Chapter 6 Practice Question Answers
- 1. Answer: D. The federal funds rate refers to the rate that banks charge each other for short-term loans.
- 2. Answer: B. Yield curves are graphs that illustrate the relationship between bonds’ maturities on the x-axis and their yields on the y-axis.
- 3. Answer: A. An inverted yield curve occurs when long-term interest rates are lower than short-term rates. This usually comes from an expectation that interest rates are going to fall. As a result, investors want to lock into long-term-bonds. This raises the demand for long-term bonds, which causes their price to rise and their yield to go down. An inverted yield curve can also be an indicator of the beginning of a recession.
- 4. Answer: C. Federal fiscal and monetary policy can affect the direction of the economy. During a recession, the federal government will often try to stimulate the economy by using fiscal policy to increase consumer spending. This fiscal policy may include either lowering taxes to give consumers more money to spend or increasing government expenditures (e.g., providing unemployment insurance, welfare benefits, etc.) to provide more jobs and services for consumers. Monetary policy may include buying treasury bonds to put more money into the economy or lowering interest rates to provide more available credit.
- 5. Answer: D. The Fed uses three tools to implement monetary policy: open market operations, discount window lending, and altering the reserve requirements. Changing the capital gains rate is not a tool of the Fed but a tool of Congress and the executive branch, which may implement fiscal policy by changing the tax code.
- 6. Answer: C. The Federal Open Market Committee (FOMC) is the group that makes monetary policy for the Federal Reserve System. It consists of the 7 members of the Board of governors and the presidents of the 12 Federal Reserve Banks. The FOMC typically meets in Washington, D.C., eight times per year. Open