Q&A Hero

Q: What are the operational components of central bank independence?

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

Q: The chairman of the Fed gives a speech and hints that, at the next meeting of the Open Market Committee, the issues of a rapidly growing economy and preliminary indications of rising prices will have to be addressed. You are in the market for a new house and your mortgage broker calls to tell you that the interest rate on the $100,000, 30-year mortgage you applied for has just increased by a quarter of a percent. Why did the rate increase even though the Fed has not announced any rate change?

Q: Today there is a clear consensus about the best way to design a central bank. What are the criteria for a successful central bank?

Q: Why might the central bankers in emerging market economies focus more attention on a stable exchange rate than say the Federal Reserve or the European Central Bank?

Q: What are the potential problems that can result if central bankers set a target of a zero rate of inflation?

Q: How do the specific goals of interest rate and exchange rate stability differ in importance from the other specific goals mentioned for central bankers?

Q: We have a country, Fantasyland, where the current per capita real income is 20,000 units of output, and the current average growth rate is 2.0 percent. What will be the difference in the standard of living twenty years from now if Fantasyland grows at a rate of 3.5 percent and we assume population is constant?

Q: 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.

Q: 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.

Q: Explain why inflation degrades the information content of prices.

Q: What may be the reasons that explain the observation that during periods of hyperinflation economic growth actually slows or even contracts?

Q: Imagine you own a retail mail order business. You produce your catalog, where items and prices are listed, in January and you use the same catalog all year. The central bank in your country increases the money supply by an amount to cause inflation to average one percent each month. Ignoring any seasonality in sales (like the holiday season), what should happen to your sales as the year progresses and why?

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

Q: What are the specific objectives of most central bankers?

Q: What do modern central bankers not do?

Q: 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.

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

Q: If governments operated like businesses, meaning their goal was to maximize profits, why would they likely never give up the power to print money to any other institution?

Q: If we think back to Chapter 11 when we discussed moral hazard, discuss how a government ceding the right to control the amount of currency to a central bank is a way to treat a potential moral hazard problem.

Q: If we look back in history, why has the role of creating money fallen to central banks?

Q: All of the following are true about central bank independence except that it: A. is usually given at the pleasure of governments.B. can be eliminated by governments in a time of crisis.C. is usually guaranteed by a country's constitution.D. can be subverted by the actions of fiscal policymakers.

Q: The autonomy of modern central banks means that governments cannot increase their spending by: A. raising taxes.B. issuing bonds.C. printing money.D. either issuing bonds or printing money; both represent debt.

Q: If a government were to find that it cannot raise taxes any further, and that it cannot borrow any further from financial markets, the government: A. cannot increase its spending any further.B. can increase spending by having the central banks purchase its bonds.C. is in default.D. can decrease the amount of money in circulation.

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

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

Q: Which of the following statements is most true concerning economic policy in the U.S.? A. Monetary policymakers tend to have a long view while fiscal policymakers tend to ignore the long-run inflationary ramifications of their actions.B. Fiscal policymakers tend to focus on inflation and unemployment while monetary policymakers focus most of their attention on the money supply and the exchange rate.C. Fiscal policymakers tend to focus more on pleasing their constituents and so are willing to sacrifice the short run for the long run.D. Monetary policy independence is enshrined in the U.S. Constitution.

Q: One thing that is true about economic policy in the U.S. is: A. fiscal and monetary policy never conflict.B. monetary and fiscal policy need not, but may conflict.C. monetary policy ultimately controls fiscal policy since the Fed controls the money supply.D. fiscal policy ultimately controls monetary policy since Congress can control the Fed's budget.

Q: The ability to control inflation expectations is most closely related to a central bank's: A. transparency.B. credibility.C. accountability.D. willingness to communicate.

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

Q: One problem for the Federal Reserve regarding setting policy stems from the fact that: A. there are multiple goals that may be inconsistent with each other.B. there are more policy instruments than goals.C. Congress sets very tight goal ranges that the central bankers must hit.D. the membership of its governing board changes so often.

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

Q: One reason for having a monetary policy framework is: A. it makes clear what specific goals the central bankers are pursuing.B. it provides leeway for central bankers to change their goals without communicating the change and disrupting financial markets.C. it provides central bankers the secrecy needed to perform their jobs effectively.D. it can make goal setting vague enough so that the central bankers can always claim success.

Q: The monetary policy framework is: A. the Law that created the Federal Reserve System.B. the idea that central banks should be interconnected across countries.C. a way to prioritize and implement the central bank's objectives when they are in conflict.D. a growing belief that there should be one central bank headquartered at the World Bank.

Q: Which of the following statements is most accurate? A. Central bank statements in developed countries are similar both in length and in the speed with which policy changes are announced.B. Central bank statements in developed countries differ both in length and in the speed with which policy changes are announced.C. Central bank statements in developed countries are similar in length but differ in the speed with which policy changes are announced.D. Central bank statements in developed countries differ in length but are similar in the speed with which policy changes are announced.

Q: One reason given for more central bankers releasing its decisions publicly is: A. for monetary policy to work, people must be taken by surprise.B. most people do not understand monetary policy so it really doesn't do any harm to release the decisions publicly.C. so that central banks across the world can coordinate their policies.D. monetary policy is more effective when households and businesses can understand and anticipate it.

Q: The Federal Reserve's policy regarding announcing its policy decisions has: A. always been to announce it immediately; that was part of the original Federal Reserve Act of 1913.B. only recently gone to immediate announcement; until 1994 these policy decisions were secret.C. been to release the decisions immediately since its early failure at preventing the Great Depression.D. changed so that now the Fed does not release its decisions publicly.

Q: Today, most central banks announce their policy actions: A. one year after the policy is put in place.B. almost immediately.C. within a 3 to 5 year "window".D. usually six months after the policy is put in place.

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

Q: Setting an explicit numerical inflation target is most associated with the goal(s) of: A. transparency.B. accountability.C. both transparency and accountability.D. neither transparency nor accountability; it's about moral hazard.

Q: The central bank for the euro area tries to achieve accountability and transparency through a: A. standard numerical objective for inflation over the medium term.B. specific target for unemployment and economic growth.C. following the monetary policy guidance of the European Parliament.D. specific target for the dollar euro exchange rate.

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

Q: The means for assuring accountability and transparency: A. may differ across the central banks of different countries.B. are the same for all successful central banks.C. involve setting specific numerical targets so there is no confusion as to what the goal is.D. are opposite to each other; increasing one means decreasing the other.

Q: To say monetary policy is transparent implies: 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.

Q: In a survey of forecasters toward the end of the financial crisis of 2007-2009, forecast inflation rates for the next decade in the United States were: A. 0%.B. 2%.C. 4%.D. 7%.

Q: During the financial crisis of 2007-2009 the U.S. Federal Reserve used its powers in all but which of the following ways: A. lending to nonbanks.B. accepting very illiquid collateral against its loans.C. lowered bank reserve requirements.D. lowered its policy rate to zero.

Q: Central bank accountability means: A. politicians will establish goals and central bankers will report on their progress.B. central bankers are not accountable to any elected officials.C. central bankers are only accountable to the banks in their respective countries.D. central bankers must hold press conferences to explain their monetary policy views.

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

Q: Most central banks of industrialized countries have monetary policy formed by: A. an individual, usually the minister of finance.B. their version of Congress.C. a committee made up of members of their central bank.D. an individual, usually the person heading the central bank at the time.

Q: In the United States, monetary policy is formed by: 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.

Q: Empirical research seems to verify that: 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.

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

Q: One argument for an independent central bank is: A. successful monetary policy requires a long time horizon usually well beyond the next election of most public officials.B. without independence competent people would not take a position in a central bank.C. the central bank usually hires more competent individuals than the Treasury department or other finance ministries.D. central bankers have a short-run focus that usually corrects problems faster.

Q: The interest rate decisions made by the Federal Open Market Committee: A. can be overridden by the President.B. can be overridden by the Secretary of the Treasury.C. can be overridden by the U.S. Senate by a two-thirds majority.D. cannot be overridden by anyone outside of the Federal Reserve.

Q: The operational components required for truly independent central banks include: A. a budget controlled by Congress.B. the ability to have policies reversed.C. monetary policies that cannot be reversed by anyone outside of the central bank.D. the chairperson of the bank being answerable only to the President.

Q: To be independent, a central bank must have: 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.

Q: The idea that central banks should be independent of political pressure is an idea that: A. has been around since there were central banks.B. is relatively new.C. every central bank was founded upon.D. became quite popular in the early 1900s.

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

Q: Most economists agree that a well-designed central bank would: A. be independent of political pressure.B. make its policy actions difficult to interpret.C. be accountable only to other banks.D. be run by one key policy maker.

Q: Successful monetary policy relies most on: 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.

Q: The 1990s saw inflation fall and real growth increase in the U.S. and in many other countries. This is partially attributed to all of the following except: A. technological innovation.B. redesign of many central banks.C. central banks became better at their jobs.D. central banks focused more on exchange rates in a global environment.

Q: Which of the following would give the most importance to the goal of exchange rate stability? A. Large, closed economiesB. The U.S. and Japan and other developed countriesC. Emerging market countries where exports and imports are central to the structure of the economyD. Europe

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

Q: Central banks are in a position to control risk in the economy because they: A. control the unemployment rate.B. control the economy's real growth rate.C. control short-term interest rates.D. can change taxes.

Q: Interest rate volatility is a problem because: 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.

Q: Keeping interest rates stable is: A. the most important goal for a central bank.B. a key goal, because stable interest rates will result in all other goals being achieved.C. a secondary goal for central banks.D. not a goal of the central bank.

Q: Since the Federal Reserve was created, it has: A. averted all financial panics that could have plagued the U.S. economy.B. averted a few financial panics but not most.C. improved its skill at securing financial stability.D. proved to be much better at preventing international panics than domestic ones.

Q: At a growth rate of 6% an economy will double in size in: A. 7 years.B. 14 years.C. 12 years.D. 6 years.

Q: Which of the following statements regarding growth was brought out from the material in Chapter 15? A. Stability results in higher output growth rates.B. Inflation volatility results in higher output growth rates.C. There is no correlation between the volatility in growth rates and annual output growth.D. The more volatile the growth rate, the higher is the annual output growth.

Q: All of the following are consequences of an economy operating above its potential level except: A. high rates of inflation.B. high interest rates.C. low unemployment.D. stable prices.

Q: Which of the following statements is not true? A. The potential growth rate in the U.S. economy may have fallen following the financial crisis of 2007-2009.B. Periods of growth below the potential level are periods of low unemployment.C. Periods of growth above the potential level are periods of low employment.D. Periods of growth below the potential level are periods of high unemployment.

Q: Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank: A. will keep interest rates low to keep the momentum.B. will now identify this new rate as the sustainable rate and try to maintain it.C. is likely to raise interest rates to slow the rate of growth.D. is likely to lower the interest rate thinking a slowdown is coming to offset this boom.

Q: Over very long periods, U.S. real economic growth averaged around: A. 3 percent per year.B. 1 percent per year.C. 5 percent per year.D. 7 percent per year.

Q: Potential output depends on all of the following except: A. technology.B. the number of firms in the economy.C. the size of the capital stock.D. the number of people who can work.

Q: In terms of economic growth, the central bank would like to: A. have the maximum growth rate possible.B. keep the growth rate averaging zero.C. keep the economy close to its potential or sustainable rate of growth.D. balance every recession with a boom.

Q: The main problem from inflation as seen by most economists is: A. inflation raises prices more than wages.B. inflation harms lenders more than it benefits borrowers.C. during periods of inflation some prices fall.D. inflation creates risk.

Q: Higher than expected inflation will increase the: A. real interest rate borrowers pay on fixed rate mortgages.B. nominal amounts people need to save for retirement.C. real interest rate savers earn on fixed rate CDs.D. real interest rates both paid on mortgages and earned on CDs.

Q: The problem for a central bank setting a zero inflation policy would be: A. the risk of high employment.B. it is impossible to have zero inflation.C. firms would have to cut the nominal wage to reduce the real wage.D. economic growth would also have to be zero.

Q: Most economists agree that the target rate of inflation for the central banks should be: A. between 7 and 9 percent.B. less than zero.C. above zero for fears of deflation.D. something over 3 but less than 6 percent.

Q: The correlation between high rates of inflation and economic growth is: A. direct; one brings about the other.B. inverse; high inflation usually means low economic growth.C. there is no correlation between these measures.D. is direct at low rates of economic growth and inverse at high rates.