Monetary Policy Basics

Monetary Policy Basics

By Ian Striz

Multiple Choice

Which of the following is NOT a monetary policy tool of the federal reserve?

• Discount Rate

• Reserve Requirement

• Open Market Operations

• Taxation

Multiple Choice

According to the graph on the previous slide, what happened to the unemployment rate in 2020?

• The unemployment rate increased

• The unemployment rate decreased

• The unemployment rate did not change

Multiple Choice

A person who pours concrete for a living in Michigan, is out of work from November to March. Which type of unemployment is this?

• Structural

• Technological

• Seasonal

• Cyclical

Multiple Choice

Which of the following is the MOST likely cause of the unemployment rate increasing in 2020?

• Technology was invented that replaced human workers

• Outside forces caused an economic contraction

• These are seasonal jobs (i.e. outdoor work in cold weather states) and it is out of season.

• The industries these jobs were in no longer exist

• Workers were temporarily unemployed while they switched jobs

Multiple Choice

A person who is a cashier at McDonald's is laid off when the restaurant installs self-service kiosks. Which type of unemployment is this?

• Structural

• Technological

• Seasonal

• Cyclical

Multiple Choice

For many reasons, the economy enters a recession. A person working as an accountant gets laid off from their workplace. 9 months later they get called back to work when the recession ends. Which type of unemployment is this?

• Structural

• Technological

• Seasonal

• Cyclical

Multiple Choice

Best Buy and other retailers announce they will no longer stock and sell CDs and DVDs. As a result, a factory producing CDs and DVDs in Vietnam closes. Which type of unemployment is this?

• Structural

• Technological

• Seasonal

• Cyclical

Multiple Choice

If the federal reserve were to try to fix this unemployment problem, which type of policy would they use?

• Fiscal Policy

• Monetary Policy

• Foreign Policy

Multiple Select

Which TWO economic goals is the Federal Reserve mandated to try to achieve?

• Economic Freedom

• Economic Efficiency

• Price Stability

• Economic Growth

• Full Employment

Multiple Choice

Which type of monetary policy would be MOST likely to reduce the unemployment rate?

• No change to the money supply

• Decrease the money supply

• Increase the money supply

Inflation

Inflation is a measure of how much the overal price level in an economy is changing. This is calculated by looking at the prices of almost everything, and figuring out how much those prices have changed.
A typical goal for inflation in an economy like the United States is 2% to 3% inflation. Anything more than that suggests prices are climbing too fast.

​United States Inflation Rate 2019-2023

Multiple Choice

According to the graph on the previous slide, what happened to the US Inflation rate between 2021 and 2022?

• Inflation increased

• Inflation decreased

• Inflation stayed the same

​Causes of Inflation

​Just like unemployment, there are a number of causes of inflation.

1. Excessive monetary growth - central banks allow money to grow too quickly.
2. Wage-Price Spiral, as wages increase, businesses pass on those costs to consumers in the form of higher prices.
3. Demand pull inflation - demand increases too quickly.
4. Cost-push - as non-labor costs increase, businesses pass on those costs to consumers.
5. Increasing corporate profit margins

Multiple Choice

During the pandemic the US Government increased unemployment benefits and sent stimulus checks to households. How might this be a cause of inflation?

• Wage-Price Spiral

• Cost-Push

• Demand-Pull

• Excessive Monetary Growth

Multiple Choice

After the pandemic, workers began successfully demanding higher wages from employers. How might this be a cause of inflation?

• Wage-Price Spiral

• Cost-Push

• Demand-Pull

• Excessive Monetary Growth

Multiple Choice

During the pandemic, many factories in China temporarily closed. Manufacturers in other countries could not get parts from China to make their products. How might this be a cause of inflation?

• Wage-Price Spiral

• Cost-Push

• Demand-Pull

• Excessive Monetary Growth

Multiple Choice

During the pandemic, the Federal Reserve kept interest rates low, close to zero. How might this be a cause of inflation?

• Wage-Price Spiral

• Cost-Push

• Demand-Pull

• Excessive Monetary Growth

Multiple Choice

If the Federal Reserve were to try to decrease inflation, which monetary policy goal would be best?

• Increase the money supply

• Decrease the money supply

• Keep the money supply the same

Multiple Choice

Which monetary policy tool would best decrease the money supply to reduce inflation?

• Increase the discount rate

• Decrease the discount rate

• Decrease the reserve requirement