1) The Fed uses three policy tools to manipulate the money supply: ________, which affect reserves and the monetary base; changes in ________, which affect the monetary base; and changes in ________, which affect the money multiplier.
A)open market operations; borrowed reserves; margin requirements
B) open market operations; borrowed reserves; reserve requirements
C) borrowed reserves; open market operations; margin requirements
D) borrowed reserves; open market operations; reserve requirements
Answer: B
2) The interest rate charged on overnight loans of reserves between banks is the
A)prime rate.
B)discount rate.
C)federal funds rate.
D)Treasury bill rate.
Answer: C
3) The quantity of reserves demanded rises when the
A) discount rate rises.
B) discount rate falls.
C) federal funds rate rises.
D) federal funds rate falls.
Answer: D
4) In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is
A) vertical.
B) horizontal.
C) positively sloped.
D) negatively sloped.
Answer: A
5) In the market for reserves, an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.
A) sale decreases
B) sale increases
C) purchase increases
D) purchase decreases
Answer: A
6) 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
Answer: B
7) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%
A) lowers the federal funds rate.
B) raises the federal funds rate
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
Answer: C
8) The Federal Reserve usually keeps the discount rate
A) above the target federal funds rate.
B) equal to the target federal funds rate.
C) below the target federal funds rate.
D) equal to zero.
Answer: A
9) In the market for reserves, a ________ in the reserve requirement increases the demand for reserves, ________ the federal funds interest rate, everything else held constant.
A) rise; lowering
B) decline; raising
C) decline; lowering
D) rise; raising
Answer: D
10) Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.
A) sale; increase
B) purchase; increase
C) sale; decrease
D) purchase; decrease
Answer: B
11)When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be
A)defensive.
B)offensive.
C)dynamic.
D)reactionary.
Answer: A
12) When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________.
A) decrease; sales
B) decrease; purchases
C) increase; sales
D) increase; purchases
Answer: C
13) If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
Answer: A
14) If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves.
A) purchases; increase
B) purchases; decrease
C) sales; increase
D) sales; decrease
Answer: B
15) 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) reverse repurchase agreement.
D) an open market sale.
Answer: A
16) 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
Answer: B
17) 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 its chairman
A) Paul Volker.
B) Alan Blinder.
C) Arthur Burns.
D) Alan Greenspan.
Answer: D
18) 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
Answer: C
19) The most common definition that central bankers 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.
Answer: D
20) 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.
Answer: D
21) 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.
Answer: C
22) 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.
Answer: A
23) 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.
Answer: B
24) 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.
Answer: C
25) 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
Answer: D
26) Under monetary targeting, a central bank announces an annual growth rate target for ________.
A)a monetary aggregate
B)a reserve aggregate
C)the monetary base
D)GDP
Answer: A
27) 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 ouput fluctuations.
D) It implies a lack of transparency.
Answer: A
28) 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.
Answer: B
29) 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.
Answer: D
30) 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
Answer: B
31) Estimates suggest that, in the United States economy, it takes just over ________ for monetary policy to affect output and just 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
Answer: A
32) Which of the following is not a disadvantage of using an implicit nominal anchor for monetary policy?
A)There is low transparency of policy.
B)There is low accountability for central bankers.
C)This type of policy relies on the policy-makers in charge.
D)It relies on a stable money-inflation relationship.
Answer: D
33) The monetary policy strategy that provides the least accountability is
A)exchange-rate targeting.
B)monetary targeting.
C)inflation targeting.
D)the implicit nominal anchor.
Answer: D
34) 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.
Answer: D
35) 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.
Answer: both A and B are acceptable
36) The primary indicator of the Fed’s stance on monetary policy is
A) the discount rate.
B) the federal funds rate.
C) the growth rate of the monetary base.
D) the growth rate of M2.
Answer: B
37) The opportunity cost of holding excess reserves is
A)the discount rate.
B)the prime rate.
C) the Treasury bill rate.
D) the federal funds rate.
Answer: D
38) When the federal funds rate equals the discount rate
A) the supply curve of reserves is vertical.
B) the supply curve of reserves is horizontal
C) the demand curve for reserves is vertical.
D) the demand curve for reserves is horizontal
Answer: B
39) 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
C) dynamic; purchase.
D) the demand curve for reserves is horizontal.
Answer: B
40) 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
Answer: A
41) 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.
Answer: B
42) The goal for high employment should seek 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.
Answer: C
43) The primary goal of the European Central Bank is
A) price stability.
B) exchange rate stability.
C) interest rate stability.
D) high employment.
Answer: A
44)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
Answer: B
45) 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.
Answer: A
46) 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.
Answer: D
47) 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.
Answer: C
48) 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
Answer: both C and D are acceptable
49) The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as
A)monetary targeting.
B)inflation targeting.
C) policy with an implicit nominal anchor.
D) exchange-rate targeting.
Answer: C
50) 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
Answer: C