Question 1

In 2012, the average daily volume on the Federal Reserve's Fedwire system was:

Accepted Answer

A) $24 billion. 
B) $240 billion. 
C) $2.4 trillion. 
D) $240 million.

Question 2

Explain why it is correct to say the Federal Reserve functions as the government's bank but it is incorrect to say it controls the government's budget.

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Question 3

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.

Question 4

Compared to an independent central bank, elected officials are likely to:

Accepted Answer

A) favor long-run stability over short-term prosperity. 
B) sacrifice short-term growth to keep future inflation low. 
C) choose monetary policies that are overly accommodative. 
D) prefer interest rates to vary more often.

Question 5

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.

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Question 6

A primary goal of central banks is to:

Accepted Answer

A) reduce the idiosyncratic risk that impacts specific investments. 
B) reduce systematic risk. 
C) keep stock and bond prices high. 
D) keep inflation rates high.

Question 7

In the United States, one problem with central bank independence is:

Accepted Answer

A) it is almost impossible to obtain because Congress controls the budget of the Federal Reserve. 
B) in a representative democracy, monetary policymakers must be held accountable to the public. 
C) central bank independence has not produced favorable results. 
D) the central bank can control policy, but the U.S.Treasury issues currency.

Question 8

Successful monetary policy relies most on:

Accepted Answer

A) having an ample supply of highly qualified people. 
B) luck. 
C) the institutional environment. 
D) knowledgeable citizens who know how to react to the policy.

Question 9

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 10

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 11

Whenever central bankers face more than one goal, the policy framework requires:

Accepted Answer

A) the central bank to always focus on inflation first. 
B) central bankers to focus on all goals, no matter what. 
C) economic growth to be the top priority. 
D) central bankers to make their priorities clear.

Question 12

One monopoly that modern central banks have is in:

Accepted Answer

A) regulating other banks. 
B) making loans to banks. 
C) issuing U.S.Treasury securities. 
D) issuing currency.

Question 13

Stable inflation implies:

Accepted Answer

A) that the rate of inflation averaged over many years is zero. 
B) that inflation is predictable. 
C) that the rate of inflation conceals relative price changes. 
D) low rates of unemployment.

Question 14

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

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Question 15

What are the specific objectives of most central bankers?

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Question 16

The primary objective of most central banks in industrialized economies is:

Accepted Answer

A) high securities prices. 
B) low unemployment. 
C) price stability. 
D) a strong domestic currency.

Question 17

What do you think is meant by the statement that "successful monetary policy requires competent people and the right institutional environment"?

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Question 18

For fiscal policymakers, one of the results of an independent central bank is:

Accepted Answer

A) to finance government spending the Treasury has to order more currency from the central bank. 
B) fiscal policymakers always have to borrow to increase spending. 
C) fiscal policymakers cannot borrow unless the Federal Reserve prints more money. 
D) increased government spending has to be financed with either higher taxes or increased government borrowing.

Question 19

What are the operational components of central bank independence?

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Question 20

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.

Exam 15: Central Banks in the World Today