Question 1

"The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to procyclical money growth. Why?

Accepted Answer

A) True 
 B)False

Question 2

Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called

Accepted Answer

A) primary credit. 
B) secondary credit. 
C) seasonal credit. 
D) lender-of-last-resort credit. 
A) primary credit. 
B) secondary credit. 
C) seasonal credit. 
D) lender-of-last-resort credit.

Question 3

Inflation targeting makes the central bank less accountable.

Accepted Answer

A) True 
 B)False

Question 4

Compare the advantages and disadvantages of monetary targeting and inflation targeting.

Accepted Answer

The answer of Compare the advantages and disadvantages of monetary...

Question 5

Price stability is desirable because

Accepted Answer

A) inflation creates uncertainty, making it difficult to plan for the future. 
B) everyone is better off when prices are stable. 
C) price stability increases the profitability of the Fed. 
D) it guarantees full employment. 
A) inflation creates uncertainty, making it difficult to plan for the future. 
B) everyone is better off when prices are stable. 
C) price stability increases the profitability of the Fed. 
D) it guarantees full employment.

Question 6

An objective of the Federal Reserve in its conduct of monetary policy is high employment.

Accepted Answer

A) True 
 B)False

Question 7

An open market purchase

Accepted Answer

A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. 
B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. 
C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. 
D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall. 
A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. 
B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. 
C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. 
D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall.

Question 8

If the Fed's strategy for conducting monetary policy is thought of as a game plan that proceeds in stages, then the game plan can be summarized as follows:

Accepted Answer

A) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets. Finally, it adjusts its policy tools to effect the desired targets and goals. 
B) The Fed selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy tools to effect the desired targets and goals. 
C) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the policy tools consistent with its intermediate targets. Finally, it adjusts its operating targets to effect the desired targets and tools. 
D) The Fed selects its policy tools, then the operating targets consistent with achieving its policy tools, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy goals to effect the desired targets and tools. 
E) None of the above. 
A) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets. Finally, it adjusts its policy tools to effect the desired targets and goals. 
B) The Fed selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy tools to effect the desired targets and goals. 
C) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the policy tools consistent with its intermediate targets. Finally, it adjusts its operating targets to effect the desired targets and tools. 
D) The Fed selects its policy tools, then the operating targets consistent with achieving its policy tools, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy goals to effect the desired targets and tools. 
E) None of the above.

Question 9

The supply curve for reserves is ________ when the federal funds rate is below the discount rate and ________ when the federal funds rate is above the discount rate.

Accepted Answer

A) upward sloping; horizontal 
B) upward sloping; vertical 
C) vertical; horizontal 
D) vertical; downward sloping 
A) upward sloping; horizontal 
B) upward sloping; vertical 
C) vertical; horizontal 
D) vertical; downward sloping

Question 10

Can the Fed control the money supply? Has it done so? What evidence can you provide to support your answer to each question?

Accepted Answer

The Federal Reserve (the Fed) has the ab

Question 11

What is the argument for the Fed paying interest to banks on required reserves? Are there good arguments for not doing this?

Accepted Answer

The answer of What is the argument for the Fed...

Question 12

When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called

Accepted Answer

A) structural unemployment. 
B) frictional unemployment. 
C) cyclical unemployment. 
D) underemployment. 
A) structural unemployment. 
B) frictional unemployment. 
C) cyclical unemployment. 
D) underemployment.

Question 13

Holding everything else constant, if the federal funds rate rises, then the demand for

Accepted Answer

A) excess reserves rises because they have a higher return. 
B) excess reserves falls because they have a higher cost. 
C) required reserves falls because the cost of borrowing from the Fed is relatively higher. 
D) required reserves rises because the cost of borrowing from the Fed is relatively lower. 
E) reserves will not change because the Fed sets the level of required reserves. 
A) excess reserves rises because they have a higher return. 
B) excess reserves falls because they have a higher cost. 
C) required reserves falls because the cost of borrowing from the Fed is relatively higher. 
D) required reserves rises because the cost of borrowing from the Fed is relatively lower. 
E) reserves will not change because the Fed sets the level of required reserves.

Question 14

An advantage of an intermediate targeting strategy is that it provides the Fed with

Accepted Answer

A) more timely information regarding the effect of monetary policy. 
B) a slow adjustment process. 
C) a target that is precisely correlated with economic activity. 
D) all of the above. 
E) only A and B of the above. 
A) more timely information regarding the effect of monetary policy. 
B) a slow adjustment process. 
C) a target that is precisely correlated with economic activity. 
D) all of the above. 
E) only A and B of the above.

Question 15

Which of the following statements is true?

Accepted Answer

A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity. 
B) Bubbles driven solely by irrational exuberance lead to a failure of financial institutions. 
C) Both A and B are correct. 
D) Neither A nor B is correct. 
A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity. 
B) Bubbles driven solely by irrational exuberance lead to a failure of financial institutions. 
C) Both A and B are correct. 
D) Neither A nor B is correct.

Question 16

The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.

Accepted Answer

A) True 
 B)False

Question 17

A discount loan by the Fed to a bank causes a(n)________ in reserves in the banking system and a(n)________ in the monetary base.

Accepted Answer

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

Question 18

Under usual circumstances, an increase in the discount rate causes

Accepted Answer

A) the federal funds rate to fall. 
B) the federal funds rate to rise. 
C) no change in the federal funds rate. 
D) the supply of reserves to increase. 
E) the supply of reserves to decrease. 
A) the federal funds rate to fall. 
B) the federal funds rate to rise. 
C) no change in the federal funds rate. 
D) the supply of reserves to increase. 
E) the supply of reserves to decrease.

Question 19

Disadvantages of using reserve requirements to control the money supply include

Accepted Answer

A) their overly-powerful impact on the money supply. 
B) creating potential liquidity problems for banks with high levels of excess reserves. 
C) their overly-powerful impact on the monetary base. 
D) all of the above. 
A) their overly-powerful impact on the money supply. 
B) creating potential liquidity problems for banks with high levels of excess reserves. 
C) their overly-powerful impact on the monetary base. 
D) all of the above.

Question 20

Assets on the Fed's balance sheet include

Accepted Answer

A) government securities and currency in circulation. 
B) discount loans and reserves. 
C) government securities and discount loans. 
D) currency in circulation and reserves. 
A) government securities and currency in circulation. 
B) discount loans and reserves. 
C) government securities and discount loans. 
D) currency in circulation and reserves.

Exam 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

"The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to procyclical money growth. Why?

Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called

Inflation targeting makes the central bank less accountable.

Compare the advantages and disadvantages of monetary targeting and inflation targeting.

Price stability is desirable because

An objective of the Federal Reserve in its conduct of monetary policy is high employment.

An open market purchase

If the Fed's strategy for conducting monetary policy is thought of as a game plan that proceeds in stages, then the game plan can be summarized as follows:

The supply curve for reserves is ________ when the federal funds rate is below the discount rate and ________ when the federal funds rate is above the discount rate.

Can the Fed control the money supply? Has it done so? What evidence can you provide to support your answer to each question?

What is the argument for the Fed paying interest to banks on required reserves? Are there good arguments for not doing this?

When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called

Holding everything else constant, if the federal funds rate rises, then the demand for

An advantage of an intermediate targeting strategy is that it provides the Fed with

Which of the following statements is true?

The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.

A discount loan by the Fed to a bank causes a(n)________ in reserves in the banking system and a(n)________ in the monetary base.

Under usual circumstances, an increase in the discount rate causes

Disadvantages of using reserve requirements to control the money supply include

Assets on the Fed's balance sheet include

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

The supply curve for reserves is when the federal funds rate is below the discount rate and when the federal funds rate is above the discount rate.

A discount loan by the Fed to a bank causes a(n) in reserves in the banking system and a(n) in the monetary base.