Question 1

The European equivalent of the U.S.'s market federal funds rate is called the: ?

Accepted Answer

A)  overnight cash rate.? 
B)  target refinancing rate.? 
C)  European discount rate.? 
D)  overnight repurchase rate. 
A)  overnight cash rate.? 
B)  target refinancing rate.? 
C)  European discount rate.? 
D)  overnight repurchase rate.

Question 2

Is the Taylor rule the specific formula followed by the FOMC? Explain.

Accepted Answer

The simple answer is no, the FOMC does n

Question 3

Given the following Taylor rule: 
Target federal funds rate = natural rate of interest + current inflation + 2x(inflation gap) + x(output gap);?What do the coefficients on the inflation and output gaps (2x, x) reveal?

Accepted Answer

In this case the coefficient on the infl

Question 4

Federal funds loans are: ?

Accepted Answer

A)  secured loans between banks and the Fed.? 
B)  unsecured loans.? 
C)  collateralized loans between banks.? 
D)  guaranteed by the FDIC. 
A)  secured loans between banks and the Fed.? 
B)  unsecured loans.? 
C)  collateralized loans between banks.? 
D)  guaranteed by the FDIC.

Question 5

Given the following formula for the Taylor rule: ?Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) If output in the economy were to fall by an additional one percent below potential, the target federal funds rate would: ?

Accepted Answer

A)  Increase by 1.5%.? 
B)  Decrease by 1.5%.? 
C)  Remain at 2.5%.? 
D)  Decrease by 0.5%. 
A)  Increase by 1.5%.? 
B)  Decrease by 1.5%.? 
C)  Remain at 2.5%.? 
D)  Decrease by 0.5%.

Question 6

Given the following formula for the Taylor rule: ?Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)?Every one percent increase in the rate of inflation will: ?

Accepted Answer

A)  increase the real federal funds rate by 1.5%.? 
B)  increase the target federal funds rate by 1.5%.? 
C)  increase the real federal funds rate by 0.5%.? 
D)  increase the target federal funds rate by 1.5% and increase the real federal funds rate by 0.5%. 
A)  increase the real federal funds rate by 1.5%.? 
B)  increase the target federal funds rate by 1.5%.? 
C)  increase the real federal funds rate by 0.5%.? 
D)  increase the target federal funds rate by 1.5% and increase the real federal funds rate by 0.5%.

Question 7

The Fed could use reserve requirements as a monetary policy instrument. In terms of desirable features for policy instruments, assess the viability of using reserve requirements.

Accepted Answer

Reserve requirements are certainly obser

Question 8

The Taylor rule is: ?

Accepted Answer

A)  the monetary policy setting formula followed explicitly by the FOMC.? 
B)  an approximation that seeks to explain how the FOMC sets their target.? 
C)  an explicit tool used by the ECB but not the Fed.? 
D)  a rule adopted by Congress to make the Fed's monetary policy more accountable to the public. 
A)  the monetary policy setting formula followed explicitly by the FOMC.? 
B)  an approximation that seeks to explain how the FOMC sets their target.? 
C)  an explicit tool used by the ECB but not the Fed.? 
D)  a rule adopted by Congress to make the Fed's monetary policy more accountable to the public.

Question 9

How do targeted asset purchases alter the outlook for the economy and inflation?

Accepted Answer

By selling short term securities like U.

Question 10

Within the European Central Bank, banks with excess reserves: ?

Accepted Answer

A)  can deposit them with the ECB and earn an interest rate below the target refinancing rate.? 
B)  earn no interest on excess reserves, similar to the system in the U.S.? 
C)  must deposit the excess with the ECB's Deposit Facility.? 
D)  none of the above answers is correct; there are no required reserves for the ECB and so therefore no excess reserves. 
A)  can deposit them with the ECB and earn an interest rate below the target refinancing rate.? 
B)  earn no interest on excess reserves, similar to the system in the U.S.? 
C)  must deposit the excess with the ECB's Deposit Facility.? 
D)  none of the above answers is correct; there are no required reserves for the ECB and so therefore no excess reserves.

Question 11

The key to the success of forward guidance as a monetary policy tool is:

Accepted Answer

A)  timing. 
B)  a favorable exchange rate. 
C)  transparency. 
D)  credibility. 
A)  timing. 
B)  a favorable exchange rate. 
C)  transparency. 
D)  credibility.

Question 12

The Fed will make a discount loan to a bank during a crisis: ?

Accepted Answer

A)  no matter what condition the bank is in.? 
B)  only if the bank is sound financially and can provide collateral for the loan.? 
C)  but if the bank doesn't have collateral the interest rate is higher.? 
D)  only if the bank would fail without the loan. 
A)  no matter what condition the bank is in.? 
B)  only if the bank is sound financially and can provide collateral for the loan.? 
C)  but if the bank doesn't have collateral the interest rate is higher.? 
D)  only if the bank would fail without the loan.

Question 13

In 2001, the FOMC lowered the target federal funds rate eleven times, cutting the rate from 6½ percent to 1¾ percent. Why didn't the Fed just cut the rate by larger amounts early on?

Accepted Answer

There are at least a couple of parts to

Question 14

During the height of the euro-are crisis, deposits at the ECB's deposit facility surged above €800 billion because:

Accepted Answer

A)  the deposit rate increased.? 
B)  euro area commercial banks preferred the safety of deposits at the central bank.? 
C)  euro area commercial banks preferred lending to other commercial banks.? 
D)  euro area commercial banks were compelled to increase deposits by ECB policy changes. 
A)  the deposit rate increased.? 
B)  euro area commercial banks preferred the safety of deposits at the central bank.? 
C)  euro area commercial banks preferred lending to other commercial banks.? 
D)  euro area commercial banks were compelled to increase deposits by ECB policy changes.

Question 15

Is discount lending used to keep banks from failing? Explain.

Accepted Answer

Not really. Discount loans to banks made

Question 16

The Fed can _____ in the economy. ?

Accepted Answer

A)  change interest rates, but not the supply of money? 
B)  change the supply of money, but not the interest rates 
C)  change both interest rates and the supply of money? 
D)  change neither interest rates nor the supply of money 
A)  change interest rates, but not the supply of money? 
B)  change the supply of money, but not the interest rates 
C)  change both interest rates and the supply of money? 
D)  change neither interest rates nor the supply of money

Question 17

Discount lending by the Fed: ?

Accepted Answer

A)  is the key component of monetary policy.? 
B)  is more important today than in years past.?. 
C)  is usually small except in times of crisis.? 
D)  amounts to five billion dollars in volume during an average week 
A)  is the key component of monetary policy.? 
B)  is more important today than in years past.?. 
C)  is usually small except in times of crisis.? 
D)  amounts to five billion dollars in volume during an average week

Question 18

Which of the following statements is most correct? ?

Accepted Answer

A)  The FOMC sets the federal funds rate.? 
B)  The discount rate is the primary policy tool of the FOMC.? 
C)  The FOMC sets the target federal funds rate range.? 
D)  The difference between the target and actual federal funds rate is the dealer's spread. 
A)  The FOMC sets the federal funds rate.? 
B)  The discount rate is the primary policy tool of the FOMC.? 
C)  The FOMC sets the target federal funds rate range.? 
D)  The difference between the target and actual federal funds rate is the dealer's spread.

Question 19

Discuss why the discount rate may be considered a penalty rate of interest charged to banks.

Accepted Answer

The discount rate could be considered a

Question 20

How does policy forward guidance influence the economy and inflation?

Accepted Answer

If the forward guidance is cre

Exam 18:Monetary Policy: Stabilizing the Domestic Economy

The European equivalent of the U.S.'s market federal funds rate is called the: ?

Is the Taylor rule the specific formula followed by the FOMC? Explain.

Given the following Taylor rule: Target federal funds rate = natural rate of interest + current inflation + 2x(inflation gap) + x(output gap);?What do the coefficients on the inflation and output gaps (2x, x) reveal?

Federal funds loans are: ?

Given the following formula for the Taylor rule: ?Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) If output in the economy were to fall by an additional one percent below potential, the target federal funds rate would: ?

Given the following formula for the Taylor rule: ?Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)?Every one percent increase in the rate of inflation will: ?

The Fed could use reserve requirements as a monetary policy instrument. In terms of desirable features for policy instruments, assess the viability of using reserve requirements.

The Taylor rule is: ?

How do targeted asset purchases alter the outlook for the economy and inflation?

Within the European Central Bank, banks with excess reserves: ?

The key to the success of forward guidance as a monetary policy tool is:

The Fed will make a discount loan to a bank during a crisis: ?

In 2001, the FOMC lowered the target federal funds rate eleven times, cutting the rate from 6½ percent to 1¾ percent. Why didn't the Fed just cut the rate by larger amounts early on?

During the height of the euro-are crisis, deposits at the ECB's deposit facility surged above €800 billion because:

Is discount lending used to keep banks from failing? Explain.

The Fed can _____ in the economy. ?

Discount lending by the Fed: ?

Which of the following statements is most correct? ?

Discuss why the discount rate may be considered a penalty rate of interest charged to banks.

How does policy forward guidance influence the economy and inflation?

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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