Question 1

The Eurozone has faced financial crises from its inception, in 1999, to the present.

Accepted Answer

The answer of The Eurozone has faced financial crises from...

Question 2

The Federal Reserve uses expansionary policy when output is above potential GDP.

Accepted Answer

The Federal Reserve uses contractionary policy when output is above potential GDP to help slow down economic growth and prevent inflation. Expansionary policy is used when output is below potential GDP to stimulate economic growth.

Question 3

The performance of the past two decades shows how ineffective discretionary monetary policy can be.

Accepted Answer

The answer of The performance of the past two decades...

Question 4

Tilting has a disadvantage in that some participants in the financial markets can act in a way that reduces the efficacy of monetary policy.

Accepted Answer

Tilting can lead to market participants adjusting their behavior, potentially undermining the intended effects of monetary policy by anticipating and counteracting central bank actions.

Question 5

During the 2007-2009 financial crisis, both the Federal Reserve and the European Central Bank bought bad debt in order to stabilize banks.

Accepted Answer

Both the Federal Reserve and the European Central Bank implemented programs to purchase bad debt from banks during the 2007-2009 financial crisis as a way to stabilize the financial system.

Question 6

Monetary targeting tends to keep aggregate demand relatively stable.

Accepted Answer

Monetary targeting involves controlling the money supply in the economy, which in turn affects interest rates and borrowing costs for businesses and consumers. By keeping a steady money supply growth rate, monetary targeting can help stabilize price levels and inflation, which in turn can help maintain stability in aggregate demand.

Question 7

Recessions that follow a banking crisis are typically short, compared to those that result from supply shocks.

Accepted Answer

Recessions following a banking crisis are often longer and more severe due to the disruption in financial systems, whereas supply shock-induced recessions can be shorter as they may resolve once the supply issue is addressed.

Question 8

The Federal Reserve's interest rate target is the level that will generally result in inflationary pressures.

Accepted Answer

The Federal Reserve's interest rate target is set with the goal of achieving economic growth and maintaining price stability, not necessarily with the intention of creating inflationary pressures. In fact, the Federal Reserve typically aims to keep inflation under control by adjusting interest rates based on economic indicators such as employment levels, GDP growth, and inflation expectations.

Question 9

Inflation targeting would fight both inflation and the recession in the event of an adverse supply shock.

Accepted Answer

Inflation targeting primarily focuses on controlling inflation by adjusting interest rates and does not directly address the underlying causes of a recession, especially in the case of an adverse supply shock which can lead to stagflation (a combination of inflation and recession).

Question 10

In order to recapitalize banks during the 2007-2009 financial crisis, the Federal Reserve shrank the monetary base.

Accepted Answer

In order to recapitalize banks during the 2007-2009 financial crisis, the Federal Reserve actually expanded the monetary base through various measures such as quantitative easing and other loan facilities. This was done to increase the availability of funds and stimulate lending in the economy.

Question 11

The practice of conducting monetary policy in secret can create uncertainty in markets.

Accepted Answer

The practice of conducting monetary policy in secret can create uncertainty in markets because it makes it difficult for market participants to anticipate the actions of the central bank and its impact on interest rates, inflation, and overall economic conditions. This uncertainty can lead to increased volatility and risk in financial markets. Transparency and clear communication from central banks about their policy decisions and rationale can help to mitigate this risk.

Question 12

Economists who believe in monetary targeting believe that the economy is inherently unstable.

Accepted Answer

Monetary targeting economists believe that controlling the money supply can stabilize the economy, implying they see it as potentially stable with proper policy.

Question 13

From 2008 to 2013, nearly two-thirds of the Eurozone nations faced some sort of financial crisis.

Accepted Answer

The answer of From 2008 to 2013, nearly two-thirds of...

Question 14

The Federal Reserve's transparency helps us understand why it makes particular decisions and also what it will probably do in similar circumstances in the future.

Accepted Answer

The Federal Reserve's transparency initiatives, such as releasing minutes of meetings and economic projections, aim to clarify its decision-making process and future policy intentions.

Question 15

The Federal Reserve has discretion regarding how best to reach its economic goals.

Accepted Answer

The Federal Reserve has the ability to choose methods and tools to achieve its economic goals, such as setting interest rates, implementing monetary policies, and conducting open market operations. However, its decisions must still conform to overall economic policies and laws set forth by the government.

Question 16

The Federal Reserve did a good job of keeping the economy near full employment with stable prices for most of Alan Greenspan's tenure, but it may have been responsible for encouraging the housing bubble that plagued Ben Bernanke.

Accepted Answer

This statement is true. Alan Greenspan was the Federal Reserve Chairman from 1987 to 2006, during which time the economy experienced relatively stable growth with low inflation and high employment. However, his policies of low interest rates and lax regulation of the financial industry may have contributed to the housing market bubble that burst during Ben Bernanke's tenure as Fed Chair.

Question 17

The only institutions bailed out by the Federal Reserve during the last financial crisis were commercial banks.

Accepted Answer

The Federal Reserve also bailed out other institutions such as investment banks, insurance companies, and mortgage companies during the last financial crisis.

Question 18

The Federal Reserve was the only major central bank that had to go beyond using the traditional tools of monetary policy to deal with the 2007-2009 financial crisis.

Accepted Answer

Other major central banks, including the European Central Bank and the Bank of England, also expanded their monetary policy tools during the 2007-2009 financial crisis, employing unconventional measures such as quantitative easing.

Question 19

The Federal Reserve has been criticized for taking too long to recognize that the nation was facing a financial crisis.

Accepted Answer

The Federal Reserve has been criticized for not recognizing the severity of the financial crisis early enough, which some argue worsened the impact of the crisis.

Question 20

No Federal Reserve chairman has had to deal with deflation since 1978.

Accepted Answer

This statement is false. The Federal Reserve had to deal with deflation during the financial crisis of 2008-2009, and former Chairman Ben Bernanke implemented various policies to combat it.

Quiz 13: Monetary Policy