Chapter 7 Conduct of Monetary Policy: Tools, Goals, and Targets 7.

1 Multiple Choice
1) An open market purchase of securities by the Fed will A) increase assets of the nonbank public and increase assets of the banking system. B) decrease assets of the nonbank public and increase assets of the Fed. C) decrease assets of the banking system and increase assets of the Fed. D) have no effect on assets of the nonbank public but increase assets of the Fed. E) increase assets of the banking system and decrease assets of the Fed. Answer: D 2) An open market sale of securities by the Fed will A) decrease liabilities of the Fed and decrease assets of the banking system. B) decrease assets of the nonbank public and decrease assets of the Fed. C) increase liabilities of the banking system and increase assets of the Fed. D) have no effect on assets of the nonbank public but increase liabilities of the Fed. E) decrease assets of the banking system and increase assets of the Fed. Answer: A 3) If the Federal Reserve wants to expand reserves in the banking system, it will A) purchase government securities. B) lower the discount rate. C) sell government securities. D) raise reserve requirements. Answer: A 4) If the Federal Reserve wants to lower the monetary base and the money supply, it will A) purchase government securities. B) raise the discount rate. C) sell government securities. D) lower reserve requirements. Answer: C 5) A discount loan by the Fed to a bank causes A) an increase in reserves in the banking system and a decrease in the monetary base. B) a decrease in reserves at the Fed and a decrease in the monetary base. C) a decrease in reserves in the banking system and a decrease in the monetary base. D) an increase in reserves in the banking system and an increase in the monetary base. Answer: D

6) When a bank repays a discount loan to the Fed, there is A) an increase in reserves in the banking system and a decrease in the monetary base. B) a decrease in reserves at the Fed and a decrease in the monetary base. C) an increase in reserves in the banking system and an increase in the monetary base. D) an increase in reserves at the Fed and an increase in the monetary base. Answer: B 7) The federal funds rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government. Answer: C 8) The discount rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government. Answer: A 9) Holding everything else constant, if the federal funds rate rises, then A) the demand for excess reserves rises because they have a higher return. B) the demand for excess reserves falls because they have a higher cost. C) the demand for required reserves rises because the cost of borrowing from the Fed is relatively lower. D) the demand for required reserves falls because the cost of borrowing from the Fed is relatively higher. E) demand for reserves will not change because the Fed sets the level of required reserves. Answer: B 10) Holding everything else constant, if the federal funds rate falls, then A) the supply of required reserves rises because the cost of borrowing from the Fed is relatively lower. B) the supply of required reserves falls because the cost of borrowing from the Fed is relatively higher. C) the supply of excess reserves falls because they have a lower return. D) the supply of excess reserves rises because they have a lower cost. E) the supply of reserves will not change because the Fed sets the level of required reserves. Answer: C

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11) An open market purchase A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall. Answer: A 12) The supply curve for reserves shifts to the left and the federal funds rate rises when A) the Fed raises reserves requirements or does an open market sale. B) the Fed raises the discount rate or does an open market purchase. C) the Fed raises the discount rate or does an open market sale. D) the Fed raises reserves requirements or raises the discount rate. Answer: C 13) The demand curve for reserves shifts to the left and the federal funds rate falls when A) the Fed decreases reserve requirements or does an open market purchase. B) the Fed lowers the discount rate. C) the Fed lowers the discount rate or does an open market purchase. D) the Fed decreases reserves requirements. E) the Fed does an open market sale. Answer: D 14) The actual execution of open market operations is done at A) the Board of Governors in Washington, D.C. B) the Federal Reserve Bank of New York. C) the Federal Reserve Bank of Philadelphia. D) the Federal Reserve Bank of Boston. Answer: B 15) The Federal Open Market Committee makes the Feds decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of A) Chicago. B) Boston. C) New York. D) San Francisco. Answer: C

16) An open market transaction intended to change the level of bank reserves is a A) repurchase agreement. B) reverse repo. C) dynamic operation. D) defensive operation. Answer: C 17) If the Federal Reserve wants to drain reserves from the banking system, it will A) purchase government securities. B) lower the discount rate. C) sell government securities. D) raise reserve requirements. Answer: C 18) The Federal Reserve will engage in an outright purchase if it wants to _____ reserves _____ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently Answer: A 19) If the Fed wants to temporarily drain reserves from the banking system, it will engage in A) a repurchase agreement. B) a matched sale-purchase transaction. C) a pump agreement. D) none of the above. Answer: B 20) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to _____ reserves _____ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently Answer: C 21) The major loan extended to Continental Illinois in 1984 is an example of which type of discount loan? A) Seasonal credit B) Extended credit C) Adjustment credit D) Installment credit Answer: B

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22) The most common type of discount loan that the Fed extends to banks is called A) seasonal credit. B) extended credit. C) adjustment credit. D) installment credit. Answer: C 23) The most common type of discount loan, _____ credit loans, are intended to help banks with _____-term liquidity problems that often result from _____ deposit outflows. A) extended; short; temporary B) adjustment; short; temporary C) extended; long; permanent D) seasonal; long; permanent Answer: B 24) A bank faces three costs when it borrows from the discount window: A) the interest cost; the cost of complying with Fed investigations of the soundness of the bank; the cost of being turned down for a discount loan in the future. B) the interest cost; the administrative cost to the bank; the cost of being turned down for a discount loan in the future. C) the interest cost; the origination fee charged by the Fed; the administrative cost to the bank. D) only (A) and (B) of the above. Answer: A 25) A financial panic was averted in October 1987 following Black Monday when the Fed announced that A) it was lowering the discount rate on extended credit. B) it would provide discount loans to any bank that would make loans to the security industry. C) it stood ready to purchase common stocks to prevent a further slide in stock prices. D) all of the above. Answer: B 26) Discount policy A) can be used to signal the Feds intentions about future monetary policy. B) can be important in preventing financial panics. C) is the Feds preferred method for changing the level of reserves in the banking system. D) all of the above. E) only (A) and (B) of the above. Answer: E

27) Disadvantages of discount policy include A) the confusion concerning the Feds intentions about future monetary policy because of the uncertainty about what a change in the discount rate is intended to signal. B) large fluctuations in the money supply from even small changes in the discount rate. C) its powerful effect, when compared to open market operations, on the monetary base. D) only (A) and (B) of the above. Answer: A 28) Disadvantages of using reserve requirements to control the money supply include A) their overly-powerful impact on the money supply. B) creating potential liquidity problems for banks with high levels of excess reserves. C) their overly-powerful impact on the monetary base. D) all of the above. Answer: A 29) The Fed is reluctant to use reserve requirements to control the money supply because A) of their overly-powerful impact on the money supply. B) they have the potential to create liquidity problems for banks with low excess reserves. C) frequent changes in reserve requirements complicate liquidity management for banks. D) of all of the above. E) of only (A) and (B) of the above. Answer: D 30) When the Federal Reserve was created, its most important role was intended to be as A) a storage facility for the nations gold. B) a lender-of-last-resort. C) a regulator of bank holding companies. D) none of the above. Answer: B 31) At its inception, the Federal Reserve was intended to be A) the Treasurys banker. B) the issuer of government debt. C) a lender-of-last-resort. D) a regulator of bank holding companies. Answer: C

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32) Changes in the reserve requirement are an infrequently used monetary policy tool since A) this tool is too blunt. B) this tool is too weak. C) banks find it costly to adjust to such changes. D) both (A) and (C) of the above are true. Answer: D 33) Open market operations as a monetary policy tool have the advantage that A) they are flexible and precise. B) they are easily reversed if mistakes are made. C) they can be implemented quickly without administrative delays. D) all of the above. E) only (A) and (B) of the above. Answer: D 34) What actions did the Fed take following the terrorist attacks of September 11, 2001? A) It increased discount lending and conducted open market purchases to meet the liquidity needs of the financial system. B) It decreased discount lending and conducted open market sales to meet the liquidity needs of the financial system. C) It suspended monetary policy actions so as to avoid taking hasty actions which might ultimately prove to be unwise. D) It reduced its monetary liabilities in order to stabilize the financial system. Answer: A 35) Price stability is desirable because A) inflation creates uncertainty, making it difficult to plan for the future. B) everyone is better off when prices are stable. C) price stability increases the profitability of the Fed. D) it guarantees full employment. Answer: A 36) The Federal Reserve desires interest rate stability because A) it allows for less uncertainty about future planning. B) interest rate volatility often leads to demands to curtail the Feds power. C) it guarantees full employment. D) of both (A) and (B) of the above. Answer: D 37) When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment. Answer: B 95

38) When there is a mismatch between job requirements and the skills of available workers, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment. Answer: A 39) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) frictional level of unemployment. B) structural level of unemployment. C) natural rate level of unemployment. D) ideal level of unemployment. Answer: C 40) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest. B) encouraging people to save. C) doing both (A) and (B) of the above. D) doing neither (A) nor (B) of the above. Answer: C 41) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest and people to save. B) encouraging firms to limit their price increases and people to consume. C) doing both (A) and (B) of the above. D) doing neither (A) nor (B) of the above. Answer: A 42) The Feds game plan can be described as follows: A) The Fed uses its policy tools to adjust intermediate targets that directly impact its operating targets in a way that allows the Fed to achieve its goals. B) The Fed uses its policy tools to adjust operating targets that directly impact its intermediate targets in a way that allows the Fed to achieve its goals. C) The Fed uses its operating targets to adjust its intermediate targets that directly impact its policy tools in a way that allows the Fed to achieve its goals. D) none of the above. Answer: B

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43) If the Feds strategy for conducting monetary policy is thought of as a game plan that proceeds in stages, then the game plan can be summarized as follows: A) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets. Finally, it adjusts its policy tools to effect the desired targets and goals. B) The Fed selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy tools to effect the desired targets and goals. C) The Fed selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy tools to effect the desired targets and goals. D) The Fed selects its policy tools, then the operating targets consistent with achieving its policy tools, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy goals to effect the desired targets and tools. E) none of the above. Answer: A 44) An advantage of an intermediate targeting strategy is that it provides the Fed with A) more timely information regarding the effect of monetary policy. B) a slow adjustment process. C) a target that is precisely correlated with economic activity. D) all of the above. E) only (A) and (B) of the above. Answer: A 45) Which of the following is not a requirement in selecting an intermediate target? A) measurability B) controllability C) flexibility D) predictability Answer: C 46) Which of the following is a potential operating target for the Fed? A) The monetary base B) The M1 money supply C) Nominal GNP D) The discount rate Answer: A

47) Which of the following is a potential operating target for the Fed? A) Nonborrowed reserves B) The federal funds rate C) The monetary base D) All of the above Answer: D 48) Which of the following is not an operating target? A) Nonborrowed reserves B) Monetary base C) Federal funds interest rate D) Discount rate E) All are operating targets. Answer: D 49) When it comes to choosing an operating target, both the _____ rate and _____ aggregates are easily controllable using the Feds policy tools. A) federal funds; monetary B) federal funds; reserve C) three-month T-bill; monetary D) thirty-year T-bond; reserve Answer: B 50) If the desired intermediate target is an interest rate, then the preferred operating target will be a(n) _____ variable like the _____ A) interest rate; three-month T-bill rate. B) interest rate; federal funds rate. C) monetary aggregate; monetary base. D) monetary aggregate; non-borrowed base. Answer: B 51) If the desired intermediate target is a monetary aggregate, then the preferred operating target will be a(n) _____ variable like the _____ A) interest rate; three-month T-bill rate. B) interest rate; federal funds rate. C) reserve aggregate; monetary base. D) reserve aggregate; narrow money supply M1. Answer: C 52) If the Fed focuses on a money supply target, fluctuations of money demand will cause the ______ to fluctuate. A) money supply B) interest rate C) unemployment rate D) inflation rate Answer: B 98

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53) If the Fed focuses on an interest rate target, fluctuations of money demand will cause the ______ to fluctuate. A) money supply B) interest rate C) unemployment rate D) inflation rate Answer: A 54) The policy that meant the Fed would make loans to member commercial banks whenever they showed up at the discount window with eligible paper was known as A) free reserves targeting. B) the real bills doctrine. C) nonborrowed reserves targeting. D) leaning against the wind. Answer: B 55) The real bills doctrine was the guiding principle for the conduct of monetary policy during the A) 1910s. B) 1940s. C) 1950s. D) 1960s. Answer: A 56) By the end of World War I, the Feds policies of rediscounting eligible paper and keeping interest rates low led to A) accelerating inflation. B) stable prices and strong economic growth, as predicted by the real bills doctrine. C) recession as reserves were steadily drained from the banking system. D) none of the above. Answer: A 57) The Feds operating strategy that led to double-digit inflation following the end of World War I was known as A) the free reserves policy. B) the federal-funds targeting strategy. C) the real bills doctrine. D) pegging the money supply. Answer: C 58) The Fed accidentally discovered open market operations in the early A) 1920s. B) 1910s. C) 1900s. D) 1890s. Answer: A 99

59) The Fed accidentally discovered open market operations when A) it came to the rescue of failing banks in the early 1930s and found that its purchases of bank loans injected reserves into the banking system. B) it purchased securities for income following the 1920-1921 recession. C) it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system. D) it reinterpreted a key provision of the Federal Reserve Act. Answer: B 60) In the 1930s, the Fed A) failed to perform its role as lender of last resort. B) raised reserve requirements in three steps in 1936-37. C) was given broad authority over reserve requirements. D) all of the above. E) only (A) and (B) of the above. Answer: D 61) In the 1930s, the Fed A) did not have enough power to perform the role of lender of last resort. B) raised reserve requirements in three steps in 1936-37. C) was given less authority over reserve requirements. D) all of the above. E) only (A) and (B) of the above. Answer: B 62) During World War II, whenever interest rates would rise and the price of bonds would begin to fall, the Fed would A) lower reserve requirements. B) raise reserve requirements. C) make open market purchases of government securities. D) make open market sales of government securities. Answer: C 63) During World War II, the Fed in effect relinquished its control of monetary policy through its policy of A) continually lowering reserve requirements. B) continually raising reserve requirements. C) pegging interest rates. D) targeting free reserves. Answer: C

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64) Under the free reserves monetary policy of the 1950s and 1960s, the Fed interpreted an increase in free reserves as A) an easing of money market conditions requiring open market sales to withdraw reserves from the banking system. B) an easing of money market conditions requiring open market sales to inject reserves into the banking system. C) a tightening of money market conditions requiring open market sales to withdraw reserves from the banking system. D) a tightening of money market conditions requiring open market purchases to inject reserves into the banking system. Answer: A 65) During the 1950s and 1960s, the Fed considered free reserves to be a particularly good indicator of money market conditions because it thought that free reserves A) represented the amount of slack in the banking system. B) represented the amount of reserves that could be expected to be used to make loans and create deposits. C) would never be lent by banks. D) represented both (A) and (B) of the above. E) represented both (A) and (C) of the above. Answer: D 66) Under the free reserves monetary policy of the 1950s and 1960s, the Fed interpreted an increase in free reserves as a(n) _____ of money market conditions requiring open market _____ to withdraw reserves from the banking system. A) tightening; purchases B) easing; purchases C) tightening; sales D) easing; sales Answer: D 67) Under the free reserves monetary policy of the 1950s and 1960s, the Fed interpreted a decrease in free reserves as a(n) _____ of money market conditions requiring open market _____ to inject reserves into the banking system. A) tightening; purchases B) easing; purchases C) tightening; sales D) easing; sales Answer: A 68) A procyclical monetary policy causes the money supply to ______ during recessions and to ______ when the economy is growing. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase Answer: D 101

69) A policy of targeting free reserves is likely to prove to be A) procyclical. B) stabilizing. C) too difficult to implement practically. D) none of the above. Answer: A 70) In practice, the Feds policy of targeting _____ in the 1960s proved to be _____, destabilizing the economy. A) money market conditions; countercyclical B) money market conditions; procyclical C) monetary aggregates; countercyclical D) monetary aggregates; procyclical Answer: B 71) Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasized A) free reserve targeting. B) interest rate targeting. C) a real bills doctrine. D) price index targeting. Answer: B 72) The Feds use of the federal funds rate as an operating target in the 1970s resulted in A) countercyclical monetary policy. B) too slow growth in M1 throughout the decade. C) procyclical monetary policy. D) too rapid growth in M1 throughout the decade. E) none of the above. Answer: C 73) The Feds operating procedures employed between 1979 and 1982 resulted in _____ swings in the federal funds rate and _____ swings in the M1 growth rate. A) increased; increased B) increased; decreased C) decreased; decreased D) decreased; increased Answer: A 74) Explanations for the Feds poor monetary control during 1979-1982 include A) the acceleration of financial deregulation. B) the suspension of credit controls in mid-1979. C) the Feds desire to fight inflation without taking all the criticism for the high interest rate policy. D) only (A) and (B) of the above. E) only (A) and (C) of the above. Answer: E 102

75) The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed A) had shifted to borrowed reserves as an operating target. B) had shifted to nonborrowed reserves as an operating target. C) had shifted to the monetary base as an operating target. D) never intended to target monetary aggregates. Answer: D 76) The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed A) never intended to target monetary aggregates. B) used the announced strategy of targeting nonborrowed reserves as a smoke screen to fight inflation. C) had shifted to the monetary base as an operating target. D) both (A) and (B) of the above. Answer: D 77) Fed policy since 1982 suggests A) that it is finally using a monetary aggregate as its intermediate target. B) that it is less concerned with fluctuations in the federal funds rate than in the 1979-1982 period. C) that it is more concerned with exchange rates than with interest rates. D) none of the above. Answer: D 78) Fed policy since 1982 suggests that A) monetary aggregates continue to be rejected as its intermediate target. B) it is pursuing a policy of interest rate smoothing. C) it is now more concerned with exchange rates than with interest rates. D) all of the above are true. E) only (A) and (B) of the above are true. Answer: E 79) By 1985, the strength of the dollar had caused a deterioration in American competitiveness with foreign businesses. In response, the Fed A) increased money growth to lower the value of the dollar. B) decreased money growth to lower the value of the dollar. C) increased money growth to raise the value of the dollar. D) decreased money growth to raise the value of the dollar. Answer: A

80) By 1985, the strength of the dollar had caused a deterioration in American competitiveness with foreign businesses. In response, the Fed _____ money growth to _____ the value of the dollar. A) increased; raise B) increased; lower C) decreased; raise D) decreased; lower Answer: B 81) During the period 1985-87, the actions of monetary policy authorities indicate that they were most directly concerned with A) stabilizing interest rates, even at the expense of losing control of monetary aggregates. B) eliminating even moderate inflation. C) lowering the value of the dollar. D) none of the above. Answer: C 82) Volatile fluctuations in money supply growth in the United Kingdom in the 1970s suggest that the Bank of England A) did not pursue its M3 monetary target seriously. B) did not pursue its M1 monetary target seriously. C) used the announced strategy of targeting the federal funds rate as a smoke screen to fight inflation. D) did both (A) and (C) of the above. E) did both (B) and (C) of the above. Answer: A 83) The Canadian experience with monetary policy during the 1970s and 1980s closely parallels that of the United States in which respects? A) The Canadian central bank announced a strategy of targeting a monetary aggregate in the 1970s. B) The Canadian central bank abandoned its monetary targeting strategy because of exchange rate concerns. C) The Canadian central banks announced strategy of targeting money was merely a smoke screen to fight inflation. D) All of the above. E) Only (A) and (B) of the above. Answer: E

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84) The German Bundesbank experience with monetary policy during the 1970s and 1980s is similar to that of Canadas central bank in which respects? A) Both the German and Canadian central banks announced strategies to target monetary aggregates in the 1970s. B) Both the German and Canadian central banks were willing to abandon monetary targeting due to exchange rate concerns. C) Although the Canadian central bank abandoned its monetary targeting strategy permanently, the Bundesbank has continued to target money. D) All of the above. E) Only (A) and (B) of the above. Answer: D 85) The Bundesbank experience with monetary policy during the 1970s and 1980s is similar to that of Canadas central bank in which respects? A) Both the German and Canadian central banks announced strategies to target monetary aggregates in the 1970s. B) Both the German and Canadian central banks were willing to abandon monetary targeting due to exchange rate concerns. C) Although the German central bank abandoned its monetary targeting strategy permanently, the Canadian central bank has continued to target money. D) Only (A) and (B) of the above. Answer: D 86) Since 1978, the central bank of Japan has conducted monetary policy A) using an interest rate as its operating target. B) in a way that has produced relatively stable money growth. C) to successfully lower Japans inflation rate. D) to achieve all of the above. E) to achieve only (B) and (C) of the above. Answer: D 87) Since 1978, the central bank of Japan has conducted monetary policy A) using the monetary base as its operating target. B) in a way that has produced relatively stable money growth. C) to help its exporters by lowering the value of the yen. D) to achieve all of the above. Answer: B

7.2 True/False
1) An objective of the Federal Reserve in its conduct of monetary policy is high employment. Answer: TRUE 2) When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment. Answer: TRUE 3) The discount rate is an operating target. Answer: FALSE 4) Flexibility is a requirement in selecting an intermediate target. Answer: FALSE 5) The real bills doctrine was the guiding principle for the conduct of monetary policy during the 1910s. Answer: TRUE 6) The Fed accidentally discovered open market operations in the early 1890s. Answer: FALSE 7) During World War II, the Fed in effect relinquished its control of monetary policy through its policy of pegging interest rates. Answer: TRUE 8) The Feds use of the federal funds rate as an operating target in the 1970s resulted in countercyclical monetary policy. Answer: FALSE 9) The Fed policy since 1982 suggests that it is using a monetary aggregate as its intermediate target. Answer: FALSE 10) Since 1978, the central bank of Japan has conducted monetary policy in a way that has produced relatively stable money growth. Answer: TRUE 11) Financial innovation, deregulation, and the breakdown of a stable relationship between M1 and economic activity all contributed to the Fed abandoning M1 as an intermediate target. Answer: TRUE 12) Inflation targeting makes the central bank less accountable. Answer: FALSE

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7.3 Essay
1) Explain why the use of an interest rate targeting strategy may result in procyclical monetary growth. 2) The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to procyclical money growth. True, false, or uncertain? Why? 3) If inflation and unemployment are of direct concern to Fed officials, why do they make such a big issue about money growth and interest rates? Why dont they just target the unemployment rate and the inflation rate directly? Explain. 4) Describe the goals of the Federal Reserve. What happens when these goals come into conflict? How would one decide if lower inflation is more important than lower unemployment? Explain. 5) Can the Fed control the money supply? Has it done so? What evidence can you provide to support your answer to each question? 6) Compare the advantages and disadvantages of monetary targeting and inflation targeting.

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