Monetary Policy Flash Cards

If the Federal Reserve wants to lower short-term market interest rates without adjusting the discount rate, which of the following actions is it most likely to take?

Conduct open market purchases of U.S. Treasury securities.

To temporarily reduce short-term interest rates in the market, which of the following actions is the Federal Reserve least likely to use?

Engaging in reverse repurchase agreements with financial institutions.

How can the Federal Reserve lower short-term interest rates without conducting open market operations or changing the discount rate?

Lower the interest rate it pays on reserve balances (IORB).

To assess whether a central bank’s monetary policy stance is expansionary or contractionary, an analyst should compare the policy rate to which of the following?

The neutral real interest rate.

Which of the following best explains why deflation might persist even when a central bank adopts an expansionary monetary policy?

The economy is experiencing a liquidity trap, where increases in the money supply do not stimulate spending.

Following years of near-zero interest rates and repeated rounds of quantitative easing, Japan continued to experience sluggish economic growth and persistent deflation throughout the 1990s and 2000s. Despite aggressive expansionary monetary policies by the Bank of Japan, consumer spending and inflation remained low. Which of the following concepts best explains why Japan’s monetary stimulus failed to eliminate deflation?

Liquidity trap conditions, where monetary policy becomes ineffective due to the public’s preference for holding cash.

Which of the following is the most commonly used monetary policy framework by central banks today?

Targeting a specific inflation rate over the medium term.

After the global financial crisis of 2008, the European Central Bank (ECB) implemented ultra-low interest rates and multiple rounds of asset purchases to stimulate economic activity. However, many Eurozone countries, particularly in the periphery (e.g., Greece, Italy, Spain), continued to struggle with low inflation, weak growth, and high unemployment for years. Which of the following best explains the limited effectiveness of expansionary monetary policy in the Eurozone during this period?

Liquidity trap conditions in parts of the Eurozone, where monetary expansion failed to boost spending.

Which of the following are components of aggregate demand? (Select all that apply.)

Household consumption of goods and services, Business investment in equipment and structures, Government purchases of goods and services, Net exports (exports minus imports)

In response to the 2008 financial crisis, the U.S. Federal Reserve slashed interest rates to near-zero and implemented several rounds of quantitative easing (QE). While financial markets stabilized, inflation remained below the Fed's 2% target for several years, and economic recovery was slow. Which of the following most accurately explains why the Fed’s expansionary monetary policy had limited immediate impact on inflation?

The U.S. was in a liquidity trap, where increased money supply had little effect on aggregate demand.