Question 1

One of the specific goals for central bankers is financial system stability. Considering the U.S., for example, would this imply that the Federal Reserve would always take action to prevent any single bank from failing? Explain.

Accepted Answer

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Question 2

The central bank has the ability to create money; this means it:

Accepted Answer

A)  can control the availability of money but not the availability of credit in the economy. 
B)  can make loans only when other institutions can. 
C)  can impact the rate of inflation. 
D)  has an objective to maximize its profit.

Question 3

There is a strong consensus among economists that monetary policy is more effective when it is formed:

Accepted Answer

A)  by an individual rather than a committee. 
B)  in secrecy without the reasoning behind it being revealed for many years. 
C)  to keep financial markets guessing. 
D)  independently of political pressure.

Question 4

One use of a monetary policy framework is to clarify all of the following except:

Accepted Answer

A)  the likely response when policy goals are in conflict with one another. 
B)  the goal that is currently receiving the most attention. 
C)  how goals will be measured. 
D)  why zero inflation is not desirable.

Question 5

In the United States, the Federal Reserve is asked to:

Accepted Answer

A)  deliver on a specific inflation target set by Congress. 
B)  meet an explicit target for economic growth. 
C)  meet a specific target for unemployment each year. 
D)  deliver price stability as one of a number of objectives.

Question 6

To be independent, a central bank must have:

Accepted Answer

A)  its policies overturned only by the president. 
B)  control of its own budget. 
C)  the board members appointed for very short terms. 
D)  the chairperson serve as a member of the President's cabinet.

Question 7

What are the three main functions a central bank performs in its role as a banker's bank?

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Question 8

Empirical research seems to verify that:

Accepted Answer

A)  countries that have less independent central banks experience lower rates of inflation. 
B)  countries that have high rates of inflation seem to have central banks with low levels of independence. 
C)  there is no relationship between the independence of central banks and rates of inflation. 
D)  the rate of inflation seems to vary directly with the amount of central bank independence.

Question 9

If one of the specific goals that central bankers focus on is economic growth, should they aim for the highest short-term growth rate the economy can achieve? Explain.

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Question 10

In the United States, monetary policy is formed by:

Accepted Answer

A)  an individual advised by a close group of people. 
B)  committee. 
C)  the President and approved by Congress. 
D)  the Chairman of the Federal Reserve and can only be overturned by the presidents of the Regional Federal Reserve Banks.

Question 11

Exchange-rate stability is likely to be a more important goal for the central banks of:

Accepted Answer

A)  emerging market economies than the central bank of the U.S. 
B)  the U.S. and Japan than most small developing countries. 
C)  countries where exports and imports make up a small total of all economic activity. 
D)  large, closed economies.

Question 12

To say monetary policy is transparent implies:

Accepted Answer

A)  that anyone could figure out what the correct policy should be. 
B)  monetary policy should not be so difficult that most people couldn't understand it. 
C)  policymakers offer plausible explanations for their decisions along with supporting data. 
D)  that when faced with the same problem, policymakers will always react the same way.

Question 13

Discuss how the goals of central bankers can be linked to risk and the ability or inability of individuals to eliminate this risk.

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Question 14

The autonomy of modern central banks means that governments cannot increase their spending by:

Accepted Answer

A)  raising taxes. 
B)  issuing bonds. 
C)  printing money. 
D)  either issuing bonds or printing money; both represent debt.

Question 15

All of the following are consequences of an economy operating above its potential level except:

Accepted Answer

A)  high rates of inflation. 
B)  high interest rates. 
C)  low unemployment. 
D)  stable prices.

Question 16

Which of the following statements is most accurate?

Accepted Answer

A)  As the inflation rate increases, inflation becomes less stable. 
B)  As the inflation rate decreases inflation becomes less stable. 
C)  As the inflation rate decreases inflation becomes more volatile. 
D)  As the inflation rate increases, inflation becomes more stable.

Question 17

In the United Kingdom accountability and transparency for its central bank is achieved by setting:

Accepted Answer

A)  a numerical target for unemployment each year. 
B)  a numerical target for economic growth. 
C)  numerical targets for economic growth and the exchange rate. 
D)  an explicit numerical target for inflation.

Question 18

Why might Congress actually prefer the higher rate of inflation that might result from deficit spending to higher taxes and/or a cut in government spending?

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Question 19

Fiscal policymakers may actually welcome some inflation for all of the following reasons except:

Accepted Answer

A)  it potentially raises tax revenues. 
B)  it reduces the real value of the national debt allowing governments to "default" on a portion of their debt. 
C)  interest payments tend to be fixed so the real interest payments are reduced. 
D)  it weakens the independence of the central bank.

Question 20

Interest rate volatility is a problem because:

Accepted Answer

A)  it adds to uncertainty, thereby diminishing the investment. 
B)  it decreases risk. 
C)  it can impact productivity in a positive way. 
D)  financial decisions become less difficult when interest rates are more volatile.

Exam 15: Central Banks in the World Today