Question 1

Using an interest rate for an intermediate target

Accepted Answer

A) will cause the quantity of money to fluctuate. 
B) will often lead to a recession. 
C) requires the use of a monetary aggregate as an operating target. 
D) is required by the Federal Reserve Act. 
A) will cause the quantity of money to fluctuate. 
B) will often lead to a recession. 
C) requires the use of a monetary aggregate as an operating target. 
D) is required by the Federal Reserve Act. A

Question 2

Which of the following statements concerning the measurability of interest rates is true?

Accepted Answer

A) Information on nominal interest rates is available to the Fed with a two-week lag. 
B) The relevant interest rates are instantaneously measurable by the Fed. 
C) The Fed is more interested in measuring the nominal interest rate than in measuring the real interest rate. 
D) The Fed is unable to continuously measure the real interest rate. 
A) Information on nominal interest rates is available to the Fed with a two-week lag. 
B) The relevant interest rates are instantaneously measurable by the Fed. 
C) The Fed is more interested in measuring the nominal interest rate than in measuring the real interest rate. 
D) The Fed is unable to continuously measure the real interest rate. D

Question 3

Ordinarily, if the Fed chooses an interest rate as an intermediate target,

Accepted Answer

A) it is worried about inflation. 
B) it is worried about unemployment. 
C) it will choose a monetary aggregate as an operating target. 
D) it will choose an interest rate as an operating target. 
A) it is worried about inflation. 
B) it is worried about unemployment. 
C) it will choose a monetary aggregate as an operating target. 
D) it will choose an interest rate as an operating target. D

Question 4

When financial markets and institutions are not efficient in matching savers and borrowers,

Accepted Answer

A) interest rates fall, which discourages saving even further. 
B) interest rates fall, which discourages investment even further. 
C) resources are lost. 
D) investment rises. 
A) interest rates fall, which discourages saving even further. 
B) interest rates fall, which discourages investment even further. 
C) resources are lost. 
D) investment rises.

Question 5

Which of the following statements is true concerning the Fed's ability to measure potential intermediate targets over a short period of time?

Accepted Answer

A) The Fed can perfectly measure the relevant interest rates, but cannot perfectly measure the relevant monetary aggregates. 
B) The Fed can perfectly measure the relevant monetary aggregates, but cannot perfectly measure the relevant interest rates. 
C) The Fed can perfectly measure both the relevant monetary aggregates and the relevant interest rates. 
D) The Fed cannot perfectly measure either the relevant monetary aggregates or the relevant interest rates. 
A) The Fed can perfectly measure the relevant interest rates, but cannot perfectly measure the relevant monetary aggregates. 
B) The Fed can perfectly measure the relevant monetary aggregates, but cannot perfectly measure the relevant interest rates. 
C) The Fed can perfectly measure both the relevant monetary aggregates and the relevant interest rates. 
D) The Fed cannot perfectly measure either the relevant monetary aggregates or the relevant interest rates.

Question 6

Which head of a central bank has emphasized the relevance of monetary aggregates for monetary policy?

Accepted Answer

A) Bernanke 
B) Greenspan 
C) Trichet 
D) Martin 
A) Bernanke 
B) Greenspan 
C) Trichet 
D) Martin

Question 7

During an economic expansion

Accepted Answer

A) excess reserves will fall, discount loans will rise, and free reserves will rise. 
B) excess reserves will rise, discount loans will rise, and free reserves will rise. 
C) excess reserves will fall, discount loans will rise, and free reserves will fall. 
D) excess reserves will fall, discount loans will fall, and free reserves will rise. 
A) excess reserves will fall, discount loans will rise, and free reserves will rise. 
B) excess reserves will rise, discount loans will rise, and free reserves will rise. 
C) excess reserves will fall, discount loans will rise, and free reserves will fall. 
D) excess reserves will fall, discount loans will fall, and free reserves will rise.

Question 8

The Fed was created

Accepted Answer

A) after financial panics in the late 1800s and early 1900s. 
B) after the stock market crash of 1929. 
C) to help finance government expenditures during World War II. 
D) to help channel funds to the residential mortgage market. 
A) after financial panics in the late 1800s and early 1900s. 
B) after the stock market crash of 1929. 
C) to help finance government expenditures during World War II. 
D) to help channel funds to the residential mortgage market.

Question 9

The Fed's practices since World War II have

Accepted Answer

A) shown that interest rate targets are always preferable to monetary aggregate targets. 
B) shown that monetary aggregate targets are always preferable to interest rate targets. 
C) produced poor operating targets, but successful intermediate targets. 
D) not produced very successful intermediate targets. 
A) shown that interest rate targets are always preferable to monetary aggregate targets. 
B) shown that monetary aggregate targets are always preferable to interest rate targets. 
C) produced poor operating targets, but successful intermediate targets. 
D) not produced very successful intermediate targets.

Question 10

Under Paul Volcker, the Fed

Accepted Answer

A) pegged the federal funds rate. 
B) used free reserves as an operating target. 
C) used nonborrowed reserves as an operating target. 
D) tightened its control over money growth. 
A) pegged the federal funds rate. 
B) used free reserves as an operating target. 
C) used nonborrowed reserves as an operating target. 
D) tightened its control over money growth.

Question 11

The Fed's inability to instantaneously observe changes in inflation and economic growth result in

Accepted Answer

A) information lag. 
B) impact lag. 
C) policy lag. 
D) jet lag. 
A) information lag. 
B) impact lag. 
C) policy lag. 
D) jet lag.

Question 12

To peg the interest rate below its equilibrium level, the Fed must

Accepted Answer

A) sell securities to drive security market prices up. 
B) sell securities to drive security market prices down. 
C) buy securities to drive security market prices up. 
D) buy securities to drive security market prices down. 
A) sell securities to drive security market prices up. 
B) sell securities to drive security market prices down. 
C) buy securities to drive security market prices up. 
D) buy securities to drive security market prices down.

Question 13

During the last two decades,

Accepted Answer

A) the Fed has abandoned its policy goal of financial market and institution stability. 
B) the Fed has not been called upon to avert financial panics. 
C) the Fed has been unable to avert several banking panics. 
D) the Fed has moved several times to avert financial panics. 
A) the Fed has abandoned its policy goal of financial market and institution stability. 
B) the Fed has not been called upon to avert financial panics. 
C) the Fed has been unable to avert several banking panics. 
D) the Fed has moved several times to avert financial panics.

Question 14

A consequence of the impact lag is that the Fed

Accepted Answer

A) may not know the impact of a change in policy. 
B) might not be able to correct a mistaken policy soon enough. 
C) may not have current information about the state of the economy. 
D) may see the impact of a change in policy on inflation, but not economic growth. 
A) may not know the impact of a change in policy. 
B) might not be able to correct a mistaken policy soon enough. 
C) may not have current information about the state of the economy. 
D) may see the impact of a change in policy on inflation, but not economic growth.

Question 15

The Fed's monetary policy during Arthur Burns's tenure

Accepted Answer

A) was countercyclical, as opposed to the procyclical policy pursued by William McChesney Martin. 
B) was procyclical, as opposed to the countercyclical policy pursued by William McChesney Martin. 
C) was countercyclical, as was the policy pursued by William McChesney Martin. 
D) was procyclical, as was the policy pursued by William McChesney Martin. 
A) was countercyclical, as opposed to the procyclical policy pursued by William McChesney Martin. 
B) was procyclical, as opposed to the countercyclical policy pursued by William McChesney Martin. 
C) was countercyclical, as was the policy pursued by William McChesney Martin. 
D) was procyclical, as was the policy pursued by William McChesney Martin.

Question 16

Most critics believe that the Fed's early attempt at monetary targeting under Arthur Burns failed because he used

Accepted Answer

A) free reserves as an operating target. 
B) the federal funds rate as an operating target. 
C) M1 instead of M2 as an intermediate target. 
D) M2 instead of M1 as an intermediate target. 
A) free reserves as an operating target. 
B) the federal funds rate as an operating target. 
C) M1 instead of M2 as an intermediate target. 
D) M2 instead of M1 as an intermediate target.

Question 17

An important problem facing the Fed is that

Accepted Answer

A) it has goals for economic growth and price stability, but no direct control over real output or the price level. 
B) it lost effective control over the monetary base. 
C) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with Congress. 
D) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with the President. 
A) it has goals for economic growth and price stability, but no direct control over real output or the price level. 
B) it lost effective control over the monetary base. 
C) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with Congress. 
D) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with the President.

Question 18

Which of the following statements is correct?

Accepted Answer

A) The Fed exercises complete control over the money supply, but only partial control over the real interest rate. 
B) The Fed exercises complete control over the real interest rate, but only partial control over the money supply. 
C) The Fed exercises complete control over both the real interest rate and the money supply. 
D) The Fed exercises complete control over neither the real interest rate nor the money supply. 
A) The Fed exercises complete control over the money supply, but only partial control over the real interest rate. 
B) The Fed exercises complete control over the real interest rate, but only partial control over the money supply. 
C) The Fed exercises complete control over both the real interest rate and the money supply. 
D) The Fed exercises complete control over neither the real interest rate nor the money supply.

Question 19

As a result of the Korean War and the Fed's pegging of the interest rate on Treasury securities,

Accepted Answer

A) the monetary base contracted. 
B) the monetary base expanded. 
C) the prices of short-term Treasury securities rose. 
D) the inflation rate declined. 
A) the monetary base contracted. 
B) the monetary base expanded. 
C) the prices of short-term Treasury securities rose. 
D) the inflation rate declined.

Question 20

The information lag facing the Fed is

Accepted Answer

A) the difficulty of becoming informed quickly of changes in public opinion about which policy goal is most important. 
B) the delay in receiving accurate information about the state of the economy. 
C) the delay in Congress and the President communicating their policy goals for the Fed to act on. 
D) the time required for monetary policy changes to affect output, employment, and prices. 
A) the difficulty of becoming informed quickly of changes in public opinion about which policy goal is most important. 
B) the delay in receiving accurate information about the state of the economy. 
C) the delay in Congress and the President communicating their policy goals for the Fed to act on. 
D) the time required for monetary policy changes to affect output, employment, and prices.

Exam 21: The Conduct of Monetary Policy

Using an interest rate for an intermediate target

Which of the following statements concerning the measurability of interest rates is true?

Ordinarily, if the Fed chooses an interest rate as an intermediate target,

When financial markets and institutions are not efficient in matching savers and borrowers,

Which of the following statements is true concerning the Fed's ability to measure potential intermediate targets over a short period of time?

Which head of a central bank has emphasized the relevance of monetary aggregates for monetary policy?

During an economic expansion

The Fed was created

The Fed's practices since World War II have

Under Paul Volcker, the Fed

The Fed's inability to instantaneously observe changes in inflation and economic growth result in

To peg the interest rate below its equilibrium level, the Fed must

During the last two decades,

A consequence of the impact lag is that the Fed

The Fed's monetary policy during Arthur Burns's tenure

Most critics believe that the Fed's early attempt at monetary targeting under Arthur Burns failed because he used

An important problem facing the Fed is that

Which of the following statements is correct?

As a result of the Korean War and the Fed's pegging of the interest rate on Treasury securities,

The information lag facing the Fed is

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

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