Q&A Hero

Q: When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called A. structural unemployment. B. frictional unemployment. C. cyclical unemployment. D. underemployment.

Q: High unemployment is undesirable because it A. results in a loss of output. B. always increases inflation. C. always increases interest rates. D. reduces idle resources.

Q: Even if the Fed could completely control the money supply, monetary policy would have critics because A. the Fed is asked to achieve many goals, some of which are incompatible with others. B. the Fed's goals do not include high employment, making labor unions a critic of the Fed. C. the Fed's primary goal is exchange rate stability, causing it to ignore domestic economic conditions. D. it is required to keep Treasury security prices high.

Q: Explain the time-inconsistency problem. What is the likely outcome of discretionary policy? What are the solutions to the time-inconsistency problem?

Q: The time-inconsistency problem in monetary policy can occur when the central bank conducts policy A. using a nominal anchor. B. using a strict and inflexible rule. C. on a discretionary, day-by-day basis. D. using a flexible, discretionary rule.

Q: If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to A. boost output in the short run. B. constrain output in the short run. C. constrain prices. D. boost prices in the short run.

Q: The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future. A. moral hazard B. time-inconsistency C. nominal-anchor D. rational-expectation

Q: The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes is referred to as the A. adverse selection problem. B. moral hazard problem. C. time-inconsistency problem. D. nominal-anchor problem.

Q: The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule. A. inflation rate B. unemployment rate C. interest rate D. foreign exchange rate

Q: Monetary policy is considered time-inconsistent because A. of the lag times associated with the implementation of monetary policy and its effect on the economy. B. policymakers are tempted to pursue discretionary policy that is more contractionary in the short run. C. policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. D. of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.

Q: A nominal anchor promotes price stability by A. outlawing inflation. B. stabilizing interest rates. C. keeping inflation expectations low. D. keeping economic growth low.

Q: A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal A. anchor. B. benchmark. C. tether. D. guideline.

Q: A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called ________ anchor. A. a nominal B. a real C. an operating D. an intermediate

Q: Economists believe that countries recently suffering hyperinflation have experienced A. reduced growth. B. increased growth. C. reduced prices. D. lower interest rates.

Q: Inflation results in A) ease of planning for the future. B) ease of comparing prices over time. C) lower nominal interest rates. D) difficulty interpreting relative price movements.

Q: The most common definition that monetary policymakers use for price stability is A. low and stable deflation. B. an inflation rate of zero percent. C. high and stable inflation. D. low and stable inflation.

Q: The Federal Reserve has been ________ preemptive because of the changing view that monetary policy has to be ________ looking. A. more; forward B. more; backward C. less; forward D. less; backward

Q: International policy coordination refers to A. central banks in major nations acting without regard to the global consequences of their policies. B. central banks in major nations pursuing only domestic objectives. C. central banks adopting policies in pursuit of joint objectives. D. central banks all adopting identical policies.

Q: The Fed can engage in preemptive strikes against a rise in inflation by ________ the federal funds interest rate; it can act preemptively against negative demand shocks by ________ the federal funds interest rate. A. raising; lowering B. raising; raising C. lowering; lowering D. lowering; raising

Q: Since the early 1990s, the Fed has conducted monetary policy by setting a target for the A. level of borrowed reserves. B. monetary base. C. federal funds rate. D. inflation rate.

Q: Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the A. monetary base. B. money supply. C. federal funds interest rate. D. exchange rate.

Q: A borrowed reserves target is ________ because increases in income ________ interest rates and discount loans, causing the Fed to ________ the monetary base, everything else held constant. A. procyclical; increase; increase B. countercyclical; increase; increase C. procyclical; reduce; reduce D. countercyclical; reduce; reduce

Q: The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness, putting pressure on the Fed to pursue a more ________ monetary policy. A. decrease; contractionary B. increase; expansionary C. increase; contractionary D. decrease; expansionary

Q: Large fluctuations in money supply growth and smaller fluctuations in the federal funds rate between October 1982 and the early 1990s indicate that the Fed had shifted to ________ as an operating target. A. borrowed reserves B. nonborrowed reserves C. excess reserves D. required reserves

Q: The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed A. had shifted to borrowed reserves as an operating target. B. had shifted to total reserves as an operating target. C. had shifted to the monetary base as an operating target. D. never intended to target monetary aggregates.

Q: The Fed operating procedures employed between 1979 and 1982 resulted in ________ swings in the federal funds rate and ________ swings in the M1 growth rate. A. increased; increased B. increased; decreased C. decreased; decreased D. decreased; increased

Q: In the 1970s, the Fed selected an interest rate as an operating target rather than a reserve aggregate primarily because it A. had no interest in targeting a monetary aggregate, as evidenced by its unwillingness to target a reserve aggregate. B. was still very concerned with achieving interest rate stability. C. was committed to targeting free reserves. D. was committed to the real bills doctrine.

Q: The Fed's use of the ________ as an operating target in the 1970s resulted in ________ monetary policy. A. federal funds rate; countercyclical B. federal funds rate; procyclical C. M1 money supply; countercyclical D. M1 money supply; procyclical

Q: The Fed's use of the federal funds rate as an operating target in the 1970s resulted in A. countercyclical monetary policy. B. too slow growth in M1 throughout the decade. C. procyclical monetary policy. D. too rapid growth in M1 throughout the decade.

Q: Although the Fed professed employment of ________ targeting during the 1970s, its behavior suggests that it emphasized ________ targeting. A. free-reserve; interest-rate B. interest-rate; monetary aggregate C. monetary aggregate; interest-rate D. free reserve; monetary aggregate

Q: Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasized A. free-reserve targeting. B. interest-rate targeting. C. a real-bills doctrine. D. price-index targeting.

Q: In practice, the Fed's policy of targeting ________ in the 1960s proved to be ________, destabilizing the economy. A. money market conditions; countercyclical B. money market conditions; procyclical C. monetary aggregates; countercyclical D. monetary aggregates; procyclical

Q: If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.A) defensive; injectB) defensive; drainC) dynamic; injectD) dynamic; drain

Q: The Federal Reserve ________ pay interest on reserves held on deposit. The European System of Central Banks ________ pay interest on reserves held on deposit. A. does; does B. does; does not C. does not; does D. does not; does not

Q: The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the A. federal funds rate. B. marginal lending rate. C. deposit facility rate. D. lombard rate.

Q: When the European System of Central Banks uses long-term refinancing operations, it is similar to the Federal Reserve using A. dynamic open market operations. B. defensive open market operations. C. discount policy. D. reserve requirements.

Q: When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using A. dynamic open market operations. B. defensive open market operations. C. discount policy. D. reserve requirements.

Q: The European System of Central Banks signals the stance of its monetary policy by setting a target for the A. federal funds rate. B. overnight cash rate. C. lombard rate. D. reserve rate.

Q: The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points. A. 50; below; 100 B. 100; above; 25 C. 100; below; 50 D. 50; above; 25

Q: Which of the following statements is an example of the Fed's conditional commitment policy? A. "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period." B. "The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." C. "Policy accommodation can be removed at a pace that is likely to be measured." D. "The exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal."

Q: The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to A. lower the long term interest rates. B. lower the short term interest rates. C. increase the long term interest rates. D. increase the short term interest rates.

Q: To lower long-term interest rates, in 2010 the Fed started its new open market operation program to purchase A. mortgage-backed securities. B. commercial papers. C. long-term Treasuries. D. Treasury bills and Treasury notes.

Q: Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem? A. open market operation B. discount policy C. required reserve ratio D. the Fed's liquidity provision

Q: To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase A. mortgage-backed securities. B. commercial papers. C. long-term Treasuries. D. Treasury bills and Treasury notes.

Q: From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because A. most of it just flowed into holdings of excess reserve. B. the Fed also increased the required reserve ratio. C. the Fed also conducted open market sales. D. the discount loan decreased.

Q: The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase A. mortgage-backed securities and long-term Treasuries. B. mortgage-backed securities and Treasury bills. C. commercial papers and short-term Treasuries. D. Treasury bills and Treasury notes.

Q: From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to A. a huge increase in the monetary base. B. a huge expansion of the money supply. C. an economic expansion. D. a high inflation.

Q: The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the A. Term Securities Lending Facility. B. Term Auction Facility. C. Primary Dealer Credit Facility. D. Commercial Paper Funding Facility.

Q: Explain dynamic and defensive open market operations. What is the purpose of each type? Describe two situations when defensive open market operations are used. How are defensive open market operations typically conducted?

Q: When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would A. increase the interest rate paid on excess reserves. B. increase discount rate. C. increase the required reserve ratio. D. conduct massive open market purchase.

Q: The policy tool of changing reserve requirements is A. the most widely used. B. the preferred tool from the bank's perspective. C. no longer used. D. still used, even with its disadvantages.

Q: Funds held in ________ are subject to reserve requirements. A. all checkable deposits B. all checkable and time deposits C. all checkable, time, and money market fund deposits D. all time deposits

Q: A decrease in ________ increases the money supply since it causes the ________ to rise. A. reserve requirements; monetary base B. reserve requirements; money multiplier C. margin requirements; monetary base D. margin requirements; money multiplier

Q: Since 1980, ________ are subject to reserve requirements. A. only commercial banks B. only the member institutions of the Federal Reserve C. only nationally chartered depository institutions D. all depository institutions

Q: An increase in ________ reduces the money supply since it causes the ________ to fall. A. reserve requirements; monetary base B. reserve requirements; money multiplier C. margin requirements; monetary base D. margin requirements; money multiplier

Q: The Federal Reserve has had the authority to vary reserve requirements since the A. 1920s. B. 1930s. C. 1940s. D. 1950s.

Q: The most important advantage of discount policy is that the Fed can use it to A. precisely control the monetary base. B. perform its role as lender of last resort. C. control the money supply. D. punish banks that have deficient reserves.

Q: The Fed's lender-of-last-resort function A. has proven to be ineffective. B. cannot prevent runs by large depositors. C. is no longer necessary due to FDIC insurance. D. creates a moral hazard problem.

Q: A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that A. it was lowering the discount rate. B. it would provide discount loans to any bank that would make loans to the security industry. C. it stood ready to purchase common stocks to prevent a further slide in stock prices. D. it was raising the discount rate.

Q: Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19, 1987) must be given to the Federal Reserve System and then-chairman A. Paul Volcker. B. Alan Blinder. C. Arthur Burns. D. Alan Greenspan.

Q: At its inception, the Federal Reserve was intended to be A. the Treasury's banker. B. the issuer of government debt. C. a lender-of-last-resort. D. a regulator of bank holding companies.

Q: The Fed is considering eliminating A. primary credit lending. B. secondary credit lending. C. seasonal credit lending. D. its lender of last resort function.

Q: The interest rate on seasonal credit equals A. the federal funds rate. B. the primary credit rate. C. the secondary credit rate. D. an average of the federal funds rate and rates on certificates of deposits.

Q: The interest rate on secondary credit is set ________ basis points ________ the primary credit rate. A. 100; above B. 100; below C. 50; above D. 50; below

Q: The discount rate refers to the interest rate on A. primary credit. B. secondary credit. C. seasonal credit. D. federal funds.

Q: The Fed prefers that ________ so that ________. A. banks borrow reserves from each other; banks can monitor each other for credit risk B. banks borrow reserves from each other; the Fed can monitor banks for credit risk C. banks borrow reserves from the Fed; banks can monitor each other for credit risk D. banks borrow reserves from the Fed; the Fed can monitor banks for credit risk

Q: The discount rate is kept ________ the federal funds rate because the Fed prefers that ________. A. below; banks can monitor each other for credit risk B. below; the Fed can monitor banks for credit risk C. above; banks can monitor each other for credit risk D. above; the Fed can monitor banks for credit risk

Q: The discount rate is kept ________ the federal funds rate because the Fed prefers that ________. A. below; banks borrow reserves from each other B. below; banks borrow reserves from the Fed C. above; banks borrow reserves from each other D. above; banks borrow reserves from the Fed

Q: The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems. A. seasonal credit; secondary credit; primary credit B. secondary credit; seasonal credit; primary credit C. primary credit; seasonal credit; secondary credit D. seasonal credit; primary credit; secondary credit

Q: The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows. A. secondary B. primary C. temporary D. seasonal

Q: The most common type of discount lending that the Fed extends to banks is called A. seasonal credit. B. secondary credit. C. primary credit. D. installment credit.

Q: The discount rate is A. the interest rate the Fed charges on loans to banks. B. the price the Fed pays for government securities. C. the interest rate that banks charge their most preferred customers. D. the price banks pay the Fed for government securities.

Q: Discount policy affects the money supply by affecting the volume of ________ and the ________. A. excess reserves; monetary base B. borrowed reserves; monetary base C. excess reserves; money multiplier D. borrowed reserves; money multiplier

Q: Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A. defensive; sale B. defensive; purchase C. dynamic; sale D. dynamic; purchase

Q: Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A. defensive; sale B. defensive; purchase C. dynamic; sale D. dynamic; purchase

Q: Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A. defensive; sale B. defensive; purchase C. dynamic; sale D. dynamic; purchase

Q: Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A. defensive; sale B. defensive; purchase C. dynamic; sale D. dynamic; purchase

Q: The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system. A. increase; permanently B. increase; temporarily C. decrease; temporarily D. decrease; permanently

Q: The Fed can offset the effects of an increase in float by engaging in A. a repurchase agreement. B. a matched sale-purchase transaction. C. an interest rate swap. D. an open market purchase.

Q: If the Fed wants to temporarily inject reserves into the banking system, it will engage in A. a repurchase agreement. B. a matched sale-purchase transaction. C. a reverse repurchase agreement. D. an open market sale.