01
Choose one
1 point
The economy is experiencing weak aggregate demand and rising cyclical unemployment. Which policy action would most directly provide expansionary monetary stimulus?
Free Practice Quiz Question List
Monetary Policy: Tools, Transmission, and Trade-Offs Online Quiz Questions
Use this free practice quiz with 20 questions to review Monetary Policy: Tools, Transmission, and Trade-Offs, test your knowledge, and prepare for your next test or exam.
20 questions
02
Choose one
1 point
What does the federal funds rate measure?
- A
The interest rate on overnight loans of reserve balances between depository institutions
- B
The interest rate charged by the Federal Reserve on all consumer loans
- C
The rate paid by households on fixed-rate mortgages
- D
The interest rate on long-term loans between governments
03
Choose one
1 point
Why can raising the interest on reserve balances (IORB) rate put upward pressure on short-term market interest rates?
- A
It necessarily increases the quantity of bank lending.
- B
Banks have less incentive to lend reserves at rates below what they can earn by holding reserves at the Federal Reserve.
- C
It places downward pressure on short-term rates by making reserves less attractive.
- D
It directly lowers the discount rate for every borrower.
04
Choose all
1 point
Which two outcomes are consistent with the interest-rate channel after an expansionary monetary policy action? Select all correct choices.
- A
Households increase purchases of interest-sensitive durable goods.
- B
Firms face a higher cost of financing investment projects.
- C
Firms increase investment because financing costs fall.
- D
Domestic goods become more expensive for foreign buyers because the domestic currency necessarily appreciates.
05
Choose all
1 point
Which two actions are examples of monetary policy that can influence economic conditions without simply changing the current federal funds rate? Select all correct choices.
- A
Repairing supply chains through central-bank spending
- B
Communicating likely future policy actions
- C
Directly increasing workers' skills
- D
Purchasing longer-term securities to influence longer-term interest rates
06
True or false
1 point
True or false: The Federal Reserve can directly set the economy's real GDP and price level through monetary policy.
- A
True
- B
False
07
True or false
1 point
True or false: Reserve requirements are currently the Federal Reserve's primary active instrument for implementing U.S. monetary policy.
- A
True
- B
False
08
Written response
1 point
What is the standard acronym for the interest rate paid by the Federal Reserve on eligible institutions' reserve balances?
09
Written response
1 point
As of March 26, 2020, what reserve requirement ratio for transaction accounts did the Federal Reserve establish? Enter the exact percentage-point value.
10
Fill in the blank
1 point
Complete the standard transmission chain: Expansionary monetary policy tends to lower interest rates, which increases , leading to higher .
11
Fill in the blank
1 point
Complete the exchange-rate channel: If domestic interest rates fall relative to foreign interest rates, the domestic currency may , which tends to increase , all else equal.
12
Open ended
1 point
Inflation is high because aggregate demand is excessive. Explain what monetary policy the central bank should use, how it would affect financial conditions and aggregate demand, and what short-run trade-off may result.
13
Choose one
1 point
Why does a sudden increase in energy prices create a particularly difficult monetary policy problem?
- A
It can always reduce inflation without affecting output or employment.
- B
It can raise inflation while reducing output and employment, so policy choices involve a trade-off.
- C
It necessarily increases output because higher energy prices increase production incentives.
- D
It can be solved directly by lowering the federal funds rate without any inflation risk.
14
Choose one
1 point
A central bank has already reduced nominal interest rates to very low levels, but further rate cuts appear unlikely to provide much additional stimulus. Which concept best describes this limitation?
- A
The natural rate of unemployment
- B
The reserve requirement multiplier
- C
The effective lower bound
- D
The exchange-rate channel
15
Choose one
1 point
Which statement best distinguishes monetary policy from fiscal policy?
- A
The government changes taxes and transfer payments.
- B
The central bank changes interest rates and financial conditions.
- C
The central bank changes government purchases.
- D
The government changes the reserve balances held by banks.
16
Choose one
1 point
What are federal funds in the federal funds market?
- A
Long-term Treasury securities held by the Federal Reserve
- B
Deposits that households hold in commercial banks
- C
Reserve balances that depository institutions lend to one another, usually overnight
- D
Loans that the Federal Reserve makes directly to households
17
Choose one
1 point
If the Federal Reserve purchases securities in an open market operation, which immediate financial-market effect is most likely?
- A
Reserve balances increase, putting downward pressure on short-term interest rates.
- B
Reserve balances decrease, putting upward pressure on short-term interest rates.
- C
The discount rate automatically rises, reducing bank liquidity.
- D
The reserve requirement rises, reducing the funds available for lending.
18
True or false
1 point
True or false: Contractionary monetary policy can reduce inflationary pressure while also increasing cyclical unemployment in the short run.
- A
True
- B
False
19
Written response
1 point
In what month and year did the Federal Reserve reduce reserve requirement ratios for transaction accounts to 0 percent?
20
Written response
1 point
What is the usual maturity of loans in the federal funds market? Enter the term.