Monetary Policy Tools and Targets

Monetary Policy Tools and Targets

1. 1. The Federal Reserve's dual mandate under the Federal Reserve Reform Act of 1977 requires the Fed to pursue which two primary objectives?

   Maximum employment and stable pricesEconomic growth and foreign-exchange stabilityInterest-rate stability and financial market stabilityMaximum employment and maximum economic growth

2. 2. Which of the following are primary monetary policy tools the Fed uses to influence the federal funds rate? (Select all that apply.)

   Open-market operations (buying or selling Treasuries and MBS)Setting the inflation target at 2%Interest on reserves (IORB)Discount-window lending to banks

3. 3. The federal funds rate transmission mechanism to the broader economy operates through which sequence?

   FFR up, short-term rates up, longer-term rates up, borrowing costs up, consumption and investment downFFR up, reserve requirements up, banks reduce lending, money supply downFFR up, inflation expectations up, expected real returns down, nominal rates upFFR up, central bank balance sheet shrinks, stock prices fall, wealth effect reduces spending

4. 4. According to the lesson, empirically how many months after a federal funds rate change does the peak effect on output typically occur?

   months

5. 5. Why did the Fed's shift from monetary targeting (M1/M2) to federal funds rate targeting in the mid-1980s occur?

   The velocity of money became unstable due to financial innovation, making the relationship between money supply and nominal GDP unreliableCongress mandated the switch in the Federal Reserve Reform ActInterest rates on reserves (IORB) could not be used with monetary targetingMonetarism was disproven and discredited by academic economists