Question 1

Observability refers to the notion that an operating target must have an expected connection with the intermediate target, which itself must eventually affect the economy in a way that is consistent with the Fed's goals.

Accepted Answer

A) True 
 B)False

Question 2

Which of the below statements is FALSE?

Accepted Answer

A)  Monetarists claim that policy that is based on known rules of growth in key monetary aggregates sustains stability in the price level, and that such stability fosters long-run economic growth and employment. 
B)  Monetarists believe that the money multiplier is basically steady, so that the link between reserves and the monetary aggregates can be identified. 
C)  The changes in interest rates that may result from changes in money demand should be allowed to affect the policy on reserves. 
D)  By 1982, the tight monetary policy had banished the worst of the inflation, which seemed to reach a bottom of about 3% to 4%.

Question 3

The Fed's policy necessarily represents trade-offs among its various goals, which have different levels of relative importance at different times, depending on the state of the economy.

Accepted Answer

A) True 
 B)False

Question 4

The Fed has numerous and complex goals related to conditions in the overall economy, which include price stability, high employment, economic growth, and stability in interest rates and the dollar's value in foreign currencies.

Accepted Answer

A) True 
 B)False

Question 5

During the late 1990s and the 2000s, due to the moderately strong U.S. dollar, strong U.S. economic growth and weak or anemic economic growth in much of the rest of the world, the United States experienced a very large but decreasing trade deficit.

Accepted Answer

A) True 
 B)False

Question 6

As of 1995, what did the Fed succeed in doing?

Accepted Answer

A)  The Fed succeeded is helping the economy achieve inflationary growth. 
B)  The Fed succeeded is helping lead the country into a recession. 
C)  The Fed helped achieve a desirable strong growth and a low inflation that was referred to as the "new paradigm." 
D)  The Fed helped achieve an undesirable weak growth and a high inflation that was referred to as the "new paradigm."

Question 7

Which of the below statements is FALSE?

Accepted Answer

A)  An important point about the operating target is that the Fed must choose either a short-term rate or the level of some reserves and cannot choose to target both kinds of variables. 
B)  As the Fed supplies more reserves and banks gain more ability to make more loans and buy other assets, the short-term rates fall; as the Fed withdraws reserves and reduces the banks' lending capacity, the short-term rates rise. 
C)  The Fed cannot know or predict the public's demand for money, which is the aggregate demand for holding some of its wealth in the form of liquid balances, such as bank deposits. 
D)  The least known of the intermediate targets is the money supply, measured by one of the more inclusive monetary aggregates.

Question 8

The Fed, like any monetary policy maker, has numerous goals but focuses, at any time, on the goal ________.

Accepted Answer

A)  that is most often neglected. 
B)  that is unfortunately most often irrelevant. 
C)  that is most in danger of not being achieved. 
D)  that most often has political reasons for implementing.

Question 9

In the Keynesian view, the Fed's decision to reduce the fed funds rate, by increasing the banking system's excess reserves, should have certain consequences. Explain these consequences.

Accepted Answer

The answer of In the Keynesian view, the Fed's decision...

Question 10

Although economists have argued many years about the identity of appropriate operating and intermediate target variables, there is no dispute about the chief characteristics of a suitable operating or intermediate target. Which of the below is NOT a chief characteristic?

Accepted Answer

A)  linkage (an expected connection with the intermediate target) 
B)  objectivity (decision-making eliminates personal experiences) 
C)  observability (targets must be readily and regularly observable economic variables) 
D)  responsiveness (respond quickly and in an expected way to the Fed's use of its tools)

Question 11

It is important to note that, when confronted with a supply shock, a central bank such as the Fed has two choices. Which of the below is ONE of these choices?

Accepted Answer

A)  The banking authorities can shoot for zero unemployment. 
B)  The banking authorities can refuse to accommodate the higher price levels that follow the shock by matching them with an increase in the money supply. 
C)  The Fed can choose to shoot for a goal of low employment of the civilian labor force. 
D)  The Fed can choose shoot for a goal of high unemployment of the civilian labor force.

Exam 5: Monetary Policy in the United States

Observability refers to the notion that an operating target must have an expected connection with the intermediate target, which itself must eventually affect the economy in a way that is consistent with the Fed's goals.

Which of the below statements is FALSE?

The Fed's policy necessarily represents trade-offs among its various goals, which have different levels of relative importance at different times, depending on the state of the economy.

The Fed has numerous and complex goals related to conditions in the overall economy, which include price stability, high employment, economic growth, and stability in interest rates and the dollar's value in foreign currencies.

During the late 1990s and the 2000s, due to the moderately strong U.S. dollar, strong U.S. economic growth and weak or anemic economic growth in much of the rest of the world, the United States experienced a very large but decreasing trade deficit.

As of 1995, what did the Fed succeed in doing?

Which of the below statements is FALSE?

The Fed, like any monetary policy maker, has numerous goals but focuses, at any time, on the goal ________.

In the Keynesian view, the Fed's decision to reduce the fed funds rate, by increasing the banking system's excess reserves, should have certain consequences. Explain these consequences.

Although economists have argued many years about the identity of appropriate operating and intermediate target variables, there is no dispute about the chief characteristics of a suitable operating or intermediate target. Which of the below is NOT a chief characteristic?

It is important to note that, when confronted with a supply shock, a central bank such as the Fed has two choices. Which of the below is ONE of these choices?