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

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

Question 3

Given the following Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap);
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? Explain.

Accepted Answer

The coefficient on the gaps are the same

Question 4

The primary policy instrument of the Federal Open Market Committee (FOMC) is:

Accepted Answer

A) The required reserve rate 
B) The discount rate 
C) The target federal funds rate 
D) The exchange rate 
A) The required reserve rate 
B) The discount rate 
C) The target federal funds rate 
D) The exchange rate

Question 5

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 6

How do policy duration commitments influence the economy and inflation?

Accepted Answer

If the commitment is credible

Question 7

We saw in Chapter 18 that many central banks have turned to a policy framework of inflation targeting.Discuss if this would be effective in a country experiencing deflation.

Accepted Answer

For a country experiencing deflation, th

Question 8

The reserve requirement is applied to two-week balances on:

Accepted Answer

A) Transactions deposits 
B) Savings deposits 
C) Both transactions deposits and savings deposits 
D) Savings deposits and one-week balances on transactions deposits 
A) Transactions deposits 
B) Savings deposits 
C) Both transactions deposits and savings deposits 
D) Savings deposits and one-week balances on transactions deposits

Question 9

Discuss the evolution of discount lending from a tool of monetary policy to its current role.

Accepted Answer

In the early years of the Fed discount l

Question 10

Seasonal credit provided by the Fed is not as common as it used to be because:

Accepted Answer

A) There are fewer banks in seasonal areas 
B) Other sources for long-term loans have developed for banks in seasonal areas 
C) Seasonal credit has been replaced by secondary credit 
D) Seasonal credit is being replaced by primary credit 
A) There are fewer banks in seasonal areas 
B) Other sources for long-term loans have developed for banks in seasonal areas 
C) Seasonal credit has been replaced by secondary credit 
D) Seasonal credit is being replaced by primary credit

Question 11

The European Central Bank's Marginal Lending Facility is used to provide:

Accepted Answer

A) Short-term loans to banks at rates below the target refinancing rate 
B) Long-term loans to banks at rates above the target refinancing rate 
C) Short-term loans at rates above the target refinancing rate 
D) Long-term loans to banks at rates below the target refinancing rate 
A) Short-term loans to banks at rates below the target refinancing rate 
B) Long-term loans to banks at rates above the target refinancing rate 
C) Short-term loans at rates above the target refinancing rate 
D) Long-term loans to banks at rates below the target refinancing rate

Question 12

The constant term in the Taylor rule is usually equal to:

Accepted Answer

A) The long-term risky real interest rate 
B) One percent point more than the long-term trend real growth rate of the economy 
C) The 30 day T-bill rate 
D) One percent point less than the long-term trend real growth rate of the economy 
A) The long-term risky real interest rate 
B) One percent point more than the long-term trend real growth rate of the economy 
C) The 30 day T-bill rate 
D) One percent point less than the long-term trend real growth rate of the economy

Question 13

For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the:

Accepted Answer

A) European target discount rate 
B) European target federal funds rate 
C) Target refinancing rate 
D) London Inter-Bank Offer Rate 
A) European target discount rate 
B) European target federal funds rate 
C) Target refinancing rate 
D) London Inter-Bank Offer Rate

Question 14

If each of the coefficients in front of the inflation gap and the output gap in the formula for the Taylor rule is 0.5, this implies:

Accepted Answer

A) That the Fed assumes that inflation and output are right on target 
B) That inflation and output are one half a percent off of their targets 
C) The Fed is giving equal weight to objectives of inflation and output 
D) That the Fed will not accept higher inflation unless unemployment falls by twice the inflation rate 
A) That the Fed assumes that inflation and output are right on target 
B) That inflation and output are one half a percent off of their targets 
C) The Fed is giving equal weight to objectives of inflation and output 
D) That the Fed will not accept higher inflation unless unemployment falls by twice the inflation rate

Question 15

Primary credit extended by the Fed is:

Accepted Answer

A) For banks needing long-term loans to work out financial problems 
B) The highest interest rate loans offered by the Fed 
C) Short-term, usually overnight loans 
D) Loans offered at the prime interest rate for periods exceeding thirty days but less than one year 
A) For banks needing long-term loans to work out financial problems 
B) The highest interest rate loans offered by the Fed 
C) Short-term, usually overnight loans 
D) Loans offered at the prime interest rate for periods exceeding thirty days but less than one year

Question 16

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 17

The Fed could make the market federal funds rate equal the target rate by:

Accepted Answer

A) Mandating that all loans be transacted at the target rate 
B) Setting the discount rate below the federal funds rate 
C) Entering the federal funds market as a borrower or a lender 
D) Paying higher interest on reserves 
A) Mandating that all loans be transacted at the target rate 
B) Setting the discount rate below the federal funds rate 
C) Entering the federal funds market as a borrower or a lender 
D) Paying higher interest on reserves

Question 18

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 19

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 20

Of the following, which would not be considered an unconventional monetary policy approach?

Accepted Answer

A) Discount rate 
B) Policy duration commitment 
C) Quantitative easing 
D) Credit easing 
A) Discount rate 
B) Policy duration commitment 
C) Quantitative easing 
D) Credit easing

Exam 18: Monetary Policy: Stabilizing the Domestic Economy

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

Which of the following statements is true?

The primary policy instrument of the Federal Open Market Committee (FOMC) is:

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.

How do policy duration commitments influence the economy and inflation?

We saw in Chapter 18 that many central banks have turned to a policy framework of inflation targeting.Discuss if this would be effective in a country experiencing deflation.

The reserve requirement is applied to two-week balances on:

Discuss the evolution of discount lending from a tool of monetary policy to its current role.

Seasonal credit provided by the Fed is not as common as it used to be because:

The European Central Bank's Marginal Lending Facility is used to provide:

The constant term in the Taylor rule is usually equal to:

For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the:

If each of the coefficients in front of the inflation gap and the output gap in the formula for the Taylor rule is 0.5, this implies:

Primary credit extended by the Fed is:

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

The Fed could make the market federal funds rate equal the target rate by:

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?

The Taylor rule is:

Of the following, which would not be considered an unconventional monetary policy approach?

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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