Question 1

Having interest rate stability

Accepted Answer

A)  allows for less uncertainty about future planning. 
B)  leads to demands to curtail the Fed's power. 
C)  guarantees full employment. 
D)  leads to problems in financial markets. 
A)  allows for less uncertainty about future planning. 
B)  leads to demands to curtail the Fed's power. 
C)  guarantees full employment. 
D)  leads to problems in financial markets.

Question 2

During World War II,whenever interest rates would rise and the price of bonds would begin to fall,the Fed would

Accepted Answer

A)  lower reserve requirements. 
B)  raise reserve requirements. 
C)  make open market purchases of government securities. 
D)  make open market sales of government securities. 
A)  lower reserve requirements. 
B)  raise reserve requirements. 
C)  make open market purchases of government securities. 
D)  make open market sales of government securities.

Question 3

Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the

Accepted Answer

A)  monetary base. 
B)  money supply. 
C)  federal funds interest rate. 
D)  exchange rate. 
A)  monetary base. 
B)  money supply. 
C)  federal funds interest rate. 
D)  exchange rate.

Question 4

During the 1950s,Fed monetary policy targeted

Accepted Answer

A)  the monetary base. 
B)  the exchange rate. 
C)  discount loans. 
D)  interest rates. 
A)  the monetary base. 
B)  the exchange rate. 
C)  discount loans. 
D)  interest rates.

Question 5

Using Taylor's rule,when the equilibrium real federal funds rate is 2 percent,there is no output gap,the actual inflation rate is zero,and the target inflation rate is 2 percent,the nominal federal funds rate should be

Accepted Answer

A)  0 percent. 
B)  1 percent. 
C)  2 percent. 
D)  3 percent. 
A)  0 percent. 
B)  1 percent. 
C)  2 percent. 
D)  3 percent.

Question 6

Due to the lack of timely data for the price level and economic growth,the Fed's strategy

Accepted Answer

A)  targets the exchange rate, since the Fed can control this variable. 
B)  targets the price of gold, since it is closely related to economic activity. 
C)  uses an intermediate target, such as an interest rate. 
D)  stabilizes the consumer price index, since the Fed can control the CPI. 
A)  targets the exchange rate, since the Fed can control this variable. 
B)  targets the price of gold, since it is closely related to economic activity. 
C)  uses an intermediate target, such as an interest rate. 
D)  stabilizes the consumer price index, since the Fed can control the CPI.

Question 7

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate.

Accepted Answer

A)  primary 
B)  dual 
C)  secondary 
D)  hierarchical 
A)  primary 
B)  dual 
C)  secondary 
D)  hierarchical

Question 8

The Fed accidentally discovered open market operations when

Accepted Answer

A)  it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system. 
B)  it purchased securities for income following the 1920-1921 recession. 
C)  it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system. 
D)  it reinterpreted a key provision of the Federal Reserve Act. 
A)  it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system. 
B)  it purchased securities for income following the 1920-1921 recession. 
C)  it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system. 
D)  it reinterpreted a key provision of the Federal Reserve Act.

Question 9

If the central bank pursues a monetary policy that is more expansionary than what firms and people expect,then the central bank must be trying to

Accepted Answer

A)  boost output in the short run. 
B)  constrain output in the short run. 
C)  constrain prices. 
D)  boost prices in the short run. 
A)  boost output in the short run. 
B)  constrain output in the short run. 
C)  constrain prices. 
D)  boost prices in the short run.

Question 10

Supply-side economic policies seek to

Accepted Answer

A)  raise interest rates through contractionary monetary policy. 
B)  increase federal government expenditures. 
C)  increase consumption expenditures by increasing taxes. 
D)  increase saving and investment using tax incentives. 
A)  raise interest rates through contractionary monetary policy. 
B)  increase federal government expenditures. 
C)  increase consumption expenditures by increasing taxes. 
D)  increase saving and investment using tax incentives.

Question 11

Explain what inflation targeting is.What are the advantages and disadvantages of this type of monetary policy strategy?

Accepted Answer

There are five main elements to inflatio

Question 12

Everything else held constant,a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble.

Accepted Answer

A)  less 
B)  about the same amount of 
C)  more 
D)  either more, less, or the same amount of 
A)  less 
B)  about the same amount of 
C)  more 
D)  either more, less, or the same amount of

Question 13

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

Accepted Answer

See figure below.
 @#IMG-DLM& With a fed

Question 14

Monetary policy is considered time-inconsistent because

Accepted Answer

A)  of the lag times associated with the implementation of monetary policy and its effect on the economy. 
B)  policymakers are tempted to pursue discretionary policy that is more contractionary in the short run. 
C)  policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. 
D)  of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy. 
A)  of the lag times associated with the implementation of monetary policy and its effect on the economy. 
B)  policymakers are tempted to pursue discretionary policy that is more contractionary in the short run. 
C)  policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. 
D)  of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.

Question 15

During World War II,the Fed in effect relinquished its control of monetary policy through its policy of

Accepted Answer

A)  continually lowering reserve requirements. 
B)  continually raising reserve requirements. 
C)  pegging interest rates. 
D)  targeting free reserves. 
A)  continually lowering reserve requirements. 
B)  continually raising reserve requirements. 
C)  pegging interest rates. 
D)  targeting free reserves.

Question 16

Real interest rates are difficult to measure because

Accepted Answer

A)  data on them are not available in a timely manner. 
B)  real interest rates depend on the hard-to-determine expected inflation rate. 
C)  they fluctuate too often to be accurate. 
D)  they cannot be controlled by the Fed. 
A)  data on them are not available in a timely manner. 
B)  real interest rates depend on the hard-to-determine expected inflation rate. 
C)  they fluctuate too often to be accurate. 
D)  they cannot be controlled by the Fed.

Question 17

Targeting interest rates can be procyclical because

Accepted Answer

A)  an increase in income increases interest rates, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. 
B)  an increase in interest rates increases income, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. 
C)  an increase in the monetary base increases the money supply, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. 
D)  an increase in income increases the monetary base and money supply, causing the Fed to buy bonds to increase interest rates and income. 
A)  an increase in income increases interest rates, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. 
B)  an increase in interest rates increases income, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. 
C)  an increase in the monetary base increases the money supply, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. 
D)  an increase in income increases the monetary base and money supply, causing the Fed to buy bonds to increase interest rates and income.

Question 18

A nominal variable,such as the inflation rate or the money supply,which ties down the price level to achieve price stability is called ________ anchor.

Accepted Answer

A)  a nominal 
B)  a real 
C)  an operating 
D)  an intermediate 
A)  a nominal 
B)  a real 
C)  an operating 
D)  an intermediate

Question 19

The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness,putting pressure on the Fed to pursue a more ________ monetary policy.

Accepted Answer

A)  decrease; contractionary 
B)  increase; expansionary 
C)  increase; contractionary 
D)  decrease; expansionary 
A)  decrease; contractionary 
B)  increase; expansionary 
C)  increase; contractionary 
D)  decrease; expansionary

Question 20

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity.

Accepted Answer

A)  below; high 
B)  below; low 
C)  above; high 
D)  above; low 
A)  below; high 
B)  below; low 
C)  above; high 
D)  above; low

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

Having interest rate stability

During World War II,whenever interest rates would rise and the price of bonds would begin to fall,the Fed would

Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the

During the 1950s,Fed monetary policy targeted

Using Taylor's rule,when the equilibrium real federal funds rate is 2 percent,there is no output gap,the actual inflation rate is zero,and the target inflation rate is 2 percent,the nominal federal funds rate should be

Due to the lack of timely data for the price level and economic growth,the Fed's strategy

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate.

The Fed accidentally discovered open market operations when

If the central bank pursues a monetary policy that is more expansionary than what firms and people expect,then the central bank must be trying to

Supply-side economic policies seek to

Explain what inflation targeting is.What are the advantages and disadvantages of this type of monetary policy strategy?

Everything else held constant,a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble.

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

Monetary policy is considered time-inconsistent because

During World War II,the Fed in effect relinquished its control of monetary policy through its policy of

Real interest rates are difficult to measure because

Targeting interest rates can be procyclical because

A nominal variable,such as the inflation rate or the money supply,which ties down the price level to achieve price stability is called ________ anchor.

The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness,putting pressure on the Fed to pursue a more ________ monetary policy.

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity.

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

The strengthening of the dollar between 1980 and 1985 contributed to a in American competitiveness,putting pressure on the Fed to pursue a more monetary policy.

The decision by inflation targeters to choose inflation targets zero reflects the concern of monetary policymakers that particularly inflation can have substantial negative effects on real economic activity.