Question 1

During the 1970s, the Federal Reserve targeted monetary aggregates like M1 and M2.

Accepted Answer

False

Question 2

The long term goal of keeping inflation low can conflict with the short term goal of lowering unemployment.

Accepted Answer

This conflict arises because policies aimed at reducing unemployment in the short term, such as lowering interest rates or increasing government spending, can lead to higher inflation. Conversely, measures to control inflation, like raising interest rates, can increase unemployment in the short term.

Question 3

Regulation Q helped lower macroeconomic volatility in the United States starting in the late 1980s.

Accepted Answer

Regulation Q, which imposed interest rate ceilings on deposits, was phased out as part of the Depository Institutions Deregulation and Monetary Control Act of 1980, not in the late 1980s, and its primary effect was to limit the ability of banks to compete for deposits, rather than directly lowering macroeconomic volatility.

Question 4

According to the Taylor Rule, if the output gap falls, the targeted interest rate should fall as well, .

Accepted Answer

According to the Taylor Rule, the targeted interest rate should be set to a level that keeps inflation at the target level and stabilizes output. If the output gap falls, it means that output is below its potential level, and the central bank should lower the targeted interest rate to stimulate economic activity and close the output gap.

Question 5

One of the Federal Reserve's goals is 0% unemployment.

Accepted Answer

The Federal Reserve aims for maximum employment, which is not the same as 0% unemployment, because some level of unemployment is considered normal due to factors like job transitions and economic changes.

Question 6

Open market operations has always been the primary tool of the Fed for controlling prices.

Accepted Answer

Open market operations are a key tool used by the Federal Reserve for controlling the money supply and influencing interest rates, which can affect inflation, but they are not solely focused on controlling prices. The Fed also uses other tools such as setting the discount rate and reserve requirements.

Question 7

A major time consistency issue for monetary policy has to do with the trade-off between output growth and unemployment.

Accepted Answer

The major time consistency issue for monetary policy is related to the trade-off between inflation and unemployment, not output growth and unemployment. Policymakers may want to stimulate the economy in the short term by lowering interest rates, which can lead to lower unemployment but higher inflation in the long term if not managed properly.

Question 8

Monetary policy that attempts to fix interest rates at a constant value is anti-cyclical.

Accepted Answer

Monetary policy that attempts to fix interest rates at a constant value is anti-cyclical because it helps to stabilize the economy during periods of economic fluctuations.

Question 9

Canada was the first country to formally adopt inflation targeting.

Accepted Answer

New Zealand was the first country to formally adopt inflation targeting, in 1990. Canada adopted this policy in 1991.

Question 10

According to the Taylor Rule, if inflation rises by 2%, then the targeted interest rate should rise by more than 2%.

Accepted Answer

The Taylor Rule suggests that for every 1% increase in inflation, the central bank should raise the nominal interest rate by more than 1% to maintain real interest rates and stabilize the economy.

Question 11

The Fed is the single reason for the reduction in volatility between 1985 and 2007.

Accepted Answer

The reduction in volatility between 1985 and 2007, often referred to as the Great Moderation, cannot be attributed to the Federal Reserve alone. Several factors, including technological advancements, better inventory management, financial innovation, globalization, and improved economic policies, contributed to this period of reduced volatility.

Question 12

The establishment of the FDIC created a time consistency issue.

Accepted Answer

The establishment of the FDIC (Federal Deposit Insurance Corporation) created a time consistency issue because it introduced a safety net for depositors, potentially encouraging banks to take on riskier investments knowing that deposits are insured, leading to moral hazard.

Question 13

Raising the reserve requirement led to a worsening of the Great Depression.

Accepted Answer

Raising the reserve requirement reduced the amount of money banks could lend, leading to a decrease in economic activity and exacerbating the effects of the Great Depression.

Question 14

Before 1979, the Federal Reserve tended to raise interest rates in a recession.

Accepted Answer

Before 1979, the Federal Reserve believed that raising interest rates during a recession would help curb inflation.

Question 15

A central bank cannot target money supply growth and interest rates at the same time.

Accepted Answer

A central bank cannot simultaneously target both money supply growth and interest rates because adjusting the money supply to target one will inevitably alter the other due to the inverse relationship between the money supply and interest rates.

Question 16

By treaty, the primary goal of the ECB is stable prices.

Accepted Answer

The primary goal of the European Central Bank (ECB), as outlined in the Treaty on the Functioning of the European Union, is to maintain price stability within the Eurozone.

Question 17

Between 1985 and 2007, the GDP growth in the United States was noticeably less volatile.

Accepted Answer

Between 1985 and 2007, the United States experienced a period often referred to as the "Great Moderation," characterized by reduced volatility in GDP growth, lower inflation rates, and fewer and less severe economic recessions compared to previous periods.

Question 18

A central bank using the Taylor Rule is only concerned about inflation.

Accepted Answer

The Taylor Rule considers both inflation and the output gap (the difference between actual and potential economic output) to guide monetary policy decisions.

Question 19

The Federal Reserve has not formally adopted inflation targeting.

Accepted Answer

The Federal Reserve has not formally adopted a specific numerical inflation target as part of its monetary policy framework, unlike some other central banks. However, it has set a longer-run goal of 2% inflation as part of its dual mandate.

Question 20

Interest rate targeting was a primary cause of the Great Inflation.

Accepted Answer

The Great Inflation was primarily caused by a combination of factors including oil price shocks, wage-price spirals, and loose monetary policy, rather than a specific focus on interest rate targeting.

Quiz 17: Monetary Policy Targets and Goals