Q&A Hero

Q: During the 1950s, the Fed targeted A. M1. B. M2. C. the monetary base. D. money market conditions.

Q: The Fed-Treasury Accord of March 1951 provided the Fed greater freedom to A. let interest rates increase. B. let unemployment increase. C. let inflation accelerate. D. let exchange rates increase.

Q: The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits A. only during World War I. B. during the Great Depression. C. during World War I and World War II. D. throughout the entire existence of the Fed.

Q: During World War II, the Fed in effect relinquished its control of monetary policy through its policy ofA. continually lowering reserve requirements.B. continually raising reserve requirements.C. pegging interest rates.D. targeting free reserves.

Q: During World War II, whenever interest rates would rise and the price of bonds would begin to fall, the Fed would A. lower reserve requirements. B. raise reserve requirements. C. make open market purchases of government securities. D. make open market sales of government securities.

Q: During World War II, whenever interest rates would ________ and the price of bonds would begin to ________, the Fed would make open market purchases. A. rise; rise B. rise; fall C. fall; rise D. fall; fall

Q: The Fed's mistakes of the early 1930s were compounded by its decision to A. raise reserve requirements in 1936-1937. B. lower reserve requirements in 1936-1937. C. raise the monetary base in 1936-1937. D. lower the monetary base in 1936-1937.

Q: The Fed accidentally discovered open market operations whenA. it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system.B. it purchased securities for income following the 1920-1921 recession.C. it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system.D. it reinterpreted a key provision of the Federal Reserve Act.

Q: The Fed accidentally discovered open market operations in the early A. 1920s. B. 1910s. C. 1900s. D. 1890s.

Q: The real bills doctrine was the guiding principle for the conduct of monetary policy during the A. 1910s. B. 1940s. C. 1950s. D. 1960s.

Q: The guiding principle for the conduct of monetary policy that held that as long as loans were being made for "productive" purposes, then providing reserves to the banking system to make these loans would not be inflationary became known as the A. free reserves doctrine. B. Benjamin Strong doctrine. C. efficient liquidity doctrine. D. real bills doctrine.

Q: In its earliest years, the Federal Reserve's guiding principle for the conduct of monetary policy was known as theA. real bills doctrine.B. liberal liquidity doctrine.C. free reserves doctrine.D. quantity theory of money.

Q: The monetary policy strategy that relies on a stable money-income relationship is A. exchange-rate targeting. B. monetary targeting. C. inflation targeting. D. the implicit nominal anchor.

Q: If the relationship between the monetary aggregate and the goal variable is weak, then A. monetary aggregate targeting is superior to exchange-rate targeting. B. monetary aggregate targeting is superior to inflation targeting. C. inflation targeting is superior to exchange-rate targeting. D. monetary aggregate targeting will not work.

Q: Which of the following is a disadvantage to monetary targeting? A. It relies on a stable money-inflation relationship. B. There is a delayed signal about the achievement of a target. C. It implies larger output fluctuations. D. It implies a lack of transparency.

Q: Which of the following is an advantage to money targeting? A. There is an immediate signal on the achievement of the target. B. It does not rely on a stable money-inflation relationship. C. It implies lack of transparency. D. It implies smaller output fluctuations.

Q: The European Central Bank (ECB) pursues a hybrid monetary policy strategy that has elements in common with the -targeting strategy previously used by the Bundesbank but also includes some elements of targeting. A. monetary; inflation B. inflation; monetary C. monetary; exchange rate D. monetary; nominal GDP

Q: One of the factors that contributed to the success German policymakers had using a monetary targeting type policy starting in the mid-1970s and continuing through the next two decades was that A. they used a rigid target for the money growth rate. B. they implemented policy so their inflation rate goal was met in the short run. C. the money target was flexible to allow the Bundesbank to concentrate on other goals as needed. D. they rarely communicated the intentions of policy to the public in order to keep the public from panicking.

Q: Compared to the United States, Japan's experience with monetary targeting during the 1978——1987 period performed A. better with regard to the inflation rate and output fluctuations. B. worse with regard to the inflation rate and output fluctuations. C. better with regard to the inflation rate, but worse with regard to output fluctuations. D. worse with regard to the inflation rate, but better with regard to output fluctuations.

Q: During the years 1979 to 1982, the Federal Reserve's announced policy was monetary targeting. During this time period the Federal Reserve A. hit all of their monetary targets. B. did not hit any of their monetary targets because it is believed that controlling the money supply was not the intent of the Federal Reserve. C. did not hit any of their monetary targets because they were unrealistic. D. hit about half of their monetary targets.

Q: In pursuing a strategy of monetary targeting, the central bank announces that it will achieve a certain value (the target) of the annual growth rate of a ________. A. a monetary aggregate B. a reserve aggregate C. the monetary base D. GDP

Q: Explain the Taylor rule, including the formula for setting the federal funds rate target, and the components of the formula. If the Fed were to use this rule, how many goals would it use to set monetary policy?

Q: The rate of inflation increases when A. the unemployment rate equals the NAIRU. B. the unemployment rate exceeds the NAIRU. C. the unemployment rate is less than the NAIRU. D. the unemployment rate increases faster than the NAIRU increases.

Q: The rate of inflation tends to remain constant when A. the unemployment rate is above the NAIRU. B. the unemployment rate equals the NAIRU. C. the unemployment rate is below the NAIRU. D. the unemployment rate increases faster than the NAIRU increases.

Q: If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ________ and monetary policy will be too ________. A. rise; tight B. rise; loose C. fall; tight D. fall; loose

Q: According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase. A. increased; more B. increased; less C. decreased; more D. decreased; less

Q: Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be A. 0 percent. B. 1 percent. C. 2 percent. D. 3 percent.

Q: Using Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be A. 5 percent. B. 5.5 percent. C. 6 percent. D. 6.5 percent.

Q: According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target. A. rises above; drops below B. drops below; drops below C. rises above; rises above D. drops below; rises above

Q: Explain and demonstrate graphically how targeting the federal funds rate can result in fluctuations in nonborrowed reserves.

Q: Explain and demonstrate graphically how targeting nonborrowed reserves can result in federal funds rate instability.

Q: When it comes to choosing an policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay. A. three-month T-bill; monetary B. three-month T-bill; reserve C. federal funds; monetary D. federal funds; reserve

Q: Which of the following is NOT a requirement in selecting a policy instrument? A. measurability B. controllability C. flexibility D. predictability

Q: Which of the following criteria need NOT be satisfied for choosing a policy instrument? A. The variable must be measurable. B. The variable must be controllable. C. The variable must be predictable. D. The variable must be transportable.

Q: Real interest rates are difficult to measure because A. data on them are not available in a timely manner. B. real interest rates depend on the hard-to-determine expected inflation rate. C. they fluctuate too often to be accurate. D. they cannot be controlled by the Fed.

Q: Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets A. a monetary aggregate. B. the monetary base. C. an interest rate. D. nominal GDP.

Q: If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent A. fluctuations of nonborrowed reserves will be small. B. fluctuations of nonborrowed reserves will be large. C. the Fed will probably quickly abandon this policy, as it did in the 1960s. D. the Fed will probably quickly abandon this policy, as it did in the 1950s.

Q: If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because A. of fluctuations in the demand for reserves. B. of fluctuations in the consumption function. C. bond values will tend to remain stable. D. of fluctuations in the business cycle.

Q: Due to the lack of timely data for the price level and economic growth, the Fed's strategy A. targets the exchange rate, since the Fed can control this variable. B. targets the price of gold, since it is closely related to economic activity. C. uses an intermediate target, such as an interest rate. D. stabilizes the consumer price index, since the Fed can control the CPI.

Q: Which of the following is a potential operating instrument for the central bank? A. the monetary base B. the M1 money supply C. nominal GDP D. the discount rate

Q: Which of the following is NOT an operating instrument? A. nonborrowed reserves B. monetary base C. federal funds interest rate D. discount rate

Q: Which of the following is NOT an argument against using monetary policy to prick asset-price bubbles? A. The effect of increasing interest rates on asset prices is uncertain. B. A bubble may only exist in some asset-prices and monetary policy will affect all asset prices. C. Using monetary policy to prick an asset-price bubble may have adverse effect on the aggregate economy. D. Even though credit-drive bubbles are easier to identify, they are still relatively hard to identify.

Q: A central bank has ________ chance to identify a credit-driven bubble compared to an irrational exuberance bubble. A. a greater B. less of a C. about the same level of a D. a greater, less or about the same level of a

Q: Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble. A. less B. about the same amount of C. more D. either more, less, or the same amount of

Q: ________ bubble is driven entirely by unrealistic optimistic expectations. A. An irrational exuberance B. A credit-driven C. A stock D. A debt-driven

Q: A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending. A. a decrease; a decrease; an increase B. a decrease; an increase; an increase C. an increase; an increase; a further increase D. a decrease; a decrease; a further decrease

Q: Suppose interest rates are kept very low for a long time such that there is a spike in the amount of lending. Everything else held constant, this could cause ________ bubble. A. an irrational exuberance B. a credit-driven C. a stock D. a debt-driven E.

Q: When asset prices increase above their fundamental values it is called an A. asset-price bubble. B. irrational bubble. C. asset-price spike. D. irrational spike.

Q: The "Greenspan doctrine"–central banks should not try to prick bubbles–was based on which of the following arguments? A. Asset-price bubbles are nearly impossible to identify. B. Monetary actions would be likely to affect asset prices in general, rather than the specific assets that are experiencing a bubble. C. Raising interest rates has often been found to cause a bubble to burst more severely. D. Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy. E. All of the above.

Q: The problems of raising the level of the inflation target include A. if the zero-lower-bound problem is rare, then the benefits of a higher inflation target are not very large. B. the costs of higher inflation in terms of the distortions it produces in the economy are high. C. it is more difficult to stabilize the inflation rate at a higher targeting level. D. all of the above.

Q: Lessons that economists and policy makers have learned from the recent global financial crisis include A. Developments in the financial sector have a far greater impact on economic activity than was earlier realized. B. The zero lower bound on interest rates can be a serious problem. C. The cost of cleaning up after a financial crisis is very high. D. Price and output stability do not ensure financial stability. E. All of the above.

Q: The FOMC "Statement on Long-Run Goals and Monetary Policy Strategy"made it clear that the Federal Reserve would be pursuing ________, consistent with its dual mandate. A. a flexible form of inflation targeting B. a strict form of inflation targeting C. a zero inflation targeting D. an implicit inflation targeting

Q: In the FOMC's "Statement on Long-Run Goals and Monetary Policy Strategy,"the FOMC agreed to a single numerical value of the inflation objective, 2% on the ________. A. PCE deflator B. GDP deflator C. CPI D. PPI

Q: The FOMC finally moved to ________ on January 25, 2012, when it issued its "Statement on Long-Run Goals and Monetary Policy Strategy." A. inflation targeting B. zero inflation policy C. "just do it" policy D. monetary targeting

Q: After Ben Bernanke became chair of the Fed in 2006, he A. increased Fed transparency. B. abandoned inflation targeting. C. used "just do it" policy. D. increased the opacity of the policymaking.

Q: Under Alan Greenspan and Ben Bernanke, the Federal Reserve was successful in pursuing a ________ policy. A) preemptive B) inflation targeting C) exchange rate targeting D) monetary targeting

Q: Suppose it takes roughly two years for monetary policy to have a significant impact on inflation. If inflation is currently low but policymakers believe inflation will rise over the next two years with an unchanged stance of monetary policy, when should they tighten monetary policy to prevent the inflationary surge? A. now B. wait until overt signs of inflation appear C. next year D. two years later

Q: Which of the following is not a disadvantage of of the Fed's "just do it" approach to monetary policy? A. There is low transparency of policy. B. There is low accountability for central bankers. C. This type of policy make the Fed more susceptible to the time-inconsistency problem. D. It relies on a stable money-inflation relationship.

Q: Estimates from large macroeconometric models of the U.S. economy suggests that it takes over ________ for monetary policy to affect output and over ________ for monetary policy to affect the inflation rate. A. 1 year; 2 years B. 2 years; 1 year C. 1 year; 6 months D. 6 months; 1 year

Q: The type of monetary policy regime that the Federal Reserve has followed From the 1980s up until the time Ben Bernanke became chair of the Federal Reserve in 2006 can best be described as A. monetary targeting. B. inflation targeting. C. policy with an implicit nominal anchor. D. exchange-rate targeting.

Q: Explain what inflation targeting is. What are the advantages and disadvantages of this type of monetary policy strategy?

Q: Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations. A. demand: tighten B. demand; loosen C. supply; tighten D. supply; loosen

Q: The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity. A. below; high B. below; low C. above; high D. above; low

Q: Which of the following is not a disadvantage to inflation targeting? A. There is a delayed signal about achievement of the target. B. Inflation targets could impose a rigid rule on policymakers. C. There is potential for larger output fluctuations. D. There is a lack of transparency.

Q: Which of the following is not an advantage of inflation targeting? A. reduction of the time-inconsistency problem B. increased monetary policy transparency C. There is an immediate signal on the achievement of the target. D. consistency with democratic principles

Q: In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting? A. The unemployment rate increased sharply. B. The unemployment rate remained constant. C. The unemployment rate has declined substantially after a sharp increase. D. The unemployment rate declined sharply immediately after the inflation targets were adopted.

Q: The first country to adopt inflation targeting was A. the United Kingdom. B. Canada. C. New Zealand. D. Australia.

Q: Which of the following is not an element of inflation targeting? A. a public announcement of medium-term numerical targets for inflation B. an institutional commitment to price stability as the primary long-run goal C. an information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy D. increased accountability of the central bank for attaining its inflation objectives

Q: The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is A. monetary targeting. B. inflation targeting. C. targeting with an implicit nominal anchor. D. interest-rate targeting.

Q: Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________. A. price stability; short run B. price stability; long run C. reducing business-cycle fluctuations; short run D. reducing business-cycle fluctuations; long run

Q: The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate. A. primary B. dual C. secondary D. hierarchical

Q: The mandate for the monetary policy goals that has been given to the European Central Bank is an example of a ________ mandate. A. primary B. dual C. secondary D. hierarchical

Q: The primary goal of the European Central Bank is A. price stability. B. exchange rate stability. C. interest rate stability. D. high employment.

Q: Which set of goals can, at times, conflict in the short run? A. high employment and economic growth B. interest rate stability and financial market stability C. high employment and price level stability D. exchange rate stability and financial market stability

Q: Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries. A. increase; more B. increase; less C. decrease; more D. decrease; less

Q: Having interest rate stability A. allows for less uncertainty about future planning. B. leads to demands to curtail the Fed's power. C. guarantees full employment. D. leads to problems in financial markets.

Q: The Federal Reserve System was created to A. make it easier to finance budget deficits. B. promote financial market stability. C. lower the unemployment rate. D. promote rapid economic growth.

Q: Supply-side economic policies seek to A. raise interest rates through contractionary monetary policy. B. increase federal government expenditures. C. increase consumption expenditures by increasing taxes. D. increase saving and investment using tax incentives.

Q: The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A. frictional level of unemployment. B. structural level of unemployment. C. natural rate level of unemployment. D. Keynesian rate level of unemployment.

Q: Unemployment resulting from a mismatch of workers' skills and job requirements is called A. frictional unemployment. B. structural unemployment. C. seasonal unemployment. D. cyclical unemployment.