Question 1

Which of the following statements is most correct?

Accepted Answer

A) The Fed can control the amount of reserves, but cannot control the monetary base 
B) The Fed can control the make up of the monetary base, but cannot affect the market interest rate 
C) The Fed can control the size of the monetary base but not the price of its components 
D) The Fed can control either the size of the monetary base or the price of its components 
A) The Fed can control the amount of reserves, but cannot control the monetary base 
B) The Fed can control the make up of the monetary base, but cannot affect the market interest rate 
C) The Fed can control the size of the monetary base but not the price of its components 
D) The Fed can control either the size of the monetary base or the price of its components D

Question 2

What is your response to the following: "The Taylor rule shows a strong correlation between the target rate actually set by the FOMC and the one predicted by the rule.Since the Taylor rule would provide accountability, credibility, and transparency, the FOMC committee should be dissolved and replaced by a form of the Taylor rule."

Accepted Answer

While the correlation might be high there are at least two problems with replacing the FOMC with the rule.First, the Taylor rule cannot handle financial panics or sudden threats to financial stability, such as terrorist attacks.The other key problem is monetary policy relies on real-time data, which means data available at the time.Economic data is constantly being revised and the correlation between the target FOMC rates set and the ones predicted by the Taylor rule were observed using economic data that was revised many times.The same correlation may not exist if data available at the time the policy was formulated was used in the rule.

Question 3

Consider the desirable features of monetary policy operating instruments and the use of intermediate targets.What missing feature makes a target intermediate rather than operating? Why did the Fed abandon the use of most intermediate targets?

Accepted Answer

In the case of intermediate targets the feature that is lacking to make the target operating rather than intermediate was controllability.To be an operating target the Fed has to be able to control it, and by definition, an intermediate target is something not directly under the Fed's immediate control.Fed abandoned most intermediate targets due to the fact that most of the intermediate targets are not tightly linked to short-term policy objectives or at least not in consistently predictable ways.

Question 4

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 5

Given the following formula for the Taylor rule: Target federal funds rate = 2 + 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 6

One outcome that would result if the Fed paid interest on reserves would be:

Accepted Answer

A) Banks would hold less excess reserves 
B) The federal government's deficit would be larger (or surplus smaller) 
C) Banks would no longer hold excess reserves 
D) The target federal funds rate would have to be fixed at a constant rate 
A) Banks would hold less excess reserves 
B) The federal government's deficit would be larger (or surplus smaller) 
C) Banks would no longer hold excess reserves 
D) The target federal funds rate would have to be fixed at a constant rate

Question 7

One of the reasons primary credit exists is to:

Accepted Answer

A) Bail out banks which are in financial trouble 
B) Provide additional reserves when the open market staff's forecasts are off 
C) Provide banks with an available source for unsecured lending 
D) Provide banks with a low interest source for long-term capital 
A) Bail out banks which are in financial trouble 
B) Provide additional reserves when the open market staff's forecasts are off 
C) Provide banks with an available source for unsecured lending 
D) Provide banks with a low interest source for long-term capital

Question 8

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

Accepted Answer

The simple answer is no, the FOMC does n

Question 9

The ways the Fed can inject reserves into the banking system include:

Accepted Answer

A) An increase in the size of the Fed's balance sheet through purchasing securities 
B) Increasing the discount rate 
C) Making loans to non-bank corporations 
D) An increase in the size of the Fed's balance sheet through selling securities 
A) An increase in the size of the Fed's balance sheet through purchasing securities 
B) Increasing the discount rate 
C) Making loans to non-bank corporations 
D) An increase in the size of the Fed's balance sheet through selling securities

Question 10

The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it:

Accepted Answer

A) Is not controllable 
B) Is not observable 
C) Cannot be quickly changed 
D) The impact of changing it is unpredictable 
A) Is not controllable 
B) Is not observable 
C) Cannot be quickly changed 
D) The impact of changing it is unpredictable

Question 11

What are the advantages from the 2002 change in the Fed's lending policy?

Accepted Answer

Prior to 2002 the Fed set a discount rat

Question 12

If the market federal funds rate were below the target rate, the response from the Fed would likely be to:

Accepted Answer

A) Raise the required reserve rate 
B) Purchase U.S.Treasury securities 
C) Sell U.S.Treasury securities 
D) Raise the discount rate 
A) Raise the required reserve rate 
B) Purchase U.S.Treasury securities 
C) Sell U.S.Treasury securities 
D) Raise the discount rate

Question 13

The types of loans the Fed makes consist of each of the following, except:

Accepted Answer

A) Primary credit 
B) Conditional credit 
C) Seasonal credit 
D) Secondary credit 
A) Primary credit 
B) Conditional credit 
C) Seasonal credit 
D) Secondary credit

Question 14

Why is it necessary to distinguish between the target federal funds rate and the market federal funds rate?

Accepted Answer

The need to distinguish the two comes fr

Question 15

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 not as important today as it was in the past 
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 not as important today as it was in the past 
D) Amounts to five billion dollars in volume during an average week

Question 16

On a particular day, the actual federal funds rate can deviate from the target federal funds rate.This might be due to all of the following except:

Accepted Answer

A) Unexpected changes in the demand for reserves 
B) The forecasts of the Fed's staff were in error 
C) There may have been more float in the banking system than anticipated 
D) Daily changes in the target rate 
A) Unexpected changes in the demand for reserves 
B) The forecasts of the Fed's staff were in error 
C) There may have been more float in the banking system than anticipated 
D) Daily changes in the target rate

Question 17

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
Every one percent decrease in the rate of inflation will:

Accepted Answer

A) Raise the target federal funds rate by 1.5% 
B) Lower the target federal funds rate by 0.5% 
C) Lower the target federal funds rate by 1.5% 
D) Raise the target federal funds rate by 0.5% 
A) Raise the target federal funds rate by 1.5% 
B) Lower the target federal funds rate by 0.5% 
C) Lower the target federal funds rate by 1.5% 
D) Raise the target federal funds rate by 0.5%

Question 18

Today, reserve requirements are:

Accepted Answer

A) Set in a way that makes reserve demand highly unpredictable 
B) Changed whenever the target federal funds rate is changed 
C) Changed instead of making changes in the discount rate 
D) Really not a direct tool of monetary policy 
A) Set in a way that makes reserve demand highly unpredictable 
B) Changed whenever the target federal funds rate is changed 
C) Changed instead of making changes in the discount rate 
D) Really not a direct tool of monetary policy

Question 19

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 20

Discuss the key criteria for success and the advantages of a central bank adopting the framework of inflation targeting.

Accepted Answer

Inflation targeting is a framework where

Exam 18: Monetary Policy: Stabilizing the Domestic Economy

Which of the following statements is most correct?

Consider the desirable features of monetary policy operating instruments and the use of intermediate targets.What missing feature makes a target intermediate rather than operating? Why did the Fed abandon the use of most intermediate targets?

The Fed would use a reverse repo when they:

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap) Every one percent increase in the rate of inflation will:

One outcome that would result if the Fed paid interest on reserves would be:

One of the reasons primary credit exists is to:

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

The ways the Fed can inject reserves into the banking system include:

The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it:

What are the advantages from the 2002 change in the Fed's lending policy?

If the market federal funds rate were below the target rate, the response from the Fed would likely be to:

The types of loans the Fed makes consist of each of the following, except:

Why is it necessary to distinguish between the target federal funds rate and the market federal funds rate?

Discount lending by the Fed:

On a particular day, the actual federal funds rate can deviate from the target federal funds rate.This might be due to all of the following except:

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap) Every one percent decrease in the rate of inflation will:

Today, reserve requirements are:

The market for reserves derives from the fact that:

Discuss the key criteria for success and the advantages of a central bank adopting the framework of inflation targeting.

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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