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Q:
Is the Taylor rule the specific formula followed by the FOMC? Explain.
Q:
The aggregate M1 consists of
A) currency plus all deposits in financial institutions.
B) currency plus all deposits in all institutions.
C) currency plus checkable deposits in financial institutions.
D) currency plus all checkable deposits.
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:
Discuss the key criteria for success and the advantages of a central bank adopting the framework of inflation targeting.
Q:
What is the maximum amount a bank can lend?
A) its total reserves
B) its excess reserves
C) its excess reserves divided by the required reserve ratio
D) the value of its checkable deposits times the required reserve ratio
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:
We saw in Chapter 18 that many central banks have turned to a policy framework of inflation targeting. Discuss if this would be effective in a country experiencing deflation.
Q:
Suppose a bank repays a $10 million discount loan that it had previously borrowed from the Fed. Illustrate how this affects the balance sheets of the Fed and the banking system. The Fed's assets decline by $10 million as discount loans decline and its liabilities decline by $10 million as reserves fall. The banking system's assets decline by $10 million due to a decline in reserves and liabilities decrease by $10 million due to a decline in discount loans.
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:
Consider the objective of flying a jet form New York to Paris. After takeoff, a pilot would certainly check a few times to see if he or she is on course. Using this example, discuss why, at least in theory, intermediate monetary policy targets may be useful.
Q:
Suppose the Fed makes a $5 million discount loan to a bank. Illustrate how this affects the balance sheets of the Fed and the banking system.
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:
Consider the desirable features of monetary policy operating instruments and the use of intermediate targets. What missing feature makes a target intermediate rather than operating? Why did the Fed abandon the use of most intermediate targets?
Q:
Illustrate the effect of an open market sale of $20 million worth of Treasury bills on the Fed's balance sheet.
Q:
A decrease in the money supply is an example of a(n) policy. a. countercyclicalb. procyclicalc. contractionary d. expansionary
Q:
Discuss why the Fed can either select a quantity or a price (interest rate) target but not both. If it helps, you can use the market for reserves for an example.
Q:
Illustrate the effect of the Fed purchasing $50 million worth of mortgage-backed securities on the Fed's balance sheet.
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:
The Fed could use reserve requirements as a monetary policy instrument. In terms of desirable features for policy instruments, assess the viability of using reserve requirements.
Q:
Why did banks increase their holdings of excess reserves during the Financial Crisis of 2007-2009?
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:
In terms of desirable features of a monetary policy instrument, explain why the size of the staff at the Fed is not a good policy instrument. Be sure to address which feature(s) it fits and which one(s) it doesn't.
Q:
What unusual policy actions did the Fed take during the Financial Crisis of 2007-2009 that affected its balance sheet?
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:
Explain the three desirable features of a good monetary policy instrument.
Q:
When conducting open market operations, at what price is it willing to buy or sell securities?
A) at the price agreed upon by the Federal Open Market Committee
B) at the price agreed upon by the Board of Governors
C) at the price set by the Fed chair
D) at whatever price is necessary to carry out its open market operations
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:
What is the consensus among economists and other monetary policy experts regarding the usefulness of the monetary policy instruments available to central banks in normal times?
Q:
Most of the increase in the monetary base between 2007 and 2012 was due to increases in:
A) currency
B) bank deposits
C) excess reserves
D) Treasury bills
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:
There have been many changes made to the method for computing the required reserves for banks over the years. Currently, lagged reserve accounting used enables a bank and the Fed to know the level of reserves required over a period of time well before the period of time begins. Why is this method for computing reserves advantageous to banks as well as the Fed?
Q:
Between late 2007 and 2012, the Fed's balance sheet:
A) remained about the same
B) more than doubled
C) more than tripled
D) rose tenfold
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:
What is the difference between primary and secondary credit offered by the Fed and who would use secondary credit?
Q:
When economists, policymakers, or journalists refer to the Fed's balance sheet, they are typically referring to the:
A) money supply
B) size of the Fed's assets
C) amount of bank reserves
D) amount of foreign reserves
Q:
The main liability on the Federal Reserve's balance sheet is a. discount loans.b. securities.c. the monetary base. d. capital.
Q:
Since 2002, the Fed has set the primary discount rate at 100 basis points above the target federal funds rate. Why is this likely to prevent the spikes in the market federal funds similar to the ones that occurred in previous years?
Q:
Individual investors who always want to hold gold are known as:
A) goldfinger
B) golden boys
C) gold bugs
D) goldilocks
Q:
The main asset on the Federal Reserve's balance sheet isa. discount loans.b. securities.c. monetary base. d. capital.
Q:
Discuss the evolution of discount lending from a tool of monetary policy to its current role.
Q:
In what year did sales of gold for investment exceed that for jewelry for the first time?
A) 1933
B) 1971
C) 2001
D) 2009
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:
Discuss why the discount rate may be considered a penalty rate of interest charged to banks.
Q:
A $10 million open market purchase will increase the monetary base by
A) $10 million.
B) $10 million times the money multiplier.
C) $10 million divided by the money multiplier.
D) an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.
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:
Is discount lending used to keep banks from failing? Explain.
Q:
If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million
A) if the public holds the proceeds as currency.
B) if the public deposits the proceeds as checkable deposits.
C) if the public deposits the proceeds with the Treasury in a monetary base account.
D) whether the public holds the proceeds as currency or deposits them as checkable deposits.
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:
Describe the supply curve in the market for bank reserves.
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:
If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show
A) an increase in securities held of $10 million and an increase in bank reserves of $10 million.
B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million.
C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.
Q:
Why does the Federal Funds rate face a zero bound?
Q:
There are Federal Reserve Banks located around the United States. a. sevenb. tenc. twelve d. fifteen
Q:
If the Fed buys securities worth $10 million, then
A) bank reserves will increase by $10 million.
B) bank reserves will decrease by $10 million.
C) currency in circulation will increase by $10 million.
D) bank holdings of securities increase by $10 million.
Q:
Could the Fed impact the amount of borrowing in the federal funds market without changing their target for the federal funds rate? Explain.
Q:
Open market operations generally involve
A) the Fed making discount loans to depository institutions.
B) the Fed buying and selling common stock in order to affect the liquidity of the stock market.
C) the Fed buying and selling U.S. government securities.
D) private investors buying and selling securities directly on exchanges, rather than through brokers.
Q:
A country's net foreign investment is equal to the amounta. the domestic country invests in other countries, minus what other countries invest in the domestic country. b. other countries invest in the domestic country, minus what the domestic country invests in other countries. c. of the current-account balance plus the capital-account balance.d. of portfolio investment made by the domestic country in other countries, minus the amount of portfolio investment other countries make in the domestic country.
Q:
Why is it necessary to distinguish between the target federal funds rate and the market federal funds rate?
Q:
What is the most direct method the Fed uses to change the monetary base?
A) open market operations
B) changing the required reserve ratio
C) changing the federal funds rate
D) changing the level of discount loans
Q:
In broad real terms, the dollara. depreciated against other currencies in the second half of the 1990s and in the early 2000s.b. depreciated against other currencies in the second half of the 1990s and appreciated against those currencies in the early 2000s.c. appreciated against other currencies in the second half of the 1990s and in the early 2000s.d. appreciated against other currencies in the second half of the 1990s and depreciated against those currencies in the early 2000s.
Q:
State and briefly define the tools of monetary policy available to the Federal Reserve.
Q:
The interest rate the Fed charges on loans to depository institutions is known as
A) the federal funds rate.
B) the Fed loan rate.
C) the discount rate.
D) the interbank clearing rate.
Q:
In 2001, the FOMC lowered the target federal funds rate eleven times, cutting the rate from 6½ percent to 1¾ percent. Why didn't the Fed just cut the rate by larger amounts early on?
Q:
When the Fed lends to depository institutions, the loans are called
A) federal funds.
B) discount loans.
C) repurchase agreements.
D) reverse repurchase agreements.
Q:
The key to the success of forward guidance as a monetary policy tool is: A. timing.B. a favorable exchange rate.C. transparency.D. credibility.
Q:
When the Fed extends loans to depository institutions
A) it increases the level of reserves.
B) it decreases the level of reserves.
C) it reduces the total value of the assets on its balance sheet.
D) it reduces the total value of the liabilities on its balance sheet.
Q:
Unconventional monetary policy tools include all but: A. quantitative easing.B. forward guidance.C. targeted asset purchases.D. reserve requirement.
Q:
The Fed's portfolio of securities consists principally of
A) municipal bonds.
B) corporate bonds.
C) U.S. Treasury obligations.
D) obligations of foreign governments.
Q:
Of the following, which would not be considered an unconventional monetary policy approach? A. Discount rateB. Policy duration commitmentC. Quantitative easingD. Credit easing
Q:
Generally,
A) countries with the most independent central banks have the lowest inflation rates.
B) countries with the least independent central banks have the lowest inflation rates.
C) countries without central banks have the lowest inflation rates.
D) the degree of independence of a country's central banks has little to do with its inflation rate.
Q:
The measure for the actual rate of inflation used in the Taylor rule is the: A. Personal Consumption Expenditure Index.B. GDP deflator.C. Consumer Price Index.D. Producer Price Index.
Q:
Which of the following is the most common goal for central banks of industrialized countries?
A) high employment
B) high economic growth
C) low interest rates
D) low inflation
Q:
Every one percent increase in the rate of inflation will: A. increase the real federal funds rate by 1.5%.B. increase the target federal funds rate by 1.5%.C. increase the real federal funds rate by 0.5%.D. increase the target federal funds rate by 1.5% and increase the real federal funds rate by 0.5%.
Q:
Who sets the inflation target for the Bank of England?
A) Prime Minister
B) Chancellor of the Exchequor
C) head of the monetary policy committee
D) majority vote of the monetary policy committee
Q:
Every one percent decrease in the rate of inflation will: A. raise the target federal funds rate by 1.5%.B. lower the target federal funds rate by 0.5%.C. lower the target federal funds rate by 1.5%.D. raise the target federal funds rate by 0.5%.
Q:
Which central bank gained the power to set interest rates independent of the government in the late 1990s?
A) Bank of England
B) Bank of Canada
C) Bank of China
D) Federal Reserve Board
Q:
If the inflation rate in the economy were to fall by 2% below the target inflation rate, the target federal funds rate would: A. Decrease by 3.0%.B. Remain at 2.5%.C. Decrease by 1.0%.D. Increase by 1.0%.
Q:
Apart from the United States, in countries where central bank board members serve fixed terms of office,
A) none have terms as long as fourteen years.
B) many serve for life or good behavior.
C) all have terms longer than fourteen years.
D) the head of the central bank rarely has a term longer than one year.
Q:
If output in the economy were to fall by an additional one percent below potential, the target federal funds rate would: A. Increase by 1.5%.B. Decrease by 1.5%.C. Remain at 2.5%.D. Decrease by 0.5%.
Q:
What are the primary arguments for and against the independence of the Fed?