Answers to questions can be found in the answers section.

1. The key goal of a central bank is

a. zero unemployment.

b. zero inflation.

c. price stability.

d. exchange rate stability.

2. This key goal might be compromised by policies designed to

a. reduce unemployment.

b. attain potential output.

c. depreciate one’s currency.

d. All of the above.

3. The most important policymaking arm of the Fed is the

a. FOMC.

b. discount window.

c. federal funds window.

d. FDIC.

4. The most important policy tool used by the Fed is

a. the discount rate.

b. open market operations.

c. the reserve requirement.

d. a helicopter.

5. An open market sale is designed to lead to a/an _______ in the fed funds rate.

a. increase

b. decrease

c. interpolation

d. abolishment

6. An open market purchase _______ money into/from the economy.

a. withdraws

b. injects

c. reduces

d. destroys

7. An open market sale would be used to

a. increase aggregate demand.

b. decrease aggregate demand.

c. increase inflation.

d. stimulate economic growth.

8. What happens if the Fed keeps policy unchanged at a time when people come to expect a sharp decline in the domestic price level?

a. Real interest rates rise.

b. Real interest rates fall.

c. Real interest rates are unaffected.

d. Real interest rates are unreal.

9. Start with an economy in recession.  The Fed decides to stimulate aggregate demand.  At the same time, unknown to the Fed, spending begins to pick-up on its own.  This suggests the possibility of

a. too much AD stimulus and deflation.

b. too much AD stimulus and inflation.

c. too little AD stimulus and deflation.

d. too little AD stimulus and inflation.

10. Suppose the Fed wants to stimulate aggregate demand and successfully reduces the fed funds rate at the same time that people come to forecast much higher inflation beginning two years hence.  This will likely mean that

a. long-term rates will fall in line with short-term rates

b. long-term rates will fall relative to short-term rates.

c. the Fed’s actions will be more successful.

d. the Fed’s actions will be less successful.

11. If inflation is under control but the unemployment rate begins to rise too much, a central bank might do which of the following.

a. raise the discount rate

b. raise the reserve requirement

c. sell government bonds

d. buy government bonds

12. The fed funds rate is the interest rate

a. the Fed charges to the government.

b. the Fed charges to commercial banks.

c. commercial banks charge each other.

d. commercial banks charge to their best corporate customers.

13. The term structure of interest rates shows the relationship between

a. prices and output.

b. interest rates on assets of varying maturities.

c. interest rates on foreign versus domestic assets.

d. interest rates on private versus government bonds.

14. A central bank is independent if

a. it serves as the banker for the federal government.

b. it uses discretion rather than rules.

c. it has the ability to create and destroy money.

d. it makes decisions without the influence of the government