Chapter 5 Questions:

**Reading is attached

1. How does the Fed's monetary policy affect economic conditions?

3. When does the Fed use a simulative monetary policy, and when does it used a restrictive monetary policy? What is a criticism of a simulative monetary policy? What is the risk of using a monetary policy that is too restrictive?

4. Describe an active monetary policy.

5. Describe a passive monetary policy.

8. Assume that the Fed's primary goal is to reduce inflation. How can it use open market operations to achieve this goal? What is a possible adverse effect of such action by the Fed (even if it achieves the goal)?

10. Describe the Fed's monetary policy response to the credit crisis.

14. When the Fed increases the money supply to lower the federal funds rate, will the cost of capital to the US companies be reduced? Explain how the segmented markets theory regarding the term structure of interest rates could influence the degree to which the Fed's monetary policy affects long term interest rates.

17. Consider a discussion during FOMC meetings in which there is a weak economy and a war, with potential major damage to oil wells. Explain why this possible effect would have received much attention at the FOMC meetings. If this possibility was perceived to be highly likely at the time of the meetings, explain how it may have complication the decision about monetary policy at that time. Given the conditions stated in this question, would you suggest that the Fed use a restrictive monetary policy, or a simulative monetary policy? Support your decision logically and acknowledge any adverse effects of your decision.

22. In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods, when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large impact on home prices? How could news of a substantial increase in the general inflation level affect the Fed' monetary policy and there by affect home prices?