate targets and reserve targets are incompatible when the Federal Reserve wants to A) expand reserves and lower interest rates. B) expand reserves and raise interest rates. C) contract reserves and the money supply. D) contract reserves and raise interest rates. 29) The effectiveness of the federal funds rate as an operating target is limited because A) the Treasury often uses federal funds market. B) reserve requirements often change. C) the demand for reserves is difficult to predict. D) the deposit expansion multiplier is difficult to predict. 30) Which of the following cannot be controlled precisely by the Federal Reserve? A) Government securities held by the New York Federal Reserve B) The discount rate C) Reserve requirement ratios D) Total bank reserves 31) Targeting reserves would be the best choice if A) there is a close and predictable relationship between bank reserves and total spending. B) there is an unpredictable relationship between bank reserves and total spending. C) the discount rate is fixed. D) private sector spending is very stable. 32) A(n) __________ in consumer spending will __________ the demand for reserves, resulting in a __________ federal funds rate. A) increase; raise; lower B) increase; raise; higher C) decrease; raise; higher D) decrease; lower; higher 33) The relationship between money and spending is A) very reliable. B) very unreliable. C) not important. D) None of the above. 34) The federal funds rate is a better target for the Fed when A) the link between reserves and spending is strong. B) there is a lot of variation in the demand for reserves that isn’t related to changes in spending. C) changes in interest rates stabilize the economy. D) bank reserves are very stable. 35) Under the new discount window system, the interest rate for primary credit loans is set A) one percentage point below the federal funds rate target. B) one percentage point above the federal funds rate target. C) two percentage points above the federal funds rate target. D) two percentage points below the federal funds rate target. 36) If banks borrowed from the Fed when the federal funds rate was below its target level A) the supply of reserves would decrease and the federal funds rate could fall even further. B) the supply of reserves would increase and the federal funds rate would rise. C) the supply of reserves would decrease and the federal funds rate would rise. D) the supply of reserves would increase and the federal funds rate could fall even further. 21.3Â Â The Taylor Rule and the Fed’s Track Record 1) During recent years, the Fed’s focus has clearly been on the use of A) the discount rate. B) the federal funds rate. C) the M2 money supply. D) borrowed reserves. 2) The Taylor rule says that the fed funds rate target is a function of all of the following, except A) the actual inflation rate. B) the target inflation rate. C) the percentage difference between actual and potential real GDP. D) the level of borrowed reserves. 3) Assume that the actual inflation rate is 3 percent, the target inflation rate is 2.5 percent, and that the percentage difference between actual and potential real GDP is 1 percent. According to the Taylor rule, the federal funds rate target should be A) 3.25 percent. B) 5.75 percent. C) 6.25 percent. D) 5.50 percent. 4) Assume that the actual inflation rate is 3 percent, the target inflation rate is 3 percent, and that the percentage difference between actual and potential real GDP is 2 percent. According to the Taylor rule, the federal funds rate target should be A) 3.5 percent. B) 6.5 percent. C) 5.5 percent. D) 5.0 percent. 5) In general, the fed funds rate A) moves in the direction suggested by the Taylor rule. B) moves in the opposite direction as suggested by the Taylor rule. C) is uncorrelated with the Taylor rule prediction. D) None of the above.