1.     Briefly define the following terms:

a.    Output gap

b.    Federal funds rate

c.    Open market operation

2.         How does the Fed control the federal funds rate? If the Fed wants to lower the federal funds rate, what will it do?

3.         When will the Fed want to raise the Federal funds rate? What is the ultimate effect on real GDP and the inflation rate from raising the federal funds rate?

4.         Tell the path through which a fall in the federal funds rate affects real GDP and inflation.

5.         What role does the multiplier effect play in monetary policy?

Answer the following multiple choice questions.

6.         An open market purchase of government securities ____ the federal funds rate and ____ the supply of loanable funds.

a.    raises; increases

b.    raises; decreases

c.    lowers; increases

d.    lowers; decreases

7.         When the Fed raises the federal funds rate, consumption expenditure ____, investment ____, and aggregate demand ____.

a.    increases; increases; increases

b.    increases; decreases; changes but whether it increases or decreases is uncertain

c.    decreases; increases; decreases

d.    decreases; decreases; decreases

8.         If the Fed is concerned about a recession, the Fed will

a.    buy government securities, lower the federal funds rate, and increase aggregate supply.

b.    sell government securities, lower the federal funds rate, and increase aggregate demand.

c.    sell government securities, raise the federal funds rate, and increase aggregate demand.

d.    buy government securities, lower the federal funds rate, and increase aggregate demand.