1. Why is it important for the Federal Reserve Board to be independent of the executive branch of the federal government?

2. When the interest rate falls, why do people desire higher money balances?

3. Describe how open market operations alter the supply of money.

4. What does the equation of exchange, M × V = P × Q, help to explain?

5. How is the impact of expansionary monetary policy different when the economy is considerably below full employment than when it is at full employment?

6. How do sticky wages and prices make monetary policy effective in the short run?

7. Suppose a rise in consumer confidence causes aggregate demand to increase, resulting in a short-run equilibrium that is above full employment output. What type of monetary policy might the Fed use to reduce inflationary pressures and to bring the economy back to full employment?

8. It seems that each time the Fed raises interest rates, the stock market has an awful few days. Why do higher interest rates have such an impact on the stock market?

9. If the Fed persistently pursues an easy money policy, what is the likely outcome?

10. When NASA scientists were operating the Mars rovers to get them to drive across the Martian landscape and collect and analyze rocks and crevices, the scientists complained that the 20-minute delay between when they issued a command and when the rovers responded made their job more challenging. Isn’t this somewhat similar to what monetary policymakers face? How is it different?

11. Suppose a devastating drought leads to higher food prices, causing a negative supply shock to occur. What type of monetary policy should the Fed use if the goal is to maintain price stability in the economy? What are the consequences of doing so?

12. Explain how the housing bubble at the beginning of the 21st century led to the Taylor rule target exceeding the actual federal funds rate. Could increasing the federal funds rate during this time have helped to reduce the severity of the last recession?

Does this quote illustrate the short-run versus the long-run aspects of monetary policy? Why or why not?

14. In 2016 Greece faced another set of hurdles in its ongoing saga of managing its debt. In order for Greece to maintain its obligations under the IMF and European Central Bank bailout packages, it must continue to cut government spending, particularly pensions that have put a strain on the budget. Greece’s leaders, meanwhile, have argued that the required spending cuts will push the economy back into recession. Using an AD/AS model, show what the required budget cuts might do to an economy that is still experiencing slow growth.

15. Why are supply shocks so much harder than demand shocks for monetary policy to adjust? Use the grid below to show your answer to this question.

16. In 2012 U.S. inflation was 2.1% and output was 4.8% below its long-run potential. Three years later, in 2015, U.S. inflation fell to 0.4% due to falling energy prices, and output improved to 1.8% below its long-run potential.

17. According to By the Numbers, what were the approximate interest rates for the following types of loans in December 2015: federal funds rate, discount rate, prime rate, 30-year mortgage rate? Why aren’t these interest rates all the same?

18. According to By the Numbers, in what region outside of the United States is the largest percentage of U.S. $100 bills in circulation held? Why is the answer not China, which holds the most U.S. debt?