Chapter 27 — Quiz

Multiple choice

Q1. The Fed's primary policy tool is: a) Taxes b) The federal funds rate c) Government spending d) Trade policy

Q2. Open market operations involve the Fed: a) Setting tax rates b) Buying or selling government bonds to affect reserves and interest rates c) Printing money d) Regulating banks

Q3. The transmission mechanism of monetary policy goes: a) Rate → taxes → spending b) Rate → borrowing → spending → output → employment → inflation c) Rate → imports → GDP d) Rate → wages → inflation

Q4. QE is used when: a) Inflation is too high b) Interest rates are at the zero lower bound and can't be cut further c) Banks have too many reserves d) The economy is overheating

Q5. The Taylor Rule relates the federal funds rate to: a) GDP and trade balance b) Inflation and the output gap c) M2 and velocity d) Government spending and taxes

Q6. Forward guidance works by: a) Regulating banks b) Shaping expectations about future policy, which affects current economic decisions c) Printing money d) Controlling imports

Q7. The 2022–23 rate hike cycle: a) Caused a deep recession b) Failed to reduce inflation c) Achieved a "soft landing" — inflation fell without a recession d) Had no effect

Q8. The full effect of a rate change on inflation takes approximately: a) 1 month b) 6 months c) 18–24 months d) 10 years

Q9. "Rules vs. discretion" in monetary policy refers to: a) Whether the Fed should follow a formula or use judgment b) Whether interest rates should be positive or negative c) Whether to use fiscal or monetary policy d) Whether to target inflation or employment

Q10. QE primarily works by: a) Raising short-term rates b) Pushing down long-term interest rates through large-scale asset purchases c) Increasing taxes d) Reducing government spending

Short answer

SA1. Name four tools the Fed uses. SA2. Trace the transmission mechanism in one paragraph. SA3. What is the Taylor Rule and why is it useful? SA4. Why was the 2022–23 soft landing considered remarkable? SA5. What is forward guidance and how does it work?

True / False

TF1. The Fed can always cut interest rates to stimulate the economy. (True / False) TF2. QE involves the Fed buying government bonds. (True / False) TF3. The full effect of monetary policy is felt within a few weeks. (True / False) TF4. The Taylor Rule requires the Fed to set rates mechanically. (True / False) TF5. The Fed achieved a soft landing in 2022–24. (True / False)

Selected answers in appendices/answers-to-selected.md.