Deck 24: Monetary Policy: a Summing up

Question 1

Which of the following is part of M3 but not M1?

A) Saving deposits.
B) High- powered money.
C) Notes and coins.
D) Current account deposits.
E) Currency.

Answer 1

Saving deposits.

Question 2

Many agree that macro prudential tools are the right instruments to deal with bubbles, credit booms, or dangerous behaviour in the financial system. These are:

A) rules that regulate trading activities in the financial markets.
B) rules that are aimed directly at employees and firms.
C) rules that regulate trading activities in the foreign exchange markets.
D) rules that protect the rights of consumers.
E) rules that are aimed directly at borrowers, lenders, and financial institutions.

Answer 2

rules that are aimed directly at borrowers, lenders, and financial institutions.

Question 3

Researchers have suggested that one way to avoid falling into the liquidity trap is to have higher average inflation. This is because higher average inflation leads to:

A) higher average real interest rates.
B) higher average nominal credit rates.
C) higher average effective interest rates.
D) higher average real credit rates.
E) higher average nominal interest rates.

Answer 3

higher average nominal interest rates.

Question 4

Suppose individuals decide to reduce their holdings of term deposit funds. Further assume that these decisions put funds into current account deposits. Given this information, we know that:

A) the demand for M1 would increase and the demand for M3 would increase.
B) the demand for M1 would increase and the demand for M3 would decrease.
C) the demand for M1 would decrease and the demand for M3 would decrease.
D) the demand for M1 would decrease and the demand for M3 would increase.
E) the demand for M1 does not change and the demand for M3 would decrease.

Question 5

The existence of inflation does which of the following?

A) Allows governments to benefit from seignorage.
B) Reduces the costs associated with money illusion.
C) Reduces tax distortions.
D) Increases output in the medium run.
E) Reduces shoe- leather costs.

Question 6

Monetary policy has medium- run effects on which of the following?

A) Both the level and composition of output.
B) The real interest rate.
C) Only the price level.
D) The level of output but not its composition.
E) The unemployment rate.

Question 7

The existence of inflation does which of the following?

A) Reduces tax distortions.
B) Reduces shoe- leather costs.
C) Allows for the possibility of negative real interest rates.
D) Eliminates money illusion.
E) Reduces the costs associated with money illusion.

Question 8

Which of the following would cause an increase in M1?

A) A decrease in the discount rate.
B) An increase in the required ratio of reserves to deposits.
C) An open market operation where the RBA buys bonds from the public.
D) Both A and B.
E) Both B and C.

Question 9

Which of the following statements about the RBA's monetary policy is correct?

A) The RBA must report each week to the Senate on the conduct of monetary policy.
B) Reserve requirements have been abandoned.
C) Over the past thirty years, the RBA has always stayed within its pre- announced target rates for growth in M3.
D) The rate at which the RBA lends money to banks is called the "federal funds rate".
E) The most common tool used by the RBA is a change in the required ratio of reserves to deposits.

Question 10

In the medium run, monetary policy determines:

A) the rate of inflation.
B) the rate of unemployment.
C) the level of output.
D) the level of employment.
E) the division of output between consumption, investment, and government goods.

Question 11

Monetary policy has short- run effects on which of the following?

A) Only the price level.
B) The level of output but not its composition.
C) Only the nominal interest rate, not the real interest rate.
D) Both the level and composition of output.
E) Inflation but not the level of output.

Question 12

In Australia, monetary policy decisions are made by:

A) the Federal Treasurer.
B) the RBA Governor.
C) the RBA Deputy Governor.
D) the RBA Board.
E) the Treasury secretary.

Question 13

Which of the following cannot be a member of the RBA Board?

A) The Deputy Governor.
B) Prominent businessmen.
C) The Federal Treasurer.
D) An academic economist.
E) The secretary to the Federal Treasury.

Question 14

When the RBA wants to signal the public about the direction of monetary policy, it will likely use:

A) the overnight cash rate.
B) the T- bill rates.
C) the discount rate.
D) the federal funds rate.
E) the commercial paper rates.

Question 15

If advertising by term deposit funds began to lure money from current account deposits, and the RBA controls M1, then:

A) the IS curve would shift leftward.
B) the LM curve would shift upward.
C) the IS curve would shift rightward.
D) the LM curve would shift downward.
E) the IS curve would shift rightward and the LM curve would shift downward.

Question 16

An asset is considered liquid if it:

A) is indexed to the rate of inflation.
B) acts as a medium of exchange.
C) can be exchanged for money at little cost.
D) can be used as a store of value.
E) has a guaranteed rate of return.

Question 17

Which of the following is true about Australia?

A) There is no M2 in Australia.
B) There is no M1 in Australia.
C) There is no broad money in Australia.
D) There is no monetary aggregate in Australia.
E) There is no M3 in Australia.

Question 18

Credit easing is designed to:

A) lower the interest rates of short- term government bonds.
B) raise the interest rates of assets other than short- term government bonds.
C) lower the interest rates of assets other than short- term government bonds.
D) raise the interest rates of assets other than long- term government bonds.
E) lower the interest rates of assets other than long- term government bonds.

Question 19

In the medium run, an increase in the rate of growth of nominal money will cause:

A) lower nominal and lower real interest rates.
B) lower nominal interest rates and an increase in the real interest rate.
C) higher nominal interest rates and no change in the real interest rate.
D) an increase in inflation and an increase in output growth.
E) a less than proportionate increase in inflation.

Question 20

The existence of inflation does which of the following?

A) Eliminates money illusion.
B) Reduces the costs associated with money illusion.
C) Reduces shoe- leather costs.
D) Reduces tax distortions.
E) Facilitates the downward adjustment of real wages.

Question 21

An objective of quantitative easing is to generate:

A) higher inflation expectations.
B) zero inflation expectations.
C) negative inflation expectations.
D) no change in inflation expectations.
E) lower inflation expectations.

Question 22

Which country first adopted an explicit inflation target?

A) Australia.
B) The United States.
C) New Zealand.
D) Canada.
E) The United Kingdom.

Question 23

Suppose the annual inflation rate is 5%, and an asset bought at the beginning of the year for $50,000 is sold for $65,000. If the capital- gains tax rate is 30%, what is the (approximate) effective tax rate on the sale of this asset?

A) 7%.
B) 10%.
C) 9%.
D) 6%.
E) 8%.

Question 24

Which of the following statements is true about the RBA's inflation target?

A) The RBA has a zero inflation target.
B) The RBA has an explicit target of 2- 3 percent inflation over the course of the business cycle.
C) The RBA has an explicit upper bound of 3 percent inflation at all times.
D) The RBA has a crawling inflation target.
E) The RBA has an implicit target for inflation, that is not revealed to the general public.

Question 25

Which of the following is an example of the "shoe- leather costs" of inflation?

A) An artificial rise in the capital gains tax.
B) The need to take more trips to the bank.
C) A rise in the cost of primary raw materials, like leather for shoes.
D) Miscalculations due to money illusion.
E) The increase in bank transactions fees.

Question 26

The nominal interest rate can be negative if:

A) the real interest rate is negative.
B) inflation is variable.
C) the inflation rate is greater than the nominal interest rate.
D) inflation is unexpected.
E) None of the above.

Question 27

Which of the following is not a tool of the RBA?

A) Reserve requirements.
B) Open market operations.
C) Lending to banks.
D) Foreign currency swaps.
E) Both B and D.

Question 28

The Governor of the Reserve Bank Board:

A) serves a 7- year renewable term as chair.
B) serves a 10- year non- renewable term as chair.
C) also serves as chair of the House of Representatives committee on monetary policy.
D) is a member of the Federal cabinet.
E) is selected by the House of Representatives, once every four years.

Question 29

Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n > nT and u < un. Given this information, we would expect that the RBA will:

A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a revaluation.
E) More information is needed to answer this question.

Question 30

Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n < nT and u > un. Given this information, we would expect that the RBA will:

A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a devaluation.
E) More information is needed to answer this question.

Question 31

Monetary policy has long- run effects on which of the following?

A) The level of output and the price level.
B) The level of output.
C) The level of output but not its composition.
D) Both the level and composition of output.
E) No policy effect on the output level.

Question 32

M1 consists of:

A) currency plus term deposits only.
B) currency only.
C) currency plus current account deposits only.
D) current account deposits only.
E) currency plus travellers cheques only.

Question 33

Which of the following would serve to reduce the costs caused by the variability of inflation?

A) Bracket creep.
B) Seignorage.
C) Indexed wages.
D) Negative real interest rates.
E) Higher capital gains tax.

Question 34

In the medium run, an increase in inflation causes:

A) no change in the opportunity cost of holding money.
B) an increase in the opportunity cost of holding money.
C) individuals to switch from holding bonds to money and increase their real money balances.
D) a decrease in the opportunity cost of holding money.
E) real interest rates to decrease.

Question 35

The data for the last twenty- five years shows an almost perfect relationship between money growth and inflation when is used as the measure of the money supply.

A) M3
B) a currency equivalent index
C) M1
D) either M1 or M3
E) None of the above.

Question 36

According to the Reserve Bank Act of 1959, the RBA has a mandate to:

A) maintain the stability of the currency of Australia.
B) maintain full employment.
C) achieve low inflation.
D) All of the above.
E) None of the above.

Question 37

The Taylor rule (where a and b are positive parameters) is represented by:

A) i = i* + a(n* - n ) - b(un - u).
B) i = i* + a(n - n*) - b(un - u).
C) i = i* + a(n - n*) - b(u - un).
D) i = i* + a(n* - n ) + b(u - un).
E) i = i* + a(n - n*) + b(u - un).

Question 38

Which of the following is considered a benefit of inflation?

A) Seignorage.
B) Money illusion.
C) The option of a negative real interest rate.
D) All of the above.
E) Both A and B.

Question 39

Credit easing is also known as:

A) targeted easing.
B) quantitative easing.
C) qualitative easing.
D) Both A and B.
E) Both A and C.

Question 40

Bracket creep would less likely occur in which of the following?

A) A flat income tax system.
B) A regressive income tax system.
C) A progressive income tax system.
D) A regressive indexed income tax system.
E) A progressive indexed income tax system.

Question 41

Money growth targets have been abandoned in Australia in favour of an inflation target because:

A) it is easier and transparent to communicate to the general public about a change in monetary policy.
B) there is no tight relation between monetary aggregate growth and inflation.
C) inflation targeting makes good sense in the medium run while allowing for output stabilisation in the short run.
D) All of the above.
E) Both A and C.

Question 42

What is inflation targeting? Is it possible for a central bank that adopts inflation targeting to also pursue output stabilisation?

Question 43

Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n > n* and u = un. Given this information, we would expect that the RBA will:

A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a revaluation.
E) More information is needed to answer this question.

Question 44

Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n < n* and u = un. Given this information, we would expect that the RBA will:

A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a devaluation.
E) More information is needed to answer this question.

Question 45

When the economy is in the liquidity trap, which of the following can provide a boost to consumption and investment?

A) People expect higher interest rates.
B) People expect a higher exchange rate.
C) People expect higher inflation.
D) People expect higher unemployment benefits.
E) People expect higher taxes.

Question 46

Which of the following is part of the macro prudential toolkit?

A) Basel II and III agreements.
B) A maximum loan- to- value ratio.
C) Controls on capital flows.
D) All of the above.
E) None of the above.

Question 47

Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n = nT and u < un. Given this information, we would expect that the RBA will:

A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a revaluation.
E) More information is needed to answer this question.

Question 48

M3 is approximately equal to which of the following?

A) Narrow money.
B) Fiat money.
C) High- powered money.
D) Near money.
E) Broad money.

Question 49

Discuss the reasons that prompted most central banks in advanced economies to abandon monetary growth targets.

Question 50

Which of the following is not part of M1 and part of M3?

A) Travellers cheques.
B) Term deposits.
C) Currency.
D) High- powered money.
E) Current account deposits.

Question 51

What are the factors that will determine the optimal inflation rate?

Question 52

Discuss quantitative easing and credit easing in relation to the liquidity trap. How effective are these unconventional monetary policy measures?

Question 53

According to the Taylor rule:

A) if inflation is equal to target inflation, the central bank should set the real interest rate equal to zero.
B) if inflation is equal to target inflation, the central bank should set the nominal interest equal to its short- run value.
C) the central bank should not care about the unemployment rate.
D) if inflation is equal to target inflation, the central bank should set the real interest rate equal to its medium- run value.
E) if inflation is equal to target inflation, the central bank should set the nominal interest rate equal to its medium- run value.

Question 54

Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n = nT and u > un. Given this information, we would expect that the RBA will:

A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a devaluation.
E) More information is needed to answer this question.

Question 55

What are the three reasons that central banks are usually hesitant to intervene to lower housing prices?

Question 56

Suppose an economy experiences an increase in inflation. Explain the possible macroeconomic benefits of this increase in inflation.

Question 57

Explain the macroeconomic effects of changes in monetary policy in: (1) the short run; and (2) the medium run.

Question 58

Since 1993, the RBA has adopted:

A) inflation targeting.
B) real output growth targeting.
C) real money growth targeting.
D) nominal output growth targeting.
E) money growth targeting.

Question 59

Briefly discuss the organisation of the RBA. Include in your answer a discussion of the individuals/groups who make decisions about monetary policy.

Question 60

A change in the reserve requirement changes:

A) the money multiplier.
B) high- powered money.
C) the discount rate.
D) the real interest rate.
E) the monetary base.

Question 61

Explain what role money illusion plays in determining the RBA's ability to affect output in the short run.

Question 62

First, write out the equation that represents the Taylor rule. Second, discuss how the Taylor rule is used to explain the implementation of monetary policy.

Question 63

Explain the costs imposed by an increase in inflation.

Question 64

Explain what is meant by shoe- leather costs.

Question 65

Discuss and explain each of the instruments of monetary policy.

Question 66

Discuss the various macro prudential tools available to policymakers to deal with bubbles, credit booms, and risky behaviour in the financial system.