Q&A Hero

Q: Why may a central bank intervene in the foreign exchange market when its currency is appreciating? A) concerns about the country's exports becoming less competitive B) concerns about inflation C) concerns about imports becoming less competitive D) to sterilize the effects on the domestic economy

Q: Why may a central bank intervene in the foreign exchange market when its currency is depreciating? A) concerns about the country's exports becoming less competitive B) concerns about inflation C) concerns about deflation D) to sterilize the effects on the domestic economy

Q: The main reason central banks engage in foreign-exchange interventions is to A) stabilize the domestic money supply. B) stabilize domestic interest rates. C) stabilize foreign interest rates. D) stabilize the exchange rate.

Q: How does a sterilized intervention by the Fed in foreign exchange market differ from an unsterilized intervention?

Q: Make use of a T-account to show the effect of the Fed's sale of $500 million worth of government securities on the Fed's balance sheet. (assume the Fed receives a check from the sale of securities)

Q: Make use of a T-account to show the effect of the Fed's purchase of $5 billion worth of foreign government securities on the Fed's balance sheet (note: assume the Fed writes a check to purchase the securities)

Q: The sale of foreign assets by a central bank accompanied by an open market purchase of securities of the same size results in: A) a reduction in the monetary base B) an increase in the monetary base C) a sterilized intervention D) an unsterilized intervention

Q: The main difference between a sterilized intervention and unsterilized intervention in the foreign exchange market is: A) a sterilized intervention is coordinated with other nations B) an unsterilized intervention does not change the exchange rate C) an unsterilized intervention does not change the monetary base D) a sterilized intervention does not change the monetary base

Q: A purchase of foreign assets by a central bank has the same impact on the monetary base as: A) an open market purchase of government securities B) an open market sale of government securities C) an increase in the discount rate D) a reduction in the interest on reserves

Q: Assets denominated in foreign currency and use in international transactions are referred to as: A) foreign money B) international reserves C) international monetary base D) foreign exchange

Q: If the Fed sells $1 billion of short-term securities issued by the Bank of Japan and at the same time purchases $1 billion of short-term securities issued by the U.S. Treasury, A) the monetary base will decline by $1 billion. B) the monetary base will rise by $1 billion. C) the Fed has conducted an unsterilized foreign-exchange intervention. D) the Fed has conducted a sterilized foreign-exchange intervention.

Q: If the Fed sterilizes the purchase of foreign assets, A) its assets and liabilities rise by the same amount. B) its assets and liabilities fall by the same amount. C) the composition of its assets changes, but its liabilities are unaffected. D) the composition of its liabilities changes, but its assets are unaffected.

Q: When the Fed allows the monetary base to respond to the purchase or sale of domestic currency in the foreign exchange market, the process is called A) open market operations. B) hedging. C) sterilized intervention. D) unsterilized intervention.

Q: If the Fed sterilizes the purchase of foreign assets, A) the monetary base is left unchanged. B) the monetary base rises by the amount of the purchase. C) the monetary base falls by the amount of the purchase. D) the monetary base may rise, fall, or remain unchanged depending on the reaction of domestic interest rates to the purchase.

Q: If the central bank buys foreign assets, A) the domestic monetary base will decline. B) domestic short-term interest rates will decline. C) the foreign-exchange value of the domestic currency will rise. D) its holdings of international reserves will rise.

Q: An unsterilized foreign-exchange intervention occurs A) whenever a central bank purchases or sells domestic currency. B) whenever a central bank purchases or sells foreign currency. C) whenever a central bank allows the monetary base to respond to the sale or purchase of domestic currency. D) whenever a central bank fails to reduce its holdings of gold by the amount of a foreign-exchange purchase.

Q: A sale of foreign assets by a central bank has the same effect on the monetary base as A) a decrease in the discount rate. B) a decrease in the required reserve ratio. C) an open market sale of government bonds. D) an open market purchase of government bonds.

Q: If the Fed sells foreign assets, the monetary base will A) fall by the amount of the sale, only if the Fed buys domestic bank deposits with the proceeds. B) fall by the amount of the sale, only if the Fed buys domestic currency with the proceeds. C) fall by the amount of the sale, whether the Fed buys domestic bank deposits or domestic currency with the proceeds. D) rise by the amount of the sale.

Q: When the Fed sells foreign assets and buy domestic assets at the same time, A) its assets and liabilities rise by the same amount. B) its assets and liabilities fall by the same amount. C) the composition of its assets changes, but its liabilities are unaffected. D) the composition of its liabilities changes, but its assets are unaffected.

Q: If the Fed buys $2 billion of short-term securities issued by the government of Japan and pays for them by writing a check for $2 billion, A) its assets will rise by $2 billion and the monetary base will rise by $2 billion. B) its assets will fall by $2 billion and the monetary base will fall by $2 billion. C) its assets will rise by $2 billion and the monetary base will fall by $2 billion. D) its assets will fall by $2 billion and the monetary base will rise by $2 billion.

Q: If the Fed buys $2 billion of short-term securities issued by the government of Japan and pays for them by writing a check for $2 billion, A) its assets will rise by $2 billion and its liabilities will fall by $2 billion. B) its assets will fall by $2 billion and its liabilities will rise by $2 billion. C) its assets and liabilities will both fall by $2 billion. D) its assets and liabilities will both rise by $2 billion.

Q: When a central bank buys foreign assets, A) its assets and liabilities rise by the same amount. B) its assets and liabilities fall by the same amount. C) the composition of its assets changes, but its liabilities are unaffected. D) the composition of its liabilities changes, but its assets are unaffected.

Q: When a central bank buys foreign assets, A) its holdings of foreign assets rise by the amount of the purchase, but the monetary base is unaffected. B) its holdings of foreign assets and the monetary base rise by the amount of the purchase. C) its holdings of foreign assets rise by the amount of the purchase, and the monetary base rises by the amount of the purchase times the money multiplier. D) the monetary base falls by the amount of the purchase.

Q: If the Fed wants to reduce the value of the dollar, it will A) sell foreign assets and buy dollars. B) sell dollars and buy foreign assets. C) buy foreign assets and also buy dollars. D) sell foreign assets and also sell dollars.

Q: If the Fed wants to increase the value of the dollar, it will A) sell foreign securities and buy dollars in international currency markets. B) buy foreign securities and sell dollars in international currency markets. C) buy foreign securities and also buy dollars in international currency markets. D) sell foreign securities and also sell dollars in international currency markets.

Q: International reserves are A) assets denominated in a foreign currency and used in international transactions. B) reserves the Fed requires banks to hold against Eurodollar deposits. C) reserves the International Monetary Fund requires banks to hold if they wish to participate in the market for foreign exchange. D) central bank holdings of gold.

Q: Foreign-exchange market interventions will always A) lead to a decline in domestic interest rates relative to foreign interest rates. B) lead to a rise in domestic interest rates relative to foreign interest rates. C) lead to a decline in the domestic money supply. D) alter a central bank's holdings of international reserves.

Q: Deliberate actions by a central bank to influence the exchange rate are known as A) current account actions. B) foreign-exchange market interventions. C) dollar-value operations. D) foreign-commerce maneuvers.

Q: International financial transactions are most likely to affect the U.S. monetary base when A) the United States is in recession. B) the United States is experiencing a severe inflation. C) the Fed tries to influence the foreign-exchange value of the dollar. D) interest rates in the United States are highly variable.

Q: Inflation is an economic problem because it A) leads inevitably to unemployment. B) makes prices less useful as signals for resource allocation. C) leads to recession. D) results in rapid increases in the money supply.

Q: Which of the following is considered to be a goal of monetary policy? A) a low federal budget deficit B) fair wages C) price stability D) an end to poverty

Q: Which of the following is NOT considered to be a goal of monetary policy? A) fair wages B) high employment C) economic growth D) price stability

Q: How did the federal funds rate compare to that suggested by Taylor's rule following the 2001 recession and during the Financial Crisis of 2007-2009? How would proponents of Taylor's rule evaluate monetary policy in each period.

Q: What has been the approach of the European Central Bank to monetary targeting?

Q: What is meant by inflation targeting? Does the Fed engage in inflation targeting?

Q: The output gap can best be described as: A) the percentage difference between GDP and its potential B) the difference between GDP in the current year compared to the previous year C) the difference between a nation's GDP and that of the nation with the highest GDP D) the difference between GDP and its forecasted level

Q: According to the Taylor rule, what should the federal funds rate target be if inflation is 5%, the target rate of inflation is 2%, the equilibrium real federal funds rate is 2%, full-employment real GDP is $9 trillion, and current real GDP is $8.55 trillion?

Q: The inflation gap can best be described as: A) the percentage difference between GDP and its potential B) the difference between inflation and its target C) the change in the inflation rate from one year to the next D) the difference between the inflation rate and the average inflation rate of that of the nations with the 3 lowest inflation rates

Q: In practice, the ECB has committed to what type of strategy for monetary policy? A) inflation targeting B) monetary targeting C) unclear as to inflation or monetary targeting D) exchange rate targeting

Q: Which central bank has its exchange rate as a focus of its monetary policy? A) Bank of Canada B) Bank of England C) European Central Bank D) Federal Reserve

Q: Why are policymakers willing to use rules for monetary policy as general guides, but unlikely to follow such rules blindly?

Q: In 2006, the Bank of Japan adopted a policy framework focusing on A) expected inflation one to two years in the future. B) current inflation. C) maintaining a fixed exchange rate. D) the growth in the money supply.

Q: What are the major advantages and disadvantages of inflation targeting?

Q: All of the following arguments are made against inflation targeting EXCEPT A) rigid numerical targets would diminish the flexibility of monetary policy. B) the Fed would need to depend on future forecasts of inflation since monetary policy acts with a lag. C) the Fed has little influence on inflation. D) Holding the Fed accountable for low inflation may make it difficult for elected officials to monitor whether the Fed is supporting good overall economic policy.

Q: All of the following arguments are presented in favor of inflation targeting EXCEPT A) it would draw attention to what the central bank can achieve in practice. B) it would provide an anchor for inflationary expectations. C) it would promote accountability by providing a yardstick by which policy can be measured. D) it would reduce the lags inherent in monetary policy.

Q: If a shock raises inflation, how fast should the central bank reduce it to its target level?

Q: Under which chair did the Fed implement the policy of inflation targeting? A) Volcker B) Bernanke C) Greenspan D) Geithner

Q: What challenges do policymakers and researchers face in using the Taylor rule?

Q: Which of the following describes the relationship between the actual federal funds rate and that suggested by Taylor's rule following the recovery from the 2001 recession? A) The federal funds rate was above that suggested by Taylor's rule. B) The federal funds rate was below that suggested by Taylor's rule. C) The federal funds rate was about equal to that suggested by Taylor's rule. D) There was not a clear relationship between the federal funds rate and that suggested by Taylor's rule.

Q: In general, periods in which the Taylor rule suggested tighter monetary policy than the Fed actually put in place are periods of rising inflation. Periods in which the Taylor rule suggested that monetary policy should be easier than the Fed actually put in place are periods of declining inflation. Describe a recent exception to these results.

Q: Suppose the economy is thought to be 2 percent below potential (i.e., the output gap is −2 percent), when potential output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 3 percentover the past year. The federal funds rate is currently 3 percent. The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 5 each. The inflation target is 1 percent.a. Is thefedfundsratecurrentlytoohighortoolow?By how much?Show your work.Suppose that all the conditions are the same as described above, except that the output gap is b. +2 percent instead of −2 percent. Is the fed funds rate currently too high or too low? By how much ?Show your work.Suppose a year has gone by, output is now 3 percent above potential, and the inflation ratec. was 5 percent over the year. What federal funds rate should the Fed now set (assuming the inflation target does not change)? Show your work.

Q: According to Taylor's rule, all of the following variables help explain the behavior of the federal funds rate EXCEPT A) output gap. B) current inflation. C) inflation gap. D) yield curve.

Q: Suppose the economy is thought to be 2 percent above potential (i.e., the output gap is 2 percent), when potential output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 2 percentover the past year. The federal funds rate is currently 3 percent. The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 5 each. The inflation target is 1 percent.a. Is the fed funds rate currently too high or too low ? By how much ? Show your work.Suppose a year has gone by, output is now just 1 percent above potential, and inflation rateb. was 5 percent over the year. What federal funds rate should the Fed now set (assuming the inflation target does not change)?

Q: Which of the following best describes a policy of inflation targeting? A) It's an inflexible rule that requires the central bank to always achieve a specified inflation rate. B) It allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession. C) It allows the central bank the flexibility of setting different inflation targets each year. D) It requires central banks to target current inflation rather than inflation forecasts.

Q: Why do monetarists favor the use of a nonactivist rule for monetary policy?

Q: Which of the following accurately describes the Fed's inflation target? A) It is implicit rather than explicit. B) It seeks to maintain an average inflation rate of 2% per year. C) It seeks to keep inflation at 2% all the time. D) Its goal is to achieve zero inflation.

Q: Why have economists abandoned the use of money-growth rules in the United States? Explain.

Q: The Fed uses operating targets as well as intermediate targets because A) the Federal Reserve Act of 1913 requires it to do so. B) the Fed controls intermediate targets only indirectly. C) the public is much more unfamiliar with the variables used as operating targets, so for policy to be effective intermediate targets must also be announced. D) if one set of targets proves ineffective in attaining policy goals, the other set is available.

Q: Describe time inconsistency and explain how it can be avoided by a central bank setting monetary policy.

Q: Which of the following is an operating target? A) M1 B) M2 C) nonborrowed reserves D) the inflation rate

Q: Which of the following is an intermediate target? A) M2 B) reserves C) unemployment rate D) inflation rate

Q: How does a central bank establish credibility?

Q: Intermediate targets are A) interim goals set on the way to fully achieving policy goals. B) targets for policy goals that are of secondary importance. C) targets the Fed hopes to achieve by June of each year. D) financial variables, such as interest rates or monetary aggregates, the Fed believes will help it to achieve policy goals.

Q: What causes the formation of an expectations trap and how can the Fed prevent one from forming?

Q: The Fed has attempted to solve the problems of being unable to directly control the variables that determine economic performance and the timing lags in observing and reacting to economic fluctuations by A) pressing Congress for legislation which would expand its powers. B) using targets to meet its goals. C) abandoning some goals in order to achieve others. D) devising new monetary policy tools.

Q: A benefit to policymakers of following rules rather than discretion is a. they could employ a larger staff of economists.b. they will contribute to the formation of an expectations trap. c. they would not be able to pursue time-inconsistent policies.d. they would gain flexibility in case the economy's structure changed.

Q: A consequence of the impact lag is that the Fed A) may not know the impact of a change in policy. B) might not be able to correct a mistaken policy soon enough. C) may not have current information about the state of the economy. D) may see the impact of a change in policy on inflation, but not economic growth.

Q: Which of the following best describes the reason why policymakers do not generally like to commit to following a rule for monetary policy?a. Because changes to the economy's structure will prevent any rule from working well for long b. Because rules do not effectively prevent time-inconsistencyc. Because rules without credibility are worse than discretion d. Because central bankers like to feel important

Q: The impact lag facing the Fed is A) the delay before open market operations are able to affect the monetary base. B) the delay before the Fed's announcement of a new policy has an impact on the decisions of the public. C) the time required for monetary policy changes to affect output, employment, and prices. D) the delay before the impact of a recession on output and prices becomes clear to the Fed.

Q: Which of the following happened as a result of inflation targeting in New Zealand ?a. It made the goals of the central bank explicit.b. It led to a higher expected inflation rate.c. It increased the inflation rate in the country.d. It lowered the credibility of the central bank.

Q: The Fed's inability to instantaneously observe changes in inflation and economic growth result in A) information lag. B) impact lag. C) policy lag. D) jet lag.

Q: Central banks that use inflation targeting usually communicate their goals and plans in a document known as the a. directive.b. inflation report. c. target analysis. d. communique.

Q: The information lag facing the Fed is A) the difficulty of becoming informed quickly of changes in public opinion about which policy goal is most important. B) the delay in receiving accurate information about the state of the economy. C) the delay in Congress and the President communicating their policy goals for the Fed to act on. D) the time required for monetary policy changes to affect output, employment, and prices.

Q: Which of the following is a disadvantage of inflation targeting?a. It reduces the flexibility of the central bank.b. It makes the goals of the central bank explicit. c. It leads to the problem of time inconsistency. d. It raises the expected inflation rate.

Q: The Fed's monetary policy tools A) have proven to be of little value in helping the Fed to achieve its monetary policy goals. B) have allowed the Fed to achieve its monetary policy goals directly. C) have allowed the Fed to achieve its monetary policy goals indirectly. D) are no longer as effective in achieving its monetary policy goals, due to restrictive legislation passed by Congress in the 1990s.

Q: Usually inflation targets are set for a a. low but positive inflation rate.b. high and positive inflation rate. c. negative inflation rate.d. zero inflation rate.

Q: An important problem facing the Fed is that A) the goals for economic growth and price stability may conflict in the short run. B) it lost effective control over the monetary base. C) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with Congress. D) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with the President.

Q: A central bank that is explicit about its goals and plans is said to be a. obvious.b. transparent. c. translucent. d. opaque.

Q: Describe the temporary lending facilities that the Fed set up during the Financial Crisis of 2007-2009.

Q: In inflation targeting, the range that represents the goal for the inflation rate is known as the a. target band.b. optimal range.c. central tendency. d. ultimate goal.