Q&A Hero

Q: If the current rate of inflation is 5% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: A. 6.5%.B. 2.5%.C. 3.5%.D. 10%.

Q: Economic policy affectsa. only the amount of money in the economy.b. only the lending policy of financial intermediaries.c. the entire financial system.d. how financial securities are traded and no other part of the financial system.

Q: During the financial crisis of 2007-2009, A) mortgage-backed securities became more liquid. B) information costs of mortgage-backed securities rose. C) information costs of mortgage-backed securities declined. D) the tax treatment of mortgage-backed securities was changed.

Q: Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will A) fall relative to the price of U.S. Treasury securities, but rise relative to the price of high-quality corporate bonds. B) rise relative to the price of U.S. Treasury securities, but fall relative to the price of high-quality corporate bonds. C) rise relative to the prices of U.S. Treasury securities and high-quality corporate bonds. D) fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds.

Q: The Taylor rule assumes the real long-term interest rate would be: A. approximately 2%.B. zero.C. five percent less the inflation rate.D. one percent.

Q: The central bank of a country follows the Taylor rule to set its interest rate. If the equilibrium real interest rate rises by 1 percentage point, all other variables remaining unchanged,a. the central bank should raise the nominal interest rate by 1 percentage point.b. the central bank should lower the nominal interest rate by 1 percentage point.c. the central bank should raise the nominal interest rate by 0.5 percentage points.d. the central bank should lower the nominal interest rate by 0.5 percentage points.

Q: Following the downgrade of U.S. debt by Standard & Poor's in August, 2011: A) other rating agencies also downgraded U.S. debt B) interest rates spiked as investor's perception of risk increased C) investors didn't seem to be any more concerned about default risk than before the downgrade D) the U.S. implemented a plan to significantly reduce its budget deficit later that year

Q: The components of the formula for the Taylor rule includes each of the following, except: A. the target federal funds rate.B. the current inflation rate.C. the 30-year U.S. Treasury bond rate.D. the inflation gap.

Q: Suppose that savers become much more willing to purchase a certain type of municipal bond. The result will be that the bond's price will A) fall relative to the price of U.S. Treasury securities but rise relative to the price of corporate bonds. B) rise relative to the price of U.S. Treasury securities but fall relative to the price of corporate bonds. C) rise relative to the prices of U.S. Treasury securities and corporate bonds. D) fall relative to the prices of U.S. Treasury securities and corporate bonds.

Q: The Taylor rule implies that the nominal federal funds rate should be increased if there is a______output gap or a_____inflation gap. a. positive; positive b. positive; negative c. negative; positived. negative; negative

Q: The existence of rating agencies has A) lowered returns on corporate bonds. B) raised returns on corporate bonds. C) left returns on corporate bonds largely unaffected. D) raised returns on both corporate bonds and Treasury securities.

Q: The greatest appeal of U.S. Treasury securities is that A) they have high yields. B) they have no default risk. C) the U.S. Treasury will repurchase them at any time. D) their market prices fluctuate very little.

Q: The systematic setting of policy according to a formula is known as a. credibility.b. an expectations trap. c. discretionary policy.d. a rule for monetary policy.

Q: The Taylor rule is: A. the monetary policy setting formula followed explicitly by the FOMC.B. an approximation that seeks to explain how the FOMC sets their target.C. an explicit tool used by the ECB but not the Fed.D. a rule adopted by Congress to make the Fed's monetary policy more accountable to the public.

Q: The Fed eases policy when ita. decreases both the money growth and the federal funds rate.b. decreases the money growth and increases the federal funds rate. c. increases both the money growth and the federal funds rate.d. increases the money growth and decreases the federal funds rate.

Q: Over the last few decades, central bankers have: A. mostly abandoned intermediate targets.B. greatly increased their focus on intermediate targets.C. found that the links between the operating instruments and intermediate targets have become more stable.D. developed more intermediate targets.

Q: Inflation targeting does all of the following except: A. increase policymakers' credibility.B. increase policymakers' accountability.C. communicate policymakers' objectives clearly and openly.D. hinder economic growth.

Q: The ideal inflation rate is also referred to as the a. steady state inflation rate.b. NAIRU.c. inflation target.d. minimal inflation rate.

Q: A company that retains a high bond rating during a recession in which many other companies see their bond ratings cut will experience A) an increased flow of funds into the market for its securities. B) an increased demand for its securities, resulting in a higher expected return. C) a decreased demand for its securities, resulting in a lower expected return. D) a decreased flow of funds into the market for its securities.

Q: When a central bank increases money growth, the bank is said to policy. a. restrictb. tightenc. destabilize d. ease

Q: Which of the following would be classified as intermediate targets for U.S. monetary policy? A. M2 but not M1B. The federal funds rateC. M1 and M2D. M1 but not M2

Q: In late 2008, the average risk premium rose because A) investors feared a revival of inflation. B) large tax increases in the United States reduced corporate profits and led to fears of increased defaults. C) of the financial crisis. D) of fraud in the market for municipal bonds.

Q: Typically, the ideal inflation rate is taken to be a. increasing over time.b. decreasing over time.c. positive and constant over time. d. zero percent.

Q: Central banks that have a hierarchical mandate with inflation targeting basically are saying: A. hitting the inflation target is the first priority after all other stated objectives are reached.B. hitting the inflation target is the only objective.C. the inflation target is the second most important goal after economic growth, which is always the most important goal for monetary policymakers.D. hitting the inflation target comes first, everything else comes second.

Q: If monetary policy is not set by a rule, it is said to be set by a. randomization.b. discretion. c. credibility.d. destabilization.

Q: A good definition for intermediate targets of monetary policy would be: A. instruments under the direct control of central bankers but one step removed from operational targets.B. instruments that are not under the direct control of the central banks but lie between operational instruments and objectives.C. the quantity or non-price targets of monetary policy.D. the real goals of monetary policy.

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

Q: During the financial crisis of 2007-09, the prices of U.S. Treasury securities A) rose and the price of corporate bonds declined. B) fell relative to the prices of corporate bonds. C) remained in the same relative position to the prices of corporate bonds. D) were frozen by order of the federal government.

Q: If the mortgage-tilt problem does not exist in an economy, it implies that the ____rate in the economy is zero percent.a. inflationb. unemployment c. interestd. average tax

Q: If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must: A. target the quantity of reserves.B. set targets for both interest rates and the quantity of reserves.C. not target the interest rates.D. let the quantity of reserves fluctuate.

Q: A flight to quality refers to a shift by savers from A) bonds and into stocks. B) stocks and into gold or other precious metals. C) bonds and into real assets, such as real estate. D) low-quality bonds and into high-quality bonds.

Q: In comparison to when monetary policy is not contractionary, under a contractionary monetary policy, the unemployment rate is and the inflation rate is over time.a. higher; higher b. higher; lower c. lower; lower d. lower; higher

Q: In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to the actual market interest rates that occurred, the: A. economy would have been better off.B. target would not have been politically acceptable.C. target would have been a federal funds rate of zero percent.D. inflation rate would have risen further.

Q: Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade? A) Baa B) Ba C) B D) All of these ratings are considered below investment grade.

Q: In comparison to when monetary policy is not expansionary, under an expansionary monetary policy, the unemployment rate is and the inflation rate is over time.a. higher; higher b. higher; lower c. lower; lower d. lower; higher

Q: If lenders anticipate no changes in liquidity, information costs, and tax differences, the yield on a risky security should be A) greater than that on a safe security and the price of a risky security should also be greater than that of a safe security. B) less than that on a safe security and the price of a risky security should also be less than that of a safe security. C) greater than that on a safe security and the price of a risky security should be lower than that of a safe security. D) less than that on a safe security and the price of a risky security should be greater than that on a safe security.

Q: Which of the following is the lowest rating given to an investment-grade bond by Moody's? A) Aa B) A C) Baa D) B

Q: From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was: A. the inflation rate increased to over 18 percent in 1983.B. many banks failed that otherwise may not have.C. interest rates rose very high.D. inflation remained high for most of the 1980's.

Q: The default risk premium fluctuates mainly A) because bond rating agencies tend to be inconsistent in their ratings of bonds. B) because risk-neutral investors will often become risk-averse as time passes. C) because taxes tend to rise over the long run. D) as new information about a borrower's creditworthiness becomes available.

Q: A decrease in the money supply is an example of a(n) policy. a. countercyclicalb. procyclicalc. contractionary d. expansionary

Q: Which of the following is the highest bond rating assigned by Moody's Investors Service? A) Aaa B) A C) B D) Baa

Q: The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it: A. is not controllable.B. is not observable.C. cannot be quickly changed.D. it has a predictable impact on the economy.

Q: Which of the following statements about junk (high-risk) bonds is true? A) They never outperform treasury bonds since they're too risky. B) The price of junk bonds increase as their perceived risk increases. C) They tend to perform best during recessions. D) One can profit by owning them if market perceptions of their risk decline.

Q: The Fed uses_____monetary policy to cause the economy to grow faster in the short run. A(n)___in the money supply is an example of such a policy. a. expansionary; decreaseb. expansionary; increase c. contractionary; increase d. contractionary; decrease

Q: Which of the following features would characterize a good monetary policy instrument? A. observable only to monetary policy officials.B. tightly linked to monetary policy objectives.C. controllable and rigid.D. difficult to change.

Q: Bond ratings A) are published annually by the federal government and are based largely on information contained in corporate tax returns. B) are published annually by the federal government and are based on publicly available information. C) are published monthly by the federal government and are based on publicly available information. D) are published by private bond-rating agencies.

Q: A secondary credit discount loan has an interest rate that is a primary credit discount loan.a. 1/4 b. 1/2 c. 1d. 2

Q: Which of the following is true of an economy in a liquity trap?a. The money supply in the economy increases rapidly as additions are made to the monetary base. b. The economy's nominal short-term interest rates become close to zero.c. The banks in the economy do not hold any reserves.d. The economy's interest rates decline when there is an increase in the monetary base.

Q: One key difference between the Fed and the European Central Bank (ECB) in their reserve requirements is that the: A. reserve requirements of the ECB are at a much higher rate than the Fed's.B. ECB's reserve requirements are more difficult for banks to predict.C. reserve requirement of the ECB are determined annually.D. ECB reserve requirement is based on all of a bank's liabilities.

Q: Over the years most monetary policy experts would agree with each of the following statements, except: A. the reserve requirement is not useful as an operational instrument.B. central bank lending is necessary to ensure financial stability.C. short-term interest rates are the best tool to use to stabilize short-term fluctuations in prices and output.D. transparency in policy making hinders accountability.

Q: Which of the following assigns widely-followed bond ratings? A) Standard & Poor's Corporation B) Securities and Exchange Commission C) Federal Reserve D) IBM

Q: Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals a. the Fed's capital stock.b. discount loans.c. the monetary base.d. required clearing balances.

Q: An increase in the amount of discount loans by the Feda. increases the money supply by an amount equal to the increase in the loans times the multiplier. b. decreases the money supply by an amount equal to the increase in the loans times the multiplier.c. decreases the money supply by an amount greater than the increase in the loans times the multiplier. d. increases the money supply by an amount lower than the increase in the loans times the multiplier.

Q: The central banks of Australia, Canada and New Zealand have eliminated reserve requirements and conduct monetary policy through a "channel" or "corridor" system. The "channel" or "corridor" refers to the spread between the central bank's: A. target interest rate and its deposit rate.B. target interest rate and its lending rate.C. lending rate and its deposit rate.D. target interest rate and the current interest rate.

Q: Which of the following statements is most correct? A. The FOMC is more successful at keeping the market rate closer to the target rate than the ECB.B. The FOMC is more successful than the ECB at keeping the market rate within a 100 basis point band of the target rate.C. The ECB has kept the market rate within a 100 basis point band of the target rate; the FOMC cannot make this claim.D. The ECB seldom has the market rate within 100 basis points of the target rate.

Q: Investors often pay professional analysts to gather and monitor information on the creditworthiness of borrowers because A) federal law requires it. B) most investors are risk neutral. C) the cost of acquiring information about a borrower's creditworthiness can be high. D) doing so increases the net-of-tax yield on most investments.

Q: The main liability on the Federal Reserve's balance sheet is a. discount loans.b. securities.c. the monetary base. d. capital.

Q: The supply curve of reserves in an economy is horizontal whena. the federal funds rate is greater than the seasonal credit discount rate. b. the federal funds rate is less than the secondary credit discount rate.c. the federal funds rate equals the primary credit discount rate.d. the federal funds rate is less than the primary credit discount rate.

Q: 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. 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.

Q: The European equivalent of the U.S.'s market federal funds rate is called the: A. overnight cash rate.B. target refinancing rate.C. European discount rate.D. overnight repurchase rate.

Q: The default risk premium is A) relevant only for securities issued by very small companies. B) the additional yield a saver requires for holding a bond with some default risk. C) zero for corporate bonds, but quite substantial for corporate stock. D) constant across the business cycle.

Q: The main asset on the Federal Reserve's balance sheet isa. discount loans.b. securities.c. monetary base. d. capital.

Q: Within the European Central Bank, banks with excess reserves: A. can deposit them with the ECB and earn an interest rate below the target refinancing rate.B. earn no interest on excess reserves, similar to the system in the U.S.C. must deposit the excess with the ECB's Deposit Facility.D. none of the above answers is correct; there are no required reserves for the ECB and so therefore no excess reserves.

Q: The default risk premium is measured A) by an index published monthly by the Securities and Exchange Commission. B) by an index published monthly by The Wall Street Journal. C) as the difference between the yield on a non-Treasury security and the yield on a U.S. Treasury security of the same maturity. D) as the difference between the nominal yield on the security and the real after-tax yield on the security.

Q: The money supply in an economy equals a. monetary base plus money multiplier.b. monetary base divided by money multiplier. c. money multiplier divided by monetary base.d. money multiplier multiplied by monetary base.

Q: Which of the following statements is true? A. The ECB's marginal lending facility was the model for the Fed's redesign of its procedures for lending to banks.B. The ECB's success in controlling reserves by paying interest on them has led the Fed to do the same.C. The ECB's weekly auctions include only a few of the largest banks in Europe.D. The Fed's redesign of its procedures for lending to banks was the model for the ECB's marginal lending facility.

Q: U.S. Treasury securities A) are considered risk free because their prices never change. B) have been defaulted on several time in U.S. history. C) are considered default-risk-free instruments. D) have a large default risk premium.

Q: A transaction in which the Fed agrees to buy a security one day and sell it back the next day is referred to as a(n)a. overnight securitization operation. b. repurchase agreement.c. legal tender. d. rebate sale.

Q: The European Central Bank's Marginal Lending Facility is used to provide: A. short-term loans to banks at rates below the target refinancing rate.B. long-term loans to banks at rates above the target refinancing rate.C. short-term loans at rates above the target refinancing rate.D. long-term loans to banks at rates below the target refinancing rate.

Q: Which of the following is a possible impact of a global savings glut on a small open economy? A) interest rate would increase B) interest rate would decrease C) domestic savings would increase D) domestic investment would increase

Q: Which of the following is considered a default-risk-free instrument? A) a three-month commercial paper issued by GE B) a share of stock issued by Google C) a three-month Treasury bill D) a ten-year bond issued by Intel

Q: Which of the following Federal Reserve Banks performs the role of buying or selling currencies in the foreign exchange market?a. The Federal Reserve Bank of Minneapolis b. The Federal Reserve Bank of Bostonc. The Federal Reserve Bank of New Yorkd. The Federal Reserve Bank of San Francisco

Q: The European Central Bank's equivalent of the Fed's open market operations (OMO) is: 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 18 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.

Q: Consider an open economy that is a net borrower (like the United States). What would be the impact of a shift to a closed economy? A) domestic interest rates would decline B) domestic savings would decline C) domestic investment would decline D) net borrowing would increase

Q: Default risk A) is the probability that a borrower will not pay in full the promised coupon or principal. B) exists only for the bonds of small corporations. C) is also known as market risk. D) is zero for bonds issued by cities and states.

Q: In which of the following cities is a Federal Reserve Bank NOT located a. Richmond.b. Denver.c. Kansas City. d. St. Louis.

Q: For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the: A. European target discount rate.B. European target federal funds rate.C. target refinancing rate.D. London Inter-Bank Offer Rate.

Q: How can a global savings glut affect the United States? A) It can reduce the world real interest rate, thus encouraging borrowing by Americans. B) It can increase the world real interest rate, thus encouraging saving by Americans. C) It can reduce the supply of loanable funds for the United States. D) It can reduce the demand for loanable funds for the United States.

Q: There are Federal Reserve Banks located around the United States. a. sevenb. tenc. twelve d. fifteen

Q: Today, reserve requirements are: A. set in a way that makes reserve demand highly unpredictable.B. changed whenever the target federal funds rate is changed.C. changed instead of making changes in the discount rate.D. really not a direct tool of monetary policy.