Title: QUIZ: The Fed’s New Monetary Policy Tools Module
Course: Recommended Resources for AP Macro from FRE > Section: Unit 4: Financial Sector

Q: Assume economic growth is very strong and the inflation rate rises above the Fed’s price stability goal. Which of the following would best describe an appropriate policy implementation?
- Use open market operations to decrease the level of reserves in the banking system.
- Lower the interest on reserve balances rate, ON RRP offering rate, and discount rate.
- Raise the interest on reserve balances rate and discount rate and lower the ON RRP offering rate.
- Raise the interest on reserve balances rate, ON RRP offering rate, and discount rate.
A: Raise the interest on reserve balances rate, ON RRP offering rate, and discount rate.
If right: That’s correct!
If wrong: That’s incorrect. If economic growth is very strong and the inflation rate rises above the Fed’s price stability goal, it is best to raise the interest on reserve balances rate, ON RRP offering rate, and discount rate.

Q: Which of the following best describes how the FOMC conducts monetary policy to increase employment during a recession to achieve its maximum employment objective?
- It increases the target range for the federal funds rate.
- It decreases the target range for the federal funds rate.
- It sells Treasury securities in the open market to decrease the federal funds rate.
- It buys Treasury securities in the open market to increase the federal funds rate.
A: It decreases the target range for the federal funds rate.
If right: That’s correct!
If wrong: That’s incorrect. The FOMC decreases the target range for the federal funds rate to increase employment during a recession.

Q: Which monetary policy tool is the Federal Reserve using when it buys and sells government securities to ensure that the level of reserves remains ample?
- ON RRP facility
- Interest on reserve balances
- Open market operations
- Discount rate
A: Open market operations
If right: That’s correct!
If wrong: That’s incorrect. Open market operations is the monetary policy tool the Federal Reserve uses when it buys and sells government securities to ensure that the level of reserves remains ample.

Q: What are the Fed’s dual mandate goals?
- Maximum employment and price stability
- Low unemployment and high inflation
- Economic growth and low interest rates
- Rising stock market values and low interest rates
A: Maximum employment and price stability
If right: That’s correct!
If wrong: That’s incorrect. Maximum employment and price stability are the Fed's dual mandate goals.

Q: Which of the following best describes how arbitrage makes interest on reserve balances an effective tool?
- If the federal funds rate falls far below the interest on reserve balances rate, banks will borrow at the federal funds rate and deposit the funds at the Fed to earn the interest on reserve balances rate and earn a profit. Many banks will seize on this opportunity, which will raise the federal funds rate.
- If the ON RRP offering rate falls far below the interest on reserve balances rate, banks will borrow at the ON RRP offering rate and deposit at the interest on reserve balances rate to earn a profit. Many banks will seize on this opportunity, which will raise the ON RRP offering rate.
- If the discount rate rises far above the interest on reserve balances rate, banks will borrow at the discount rate and deposit at the interest on reserve balances rate to earn a profit. Many banks will seize on this opportunity, which will raise the discount rate.
- If the discount rate rises far above the interest on reserve balances rate, banks will borrow at the interest on reserve balances rate and deposit at the discount rate to earn a profit. Many banks will seize on this opportunity, which will raise the discount rate.
A: If the federal funds rate falls far below the interest on reserve balances rate, banks will borrow at the federal funds rate and deposit the funds at the Fed to earn the interest on reserve balances rate and earn a profit. Many banks will seize on this opportunity, which will raise the federal funds rate.
If right: That’s correct!
If wrong: That’s incorrect. Arbitrage makes interest on reserve balances an effective tool because if the federal funds rate falls far below the interest on reserve balances rate, banks will borrow at the federal funds rate and deposit the funds at the Fed to earn the interest on reserve balances rate and earn a profit. Many banks will seize on this opportunity, which will raise the federal funds rate.

Q: Assume the economy starts to weaken and the FOMC determines that employment is falling short of maximum employment. Which of the following would best describe an appropriate policy implementation?
- Raise the interest on reserve balances rate, ON RRP offering rate, and discount rate.
- Use open market operations to decrease the level of reserves in the banking system.
- Lower the interest on reserve balances rate, ON RRP offering rate, and discount rate.
- Lower the interest on reserve balances rate and discount rate and raise the ON RRP offering rate.
A: Lower the interest on reserve balances rate, ON RRP offering rate, and discount rate.
If right: That’s correct!
If wrong: That’s incorrect. If the economy starts to weaken, the appropriate policy implementation is to lower the interest on reserve balances rate, ON RRP offering rate, and discount rate.

Q: Which monetary policy tool serves as a ceiling for the federal funds rate?
- Open market operations
- Interest on reserve balances
- ON RRP offering facility
- Discount rate
A: Discount rate
If right: That’s correct!
If wrong: That’s incorrect. The discount rate serves as a ceiling for the federal funds rate.

Q: How does increasing the federal funds rate affect the economy?
- A higher federal funds rate discourages consumer spending and reduces business investment.
- A higher federal funds rate encourages consumer spending and increases business investment.
- A higher federal funds rate results in a higher return for investors, which encourages spending and investment.
- A higher federal funds rate results in a stronger dollar, which decreases the trade deficit.
A: A higher federal funds rate discourages consumer spending and reduces business investment.
If right: That’s correct!
If wrong: That’s incorrect. Increasing the federal funds rate affects the economy by discouraging consumer spending and reducing business investment.

Q: Which of the following best describes the Fed’s price stability goal?
- Prices that on average do not change; an inflation rate of zero
- An inflation rate that does not exceed 2 percent
- Inflation that averages 2 percent over time
- Inflation that averages between 3 and 5 percent over time
A: Inflation that averages 2 percent over time
If right: That’s correct!
If wrong: That’s incorrect. Inflation that averages 2 percent over time is the Fed’s price stability goal.

Q: Which of the following best describes the Fed’s maximum employment goal?
- Unemployment that averages 4 percent over time
- Unemployment that averages 5 percent over time
- Unemployment that averages 6 percent over time
- Highest level of employment than can be sustained with 2 percent inflation
A: Highest level of employment than can be sustained with 2 percent inflation
If right: That’s correct!
If wrong: That’s incorrect. The Fed’s maximum employment goal is the highest level of employment that can be sustained with 2 percent inflation.

Q: Which monetary policy tool is a supplementary tool that sets a floor for the federal funds rate?
- Open market operations
- Interest on reserve balances
- ON RRP facility
- Discount rate
A: ON RRP facility
If right: That’s correct!
If wrong: That’s incorrect. ON RRP facility is the supplementary tool that sets a floor for the federal funds rate.

Q: When the FOMC conducts monetary policy, it sets the target range for the
- interest on reserve balances (IORB) rate.
- ON RRP offering rate.
- amount of open market operations.
- federal funds rate.
A: federal funds rate.
If right: That’s correct!
If wrong: That’s incorrect. When the FOMC conducts monetary policy, it sets the target range for the federal funds rate.

Q: Which monetary policy tool is the primary tool the Fed uses to adjust the federal funds rate?
- Open market operations
- Interest on reserve balances (IORB)
- ON RRP facility
- Discount rate
A: Interest on reserve balances (IORB)
If right: That’s correct!
If wrong: That’s incorrect. Interest on reserve balances (IORB) is the primary tool the Fed uses to adjust the federal funds rate.

Q: Which of the following best describes how interest on reserve balances serves as a reservation rate?
- It is a risk-free option because banks should not be willing to lend their funds for less than the interest on reserve balances rate.
- The Fed offers several interest rates; banks will choose the highest rate, which is the interest on reserve balances rate.
- The interest on reserve balances rate is set below the federal funds rate; banks will borrow at the interest on reserve balances rate and deposit at the federal funds rate, which will raise the interest on reserve balances rate.
- It is a risk-free option because banks will always seek a higher return elsewhere.
A: It is a risk-free option because banks should not be willing to lend their funds for less than the interest on reserve balances rate.
If right: That’s correct!
If wrong: That’s incorrect. Interest on reserve balances serves as a reservation rate because banks should not be willing to lend their funds for less than the interest on reserve balances rate.