CBE Monetary Policy 2

Question 1

Which monetary policy tool involves the Fed buying or selling government securities in the open market?

Accepted Answer

Open market operations

Answer

Open market operations are the Fed's primary tool, where it buys or sells Treasury securities to expand or contract the money supply.

Question 2

When the Fed purchases Treasury securities, what is the immediate effect on bank reserves?

Accepted Answer

Reserves increase, expanding credit capacity

Answer

Fed purchases inject reserves into the banking system, increasing banks' capacity to extend loans and expand the money supply.

Question 3

The Taylor Rule suggests that the federal funds rate should rise when:

Accepted Answer

Inflation exceeds its target or output exceeds potential

Answer

The Taylor Rule prescribes higher rates when inflation is above target or when output (real GDP) exceeds its potential level.

Question 4

Quantitative easing (QE) differs from conventional monetary policy primarily because QE:

Accepted Answer

Involves purchasing longer-term assets to lower long-term yields

Answer

QE targets long-term interest rates by purchasing longer-dated securities (e.g., MBS, 10-year Treasuries) when short-term rates are already near zero.

Question 5

The 'zero lower bound' (ZLB) problem means that:

Accepted Answer

Nominal interest rates cannot fall significantly below zero, limiting conventional stimulus

Answer

Nominal interest rates face a practical floor near zero because savers can hold cash, constraining the Fed's ability to use conventional rate cuts.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Monetary Policy 2