Final Exam

Question 1

Number of Federal Reserve Banks

Answer 1

12

Question 2

Federal Reserve Act of 1913

Answer 2

Established Federal Reserve system that consists of board of governors, FOMC, and 12 Federal Reserve banks

Question 3

Functions of Board of Governors

Answer 3

Vote on omo operations, set reserve requirement, control discount rate

Question 4

Term Length of 7 Board of Governors members

Answer 4

14 years

Question 5

Functions of Federal Reserve Banks

Answer 5

Vote on OMO, issue/withdraw new currency, decide which banks get discount loans

Question 6

Who FOMC consists of

Answer 6

7 appointed board of governors plus 4 of 5 rotating FRB presidents

Question 7

Functions of FOMC

Answer 7

Set fed funds range

Question 8

A single bank can create deposits equal only to the amount of its excess reserves, it cannot
by itself generate multiple deposit expansion, true of false?

Answer 8

True

Question 9

Conventional monetary tools

Answer 9

OMO, discount window, reserve requirements,interest on reserves

Question 10

Nonconventional monetary tools

Answer 10

Large-scale asset purchases, liquidity provision, forward guidance, zero interest on reserves

Question 11

Objective of monetary policy

Answer 11

Keep the monetary base stable with conventional monetary tools using tactical adjustments in the Fed Funds Rate (FFR)

Question 12

Types of OMO

Answer 12

Dynamic, defensive

Question 13

Repo Facility

Answer 13

OMP with seller to repurchase securities within 1-15 days

Question 14

Reserve Repo Facility

Answer 14

OMS with buyer to sell back securities

Question 15

Floating Rate

Answer 15

Exchange rate regime where value of occurrence is allowed to be determined solely by demand for and supply of, currency on the for-ex market

Question 16

IOR

Answer 16

Interest on Reserves

Question 17

Purpose of Interest on Reserves

Answer 17

Act like a floor for the Fed Funds Rate and creates a lower bound on the range

Question 18

Time-Inconsistency Problem

Answer 18

Theory that MP conducted on a discretionary, day-to-day basis leads to poor long-run outcomes

Question 19

Number of Inflation Targeting Advantages

Answer 19

4

Question 20

Taylor Rule

Answer 20

Guiding principal in setting Fed Funds Rate

Question 21

Equation for Taylor Rule

Answer 21

Current Inflation + Equilibrium Inflation Rate + 1/2 (Inflation Gap) + 1/2 (Output Gap)

Question 22

Inflationary Gap

Answer 22

When actual GDP is greater than potential GDP

Question 23

Does inflation targeting specifically focus on inflation

Answer 23

No

Question 24

Is there conflict between inflation and output in the long run

Answer 24

No

Question 25

Supply shock drivers in the short run

Answer 25

Change in inflation, price shocks,change in potential output, persistent output gaps

Question 26

Lucas’ Critique of Rules-Based Policy

Answer 26

Structural shifts can cause macroeconomic models to be inaccurate

Question 27

Two Types of Asset Price Bubbles

Answer 27

Credit-Driven, Irrational Exhuberance

Question 28

Lean Approach To Handling Bubbles

Answer 28

Laissez-faire attitude, easy money policy that may promote financial instability

Question 29

Clean-Up Approach To Handling Bubbles

Answer 29

Nearly impossible to identify in real time, raising interest rates may be effective in restraining bubbles but may negatively harm economy

Question 30

Three Stabilization Policies

Answer 30

Do nothing, activist, stabilize output