Question 1

Which of the following is not an operating instrument?

Accepted Answer

A)  Nonborrowed reserves 
B)  Monetary base 
C)  Federal funds interest rate 
D)  Discount rate 
A)  Nonborrowed reserves 
B)  Monetary base 
C)  Federal funds interest rate 
D)  Discount rate

Question 2

High inflation can spiral out of control when

Accepted Answer

A)  expected inflation increases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation. 
B)  expected inflation decreases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation. 
C)  expected inflation increases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation. 
D)  expected inflation decreases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation. 
A)  expected inflation increases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation. 
B)  expected inflation decreases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation. 
C)  expected inflation increases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation. 
D)  expected inflation decreases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation.

Question 3

The Fed's mistakes of the early 1930s were compounded by its decision to

Accepted Answer

A)  raise reserve requirements in 1936-1937. 
B)  lower reserve requirements in 1936-1937. 
C)  raise the monetary base in 1936-1937. 
D)  lower the monetary base in 1936-1937. 
A)  raise reserve requirements in 1936-1937. 
B)  lower reserve requirements in 1936-1937. 
C)  raise the monetary base in 1936-1937. 
D)  lower the monetary base in 1936-1937.

Question 4

The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future.

Accepted Answer

A)  moral hazard 
B)  time-inconsistency 
C)  nominal-anchor 
D)  rational-expectation 
A)  moral hazard 
B)  time-inconsistency 
C)  nominal-anchor 
D)  rational-expectation

Question 5

Even if the Fed could completely control the money supply,monetary policy would have critics because

Accepted Answer

A)  the Fed is asked to achieve many goals, some of which are incompatible with others. 
B)  the Fed's goals do not include high employment, making labor unions a critic of the Fed. 
C)  the Fed's primary goal is exchange rate stability, causing it to ignore domestic economic conditions. 
D)  it is required to keep Treasury security prices high. 
A)  the Fed is asked to achieve many goals, some of which are incompatible with others. 
B)  the Fed's goals do not include high employment, making labor unions a critic of the Fed. 
C)  the Fed's primary goal is exchange rate stability, causing it to ignore domestic economic conditions. 
D)  it is required to keep Treasury security prices high.

Question 6

Explain and demonstrate graphically how targeting nonborrowed reserves can result in federal funds rate instability.

Accepted Answer

See figure below.
 @#IMG-DLM& When nonborrowed res

Question 7

Which of the following is not a disadvantage to inflation targeting?

Accepted Answer

A)  There is a delayed signal about achievement of the target. 
B)  Inflation targets could impose a rigid rule on policymakers. 
C)  There is potential for larger output fluctuations. 
D)  There is a lack of transparency. 
A)  There is a delayed signal about achievement of the target. 
B)  Inflation targets could impose a rigid rule on policymakers. 
C)  There is potential for larger output fluctuations. 
D)  There is a lack of transparency.

Question 8

Explain the time-inconsistency problem.What is the likely outcome of discretionary policy? What are the solutions to the time-inconsistency problem?

Accepted Answer

With policy discretion,policymakers have

Question 9

Explain the Federal Reserve's "just do it" approach to monetary policy. What are the advantages and disadvantages to this type of strategy?

Accepted Answer

The Federal Reserve doesn't use an expli

Question 10

The Fed accidentally discovered open market operations in the early

Accepted Answer

A)  1920s. 
B)  1910s. 
C)  1900s. 
D)  1890s. 
A)  1920s. 
B)  1910s. 
C)  1900s. 
D)  1890s.

Question 11

Since the early 1990s,the Fed has conducted monetary policy by setting a target for the

Accepted Answer

A)  level of borrowed reserves. 
B)  monetary base. 
C)  federal funds rate. 
D)  inflation rate. 
A)  level of borrowed reserves. 
B)  monetary base. 
C)  federal funds rate. 
D)  inflation rate.

Question 12

When it comes to choosing an policy instrument,both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay.

Accepted Answer

A)  three-month T-bill; monetary 
B)  three-month T-bill; reserve 
C)  federal funds; monetary 
D)  federal funds; reserve 
A)  three-month T-bill; monetary 
B)  three-month T-bill; reserve 
C)  federal funds; monetary 
D)  federal funds; reserve

Question 13

The primary goal of the European Central Bank is

Accepted Answer

A)  price stability. 
B)  exchange rate stability. 
C)  interest rate stability. 
D)  high employment. 
A)  price stability. 
B)  exchange rate stability. 
C)  interest rate stability. 
D)  high employment.

Question 14

In its earliest years,the Federal Reserve's guiding principle for the conduct of monetary policy was known as the

Accepted Answer

A)  real bills doctrine. 
B)  liberal liquidity doctrine. 
C)  free reserves doctrine. 
D)  quantity theory of money. 
A)  real bills doctrine. 
B)  liberal liquidity doctrine. 
C)  free reserves doctrine. 
D)  quantity theory of money.

Question 15

The theory that monetary policy conducted on a discretionary,day-by-day basis leads to poor long-run outcomes is referred to as the

Accepted Answer

A)  adverse selection problem. 
B)  moral hazard problem. 
C)  time-inconsistency problem. 
D)  nominal-anchor problem. 
A)  adverse selection problem. 
B)  moral hazard problem. 
C)  time-inconsistency problem. 
D)  nominal-anchor problem.

Question 16

Which of the following is not an advantage of inflation targeting?

Accepted Answer

A)  There is simplicity and clarity of the target. 
B)  Inflation targeting does not rely on a stable money-inflation relationship. 
C)  There is an immediate signal on the achievement of the target. 
D)  Inflation targeting reduces the effects of inflation shocks. 
A)  There is simplicity and clarity of the target. 
B)  Inflation targeting does not rely on a stable money-inflation relationship. 
C)  There is an immediate signal on the achievement of the target. 
D)  Inflation targeting reduces the effects of inflation shocks.

Question 17

The time-inconsistency problem with monetary policy tells us that,if policymakers use discretionary policy,there is a higher probability that the ________ will be higher,compared to policy makers following a behavior rule.

Accepted Answer

A)  inflation rate 
B)  unemployment rate 
C)  interest rate 
D)  foreign exchange rate 
A)  inflation rate 
B)  unemployment rate 
C)  interest rate 
D)  foreign exchange rate

Question 18

Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets

Accepted Answer

A)  a monetary aggregate. 
B)  the monetary base. 
C)  an interest rate. 
D)  nominal GDP. 
A)  a monetary aggregate. 
B)  the monetary base. 
C)  an interest rate. 
D)  nominal GDP.

Question 19

Economists believe that countries recently suffering hyperinflation have experienced

Accepted Answer

A)  reduced growth. 
B)  increased growth. 
C)  reduced prices. 
D)  lower interest rates. 
A)  reduced growth. 
B)  increased growth. 
C)  reduced prices. 
D)  lower interest rates.

Question 20

The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits

Accepted Answer

A)  only during World War I. 
B)  during the Great Depression. 
C)  during World War I and World War II. 
D)  throughout the entire existence of the Fed. 
A)  only during World War I. 
B)  during the Great Depression. 
C)  during World War I and World War II. 
D)  throughout the entire existence of the Fed.

Exam 16: The Conduct of Monetary Policy: Strategy and Tactics

Which of the following is not an operating instrument?

High inflation can spiral out of control when

The Fed's mistakes of the early 1930s were compounded by its decision to

The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future.

Even if the Fed could completely control the money supply,monetary policy would have critics because

Explain and demonstrate graphically how targeting nonborrowed reserves can result in federal funds rate instability.

Which of the following is not a disadvantage to inflation targeting?

Explain the time-inconsistency problem.What is the likely outcome of discretionary policy? What are the solutions to the time-inconsistency problem?

Explain the Federal Reserve's "just do it" approach to monetary policy. What are the advantages and disadvantages to this type of strategy?

The Fed accidentally discovered open market operations in the early

Since the early 1990s,the Fed has conducted monetary policy by setting a target for the

When it comes to choosing an policy instrument,both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay.

The primary goal of the European Central Bank is

In its earliest years,the Federal Reserve's guiding principle for the conduct of monetary policy was known as the

The theory that monetary policy conducted on a discretionary,day-by-day basis leads to poor long-run outcomes is referred to as the

Which of the following is not an advantage of inflation targeting?

The time-inconsistency problem with monetary policy tells us that,if policymakers use discretionary policy,there is a higher probability that the ________ will be higher,compared to policy makers following a behavior rule.

Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets

Economists believe that countries recently suffering hyperinflation have experienced

The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Foreign Exchange Market

The International Financial System

Quantity Theory, inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

When it comes to choosing an policy instrument,both the rate and aggregates are measured accurately and are available daily with almost no delay.