MC: Monetary Policy (I)

Question 1

What is the formula for the Neutral Interest Rate?

Answer 1

= trend growth rate of real GDP + target inflation rate

Question 2

If the policy rate is set above the neutral rate, then the feds goal is _____.

Answer 2

Contractionary

Question 3

If the policy rate is set below the neutral rate, then the feds goal is _____.

Answer 3

Expansionary

Question 4

Monetary policy affects the economy through what four interrelated channels?

Answer 4

1.Lending rates
2.asset prices
3.expectations
4.exchange rates

Question 5

What monetary policy tool is most often used?

Answer 5

Open market operations

Question 6

Which monetary policy tool is seldom used?

Answer 6

Required reserve ratio adjustments

Question 7

What are three monetary policy tools used by central bank?

Answer 7

1.Policy rate
2. Open market operations
3. Required reserve ratio

Question 8

What are the two limitations of monetary policy?

Answer 8

1. Inflation caused by supply side shocks
2. Issues with transmission mechanism (market participants expectations, bond market vigilantes, liquidity trap)

Question 9

Describe relationship between expansionary fiscal policy and contractionary monetary policy.

Answer 9

Question 10

Describe relationship between contractionary fiscal policy and contractionary monetary policy.

Answer 10

Question 11

Describe relationship between expansionary fiscal policy and expansionary monetary policy.

Answer 11

Question 12

Describe relationship between contractionary fiscal policy and expansionary monetary policy.

Answer 12