Monetary Policy WIN

Which entity of the Federal Reserve is responsible for monetary policy?

• The 12 Federal Reserve Banks

• Congress

• Federal Open Market Committee

• The President of the U.S.

What is the role of the Federal Open Market Committee (FOMC)?

• Conducting monetary policy

• Regulating banks

• Setting fiscal policy

• Managing international trade

When would the Federal Reserve use expansionary monetary policy?

• During a recession

• During inflation

• During both a recession and inflation

• During neither a recession nor inflation

What is the goal of contractionary monetary policy?

• To stimulate the economy

• To control inflation

• To increase government spending

• To reduce taxes

What happens to interest rates during expansionary monetary policy?

• They increase

• They decrease

• They remain unchanged

• It depends on the specific situation

Answer explanation

When interest rates decrease, consumers are more likely to take out loans on things like cars and houses. Businesses will make investments in capital when interest rates decrease. Both of these things will stimulate the economy and put people back to work. The country will get out of a recession!

What is the dual mandate of the Fed?

• To maintain price stability and full employment

• To maximize economic growth

• To minimize income inequality

• To promote international trade

When expansionary policy is used, the goal is to __________ consumer demand.

• increase

• decrease

• maintain

• none of these

Answer explanation

When consumer demand increases, it means that prices will increase. This increase in price will signal to businesses that they need to produce more supply. When producers need to increase production, they will hire more labor...this will put people back to work and stimulate the economy.

Why would the Fed influence interest rates to increase?

• To fight inflation

• To stimulate the economy

• To expand the economy

• To fight a recession

Answer explanation

When inflation occurs, prices are rising in the economy. When the Fed raises interest rates it discourages consumers and businesses from taking out loans. This decrease in demand for goods, services, and capital will cause prices to lower. (Left shift in demand will lower the equilibrium price)