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: 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.
3. 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.
4. 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 market operations are carried out by the Open Market Trading Desk of the Federal Reserve Bank of New York.
5. Answer: B. An automatic stabilizer is a government program whose expenditures automatically fluctuate counter to the economic cycle. In a recession, as unemployment rises, welfare payments automatically increase. This puts money in consumers’ hands exactly when consumer spending is on the decline. Conversely, in boom times, fewer people are on welfare, reducing government expenditures, and reducing the likelihood of the economy becoming overheated.
6. Answer: A. The nomi