Question 1

Central banks that have a hierarchical mandate with inflation targeting basically are saying: ?

Accepted Answer

A)  hitting the inflation target is the first priority after all other stated objectives are reached.? 
B)  hitting the inflation target is the only objective.? 
C)  the inflation target is the second most important goal after economic growth, which is always the most important goal for monetary policymakers.? 
D)  hitting the inflation target comes first, everything else comes second. 
A)  hitting the inflation target is the first priority after all other stated objectives are reached.? 
B)  hitting the inflation target is the only objective.? 
C)  the inflation target is the second most important goal after economic growth, which is always the most important goal for monetary policymakers.? 
D)  hitting the inflation target comes first, everything else comes second. D

Question 2

Given the following Taylor rule: 
Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)
Explain. Since the coefficients on the inflation and output gaps are equal, does this mean the central bank will respond to a one percent increase in inflation with the same change in the target rate as they would initiate from a one percent increase in the output gap

Accepted Answer

The coefficient on the gaps are the same, however, the rule has a bias toward inflation in that it includes the current rate of inflation as a term. If the rate of inflation increases by 1 percent the target interest rate actually would increase by 1.5 percent since the current inflation rate would be 1 percent higher and the additional 0.5 comes from the inflation gap times ½. If the output gap increases by 1 percent the target interest rate will be increased by 0.5 percent.

Question 3

Which of the following statements is true? ?

Accepted Answer

A)  The ECB's marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks.? 
B)  The ECB's success in controlling reserves by paying interest on them has led the Fed to do the same.? 
C)  The ECB's weekly auctions include only a few of the largest banks in Europe.? 
D)  The Fed's redesign of its procedures for lending to banks was the model for the ECB's marginal lending facility. 
A)  The ECB's marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks.? 
B)  The ECB's success in controlling reserves by paying interest on them has led the Fed to do the same.? 
C)  The ECB's weekly auctions include only a few of the largest banks in Europe.? 
D)  The Fed's redesign of its procedures for lending to banks was the model for the ECB's marginal lending facility. A

Question 4

The market for reserves derives from the fact that: ?

Accepted Answer

A)  reserves pay a relatively high return.? 
B)  desired reserves don't always equal actual reserves.? 
C)  the Fed refuses to lend to banks.? 
D)  banks do not want excess reserves. 
A)  reserves pay a relatively high return.? 
B)  desired reserves don't always equal actual reserves.? 
C)  the Fed refuses to lend to banks.? 
D)  banks do not want excess reserves.

Question 5

The components of the formula for the Taylor rule includes each of the following, except: ?

Accepted Answer

A)  the target federal funds rate.? 
B)  the current inflation rate.? 
C)  the 30-year U.S. Treasury bond rate.? 
D)  the inflation gap. 
A)  the target federal funds rate.? 
B)  the current inflation rate.? 
C)  the 30-year U.S. Treasury bond rate.? 
D)  the inflation gap.

Question 6

Which of the following statements is most correct? ?

Accepted Answer

A)  The FOMC is more successful at keeping the market rate closer to the target rate than the ECB until the Fed began paying interest on reserves.? 
B)  The ECB is more successful at keeping the market rate closer to the target rate than the FOMC until the Fed began paying interest on reserves .? 
C)  The ECB and FOMC are equally successful at keeping the target rate in range.? 
D)  The ECB seldom has the market rate close to the target rate. 
A)  The FOMC is more successful at keeping the market rate closer to the target rate than the ECB until the Fed began paying interest on reserves.? 
B)  The ECB is more successful at keeping the market rate closer to the target rate than the FOMC until the Fed began paying interest on reserves .? 
C)  The ECB and FOMC are equally successful at keeping the target rate in range.? 
D)  The ECB seldom has the market rate close to the target rate.

Question 7

The focus for most central banks today is: ?

Accepted Answer

A)  the quantity of M1.? 
B)  interest rates.? 
C)  the quantity of M2.? 
D)  controlling the size of the money multiplier. 
A)  the quantity of M1.? 
B)  interest rates.? 
C)  the quantity of M2.? 
D)  controlling the size of the money multiplier.

Question 8

Discuss why the Fed can either both a quantity and a price (interest rate) target unlike other monopolies.

Accepted Answer

The Fed sets monetary policy primarily t

Question 9

In terms of desirable features of a monetary policy instrument, explain why the size of the staff at the Fed is not a good policy instrument. Be sure to address which feature(s) it fits and which one(s) it doesn't.

Accepted Answer

The desirable features of a policy instr

Question 10

Over the years most monetary policy experts would agree with each of the following statements, except: ?

Accepted Answer

A)  the reserve requirement is not useful as an operational instrument.? 
B)  central bank lending is necessary to ensure financial stability.? 
C)  short-term interest rates are the best tool to use to stabilize short-term fluctuations in prices and output.? 
D)  transparency in policy making hinders accountability. 
A)  the reserve requirement is not useful as an operational instrument.? 
B)  central bank lending is necessary to ensure financial stability.? 
C)  short-term interest rates are the best tool to use to stabilize short-term fluctuations in prices and output.? 
D)  transparency in policy making hinders accountability.

Question 11

Compare the supply curve in the market for bank reserves prior to 2008 with the supply curve following the financial crisis.

Accepted Answer

The supply curve in the market for bank

Question 12

From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was: ?

Accepted Answer

A)  the inflation rate increased to over 18 percent in 1983.? 
B)  many banks failed that otherwise may not have.? 
C)  interest rates rose very high.? 
D)  inflation remained high for most of the 1980's. 
A)  the inflation rate increased to over 18 percent in 1983.? 
B)  many banks failed that otherwise may not have.? 
C)  interest rates rose very high.? 
D)  inflation remained high for most of the 1980's.

Question 13

Forward guidance is:

Accepted Answer

A)  statements today about policy targets in the future. 
B)  expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. 
C)  asset purchases that shift the composition of the Fed's balance sheet. 
D)  statements of policy changes and dates those changes will take effect. 
A)  statements today about policy targets in the future. 
B)  expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. 
C)  asset purchases that shift the composition of the Fed's balance sheet. 
D)  statements of policy changes and dates those changes will take effect.

Question 14

The Fed would use a reverse repo when they: ?

Accepted Answer

A)  want to temporarily increase the monetary base. 
B)  forecast a permanent decrease in the demand for monetary base. 
C)  forecast a permanent increase in the demand for monetary base. 
D)  want to temporarily decrease the monetary base. 
A)  want to temporarily increase the monetary base. 
B)  forecast a permanent decrease in the demand for monetary base. 
C)  forecast a permanent increase in the demand for monetary base. 
D)  want to temporarily decrease the monetary base.

Question 15

Discount lending ties into the Fed's function of: ?

Accepted Answer

A)  lender of last resort.? 
B)  open market operations.? 
C)  the government's bank.? 
D)  regulation of banking. 
A)  lender of last resort.? 
B)  open market operations.? 
C)  the government's bank.? 
D)  regulation of banking.

Question 16

Reserve demand becomes horizontal at the IOER rate because:

Accepted Answer

A)  banks will not make loans at less than the IOER rate. 
B)  banks must earn more than the IOER rate to lend. 
C)  the reserve supply is always set by the Fed so that the federal funds rate is greater than the IOER rate. 
D)  the IOER rate is the upper bound of the target federal funds rate 
A)  banks will not make loans at less than the IOER rate. 
B)  banks must earn more than the IOER rate to lend. 
C)  the reserve supply is always set by the Fed so that the federal funds rate is greater than the IOER rate. 
D)  the IOER rate is the upper bound of the target federal funds rate

Question 17

The interest rate on primary credit extended by the Fed is?

Accepted Answer

A)  the average of the prime interest rate charged by the ten largest banks in the nation? 
B)  below the IOER? 
C)  equal to the IOER? 
D)  above the IOER 
A)  the average of the prime interest rate charged by the ten largest banks in the nation? 
B)  below the IOER? 
C)  equal to the IOER? 
D)  above the IOER

Question 18

Recent research by Fed researchers put the natural rate of interest at: ?

Accepted Answer

A)  close to 0 percent.? 
B)  negative one percent.? 
C)  two percent.? 
D)  five percent. 
A)  close to 0 percent.? 
B)  negative one percent.? 
C)  two percent.? 
D)  five percent.

Question 19

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would: ?

Accepted Answer

A)  increase the IOER.? 
B)  decrease the IOER.? 
C)  do nothing; the Fed will let the market work.? 
D)  increase the supply of reserves. 
A)  increase the IOER.? 
B)  decrease the IOER.? 
C)  do nothing; the Fed will let the market work.? 
D)  increase the supply of reserves.

Question 20

If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be: ?

Accepted Answer

A)  a decrease in the market federal funds rate.? 
B)  a market federal funds rate that will equal the target rate.? 
C)  an increase in the market federal funds rate.? 
D)  nothing; reserve supply is so high that the market federal funds rate will be unchanged. 
A)  a decrease in the market federal funds rate.? 
B)  a market federal funds rate that will equal the target rate.? 
C)  an increase in the market federal funds rate.? 
D)  nothing; reserve supply is so high that the market federal funds rate will be unchanged.

Exam 18:Monetary Policy: Stabilizing the Domestic Economy

Central banks that have a hierarchical mandate with inflation targeting basically are saying: ?

Which of the following statements is true? ?

The market for reserves derives from the fact that: ?

The components of the formula for the Taylor rule includes each of the following, except: ?

Which of the following statements is most correct? ?

The focus for most central banks today is: ?

Discuss why the Fed can either both a quantity and a price (interest rate) target unlike other monopolies.

In terms of desirable features of a monetary policy instrument, explain why the size of the staff at the Fed is not a good policy instrument. Be sure to address which feature(s) it fits and which one(s) it doesn't.

Over the years most monetary policy experts would agree with each of the following statements, except: ?

Compare the supply curve in the market for bank reserves prior to 2008 with the supply curve following the financial crisis.

From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was: ?

Forward guidance is:

The Fed would use a reverse repo when they: ?

Discount lending ties into the Fed's function of: ?

Reserve demand becomes horizontal at the IOER rate because:

The interest rate on primary credit extended by the Fed is?

Recent research by Fed researchers put the natural rate of interest at: ?

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would: ?

If the current market federal funds rate equals the target rate and the demand for reserves increases, the likely response in the federal funds market will be: ?

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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