Question 1

The tool the Fed uses to keep the federal funds rate close to the target is:

Accepted Answer

A) The required reserve rate 
B) Discount lending 
C) Open market operations 
D) They can set the rate by law 
A) The required reserve rate 
B) Discount lending 
C) Open market operations 
D) They can set the rate by law

Question 2

One reason the target federal funds rate may not equal the actual federal funds rate is because:

Accepted Answer

A) There is no way that the Fed could keep the actual rate at the target rate 
B) The target rate changes with the demand for reserves 
C) Attaining the target rate involves forecasting reserve demand and forecasts are subject to error 
D) None of the answers is correct; the target and the actual federal funds rates are always equal 
A) There is no way that the Fed could keep the actual rate at the target rate 
B) The target rate changes with the demand for reserves 
C) Attaining the target rate involves forecasting reserve demand and forecasts are subject to error 
D) None of the answers is correct; the target and the actual federal funds rates are always equal

Question 3

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would:

Accepted Answer

A) Increase the supply of reserves 
B) Decrease the supply of reserves 
C) Do nothing; the Fed will let the market work 
D) Alter the demand for reserves 
A) Increase the supply of reserves 
B) Decrease the supply of reserves 
C) Do nothing; the Fed will let the market work 
D) Alter the demand for reserves

Question 4

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

Accepted Answer

Not really.Discount loans to banks made

Question 5

The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system that involves setting a:

Accepted Answer

A) Target interest rate only 
B) Target interest rate and a lending rate only 
C) Target interest rate and a deposit rate only 
D) Target interest rate, a lending rate, and a deposit rate 
A) Target interest rate only 
B) Target interest rate and a lending rate only 
C) Target interest rate and a deposit rate only 
D) Target interest rate, a lending rate, and a deposit rate

Question 6

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 7

Could the Fed enter the federal funds market to make sure the market and target rates are always equal, and if they could, why don't they?

Accepted Answer

Though the Fed could enter the market to

Question 8

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 9

During the 1990s many countries developed a monetary policy framework that focused on inflation targeting.This is an example of policymakers:

Accepted Answer

A) Focusing exclusively on an intermediate target 
B) Bypassing intermediate targets and focusing directly on an objective 
C) Focusing on multiple numerical targets 
D) Developing a new intermediate target 
A) Focusing exclusively on an intermediate target 
B) Bypassing intermediate targets and focusing directly on an objective 
C) Focusing on multiple numerical targets 
D) Developing a new intermediate target

Question 10

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:

Accepted Answer

A) 7% 
B) 9% 
C) 5% 
D) 4.5% 
A) 7% 
B) 9% 
C) 5% 
D) 4.5%

Question 11

Inflation targeting does all of the following except:

Accepted Answer

A) Increase policymakers' credibility 
B) Increase policymakers' accountability 
C) Communicate policymakers' objectives clearly and openly 
D) Hinder economic growth 
A) Increase policymakers' credibility 
B) Increase policymakers' accountability 
C) Communicate policymakers' objectives clearly and openly 
D) Hinder economic growth

Question 12

If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be:

Accepted Answer

A) The market federal funds rate will decrease 
B) The market federal funds rate will equal the target rate 
C) The market federal funds rate will increase 
D) Nothing; the Fed would act immediately and the market would not be affected 
A) The market federal funds rate will decrease 
B) The market federal funds rate will equal the target rate 
C) The market federal funds rate will increase 
D) Nothing; the Fed would act immediately and the market would not be affected

Question 13

Which of the following would be classified as intermediate targets for U.S.monetary policy?

Accepted Answer

A) M2 but not M1 
B) The federal funds rate 
C) M1 and M2 
D) M1 but not M2 
A) M2 but not M1 
B) The federal funds rate 
C) M1 and M2 
D) M1 but not M2

Question 14

During the financial crisis of 2007 - 2009 it became difficult for the Fed to hit their target federal funds rate because:

Accepted Answer

A) of the number of bank failures 
B) of the Federal government stimulus package 
C) of the loss of liquidity in the interbank lending market 
D) of the instability in the stock market 
A) of the number of bank failures 
B) of the Federal government stimulus package 
C) of the loss of liquidity in the interbank lending market 
D) of the instability in the stock market

Question 15

The Fed is reluctant to change the required reserve rate because:

Accepted Answer

A) Changes in the rate have a small impact on the actual quantity of money 
B) The money multiplier is not impacted by the required reserve rate 
C) The time lag between changing the required reserve rate and changes in the money supply can be too long 
D) Small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits 
A) Changes in the rate have a small impact on the actual quantity of money 
B) The money multiplier is not impacted by the required reserve rate 
C) The time lag between changing the required reserve rate and changes in the money supply can be too long 
D) Small changes in the required reserve rate can have too big of an impact on the money multiplier and the level of deposits

Question 16

For most of the Fed's history, the Fed:

Accepted Answer

A) Lent reserves at an interest rate below the target federal funds rate 
B) Found banks would borrow from the Fed far more often than they would borrow in the federal funds market 
C) Was very lenient in making discount loans 
D) Tied the discount rate to the rate on Treasury securities 
A) Lent reserves at an interest rate below the target federal funds rate 
B) Found banks would borrow from the Fed far more often than they would borrow in the federal funds market 
C) Was very lenient in making discount loans 
D) Tied the discount rate to the rate on Treasury securities

Question 17

Which of the following would be categorized as an unconventional monetary policy tool?

Accepted Answer

A) Discount window lending 
B) Lending to nonbanks 
C) Federal funds rate target 
D) Deposit rate 
A) Discount window lending 
B) Lending to nonbanks 
C) Federal funds rate target 
D) Deposit rate

Question 18

Given the following formula for the Taylor rule: Target federal funds rate = 2 + 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 19

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If the inflation rate in the economy were to fall by 2% below the target inflation rate, the target federal funds rate would:

Accepted Answer

A) Decrease by 3.0% 
B) Remain at 2.5% 
C) Decrease by 1.0% 
D) Increase by 1.0% 
A) Decrease by 3.0% 
B) Remain at 2.5% 
C) Decrease by 1.0% 
D) Increase by 1.0%

Question 20

The European equivalent of the Fed's open market operations (OMO) is:

Accepted Answer

A) Very similar to the Fed's OMO in that they are highly centralized 
B) Dissimilar to the Fed's OMO in that the operations are conducted at all 13 of the National Central Banks simultaneously 
C) Similar to the Fed's OMO in that they accept only U.S.Treasury securities in their refinancing operations 
D) Dissimilar to the Fed's OMO because fewer banks participate in the auctions of the securities 
A) Very similar to the Fed's OMO in that they are highly centralized 
B) Dissimilar to the Fed's OMO in that the operations are conducted at all 13 of the National Central Banks simultaneously 
C) Similar to the Fed's OMO in that they accept only U.S.Treasury securities in their refinancing operations 
D) Dissimilar to the Fed's OMO because fewer banks participate in the auctions of the securities

Exam 18: Monetary Policy: Stabilizing the Domestic Economy

The tool the Fed uses to keep the federal funds rate close to the target is:

One reason the target federal funds rate may not equal the actual federal funds rate is because:

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would:

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

The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system that involves setting a:

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.

Could the Fed enter the federal funds market to make sure the market and target rates are always equal, and if they could, why don't they?

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

During the 1990s many countries developed a monetary policy framework that focused on inflation targeting.This is an example of policymakers:

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap) If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:

Inflation targeting does all of the following except:

If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be:

Which of the following would be classified as intermediate targets for U.S.monetary policy?

During the financial crisis of 2007 - 2009 it became difficult for the Fed to hit their target federal funds rate because:

The Fed is reluctant to change the required reserve rate because:

For most of the Fed's history, the Fed:

Which of the following would be categorized as an unconventional monetary policy tool?

Given the following formula for the Taylor rule: Target federal funds rate = 2 + 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 = 2 + current inflation + ½(inflation gap) +½(output gap) If the inflation rate in the economy were to fall by 2% below the target inflation rate, the target federal funds rate would:

The European equivalent of the Fed's open market operations (OMO) is:

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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