Deck 22: Monetary Policy

Question 1

Which two factors heated the boom in the Dubai housing and construction sectors between 2000 and 2008?

A) the UAE Central Bank lowered interest rates in 2001 but raised interest rates in 2007.
B) the UAE Central Bank lowered interest rates in 2001 but delayed changing interest rates in 2007.
C) the UAE Central Bank raised interest rates in 2001 and raised interest rates in 2007.
D) the UAE Central Bank raised interest rates in 2001 but lowered interest rates in 2007.
E) the UAE Central Bank raised interest rates in 2001 but did not change interest rates in 2007.

Answer 1

the UAE Central Bank lowered interest rates in 2001 but delayed changing interest rates in 2007.

Question 2

During the housing market and the financial crisis in 2007 through 2009 many Central banks increased the volume of discount loans. The goal of the Central banks was to

A) reduce the rate of inflation.
B) reassure financial markets and promote financial stability.
C) reduce the current account deficit.
D) reduce unemployment.
E) stimulate economic growth.

Answer 2

reassure financial markets and promote financial stability.

Question 3

Policy makers in the decades after the 19870s had price stability as a policy goal.

Answer 3

True

Question 4

The Central bank's two main monetary policy targets are

A) price stability and high employment.
B) interest rates and high employment.
C) price stability and the money supply.
D) the money supply and interest rates.

Question 5

The interest rate on a Treasury bill that you pay $980 for today that matures in one year and pays $1,000 is

A) 2 percent.
B) 1 percent.
C) 3 percent.
D) 4 percent.

Question 6

The interest rate on a Treasury bill that you pay $870 for today that matures in one year and pays $1,000 is

A) 13 percent.
B) 12 percent.
C) 15 percent.
D) 14 percent.

Question 7

If the interest rate is 3 percent, the price of a Treasury bill that pays $1,000 in one year is

A) $1,030.
B) $971.
C) $980.
D) $990.

Question 8

If the interest rate is 9 percent, the price of a Treasury bill that pays $1,000 in one year is

A) $1,090.
B) $910.
C) $917.
D) $945.

Question 9

Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $800 billion. Suppose the Central bank increases the money supply to $850 billion. At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short -term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $850 billion quantity of the money supply. What causes households and firms to want to hold the additional $50 billion of the money supply?

Question 10

What is the interest rate for a Treasury bill that pays $1,000 in one year, if the price of the Treasury bill today is 943? What is the interest rate for the Treasury bill if its price is 917?

Question 11

Stock prices tend to rise when investors expect that the Central bank will be

A) lowering interest rates.
B) raising interest rates.
C) leaving interest rates unchanged.
D) raising the inflation rate.

Question 12

Changes in interest rates affect stock prices because changes in interest rates affect

A) the amount of money in the economy.
B) real GDP, which affects the profitability of firms.
C) government purchases, which increases the amount of money in the economy.
D) government purchases, which affects the profitability of firms.

Question 13

-Refer to Table 22-3. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2011 if the Central bank does not use monetary policy:
a. If the Central bank wants to keep real GDP at its potential level in 2011, should it use an expansionary policy or a contractionary policy? Should the trading desk buy T-bills or sell them?
b. Suppose the Central bank's policy is successful in keeping real GDP at its potential level in 2011. State whether each of the following will be higher or lower than if the Central bank had taken no action:
(i) Real GDP
(ii) Full-employment real GDP
(iii) The inflation rate
(iv) The unemployment rate
c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2010 and 2011; SRAS curves 2010 and 2011; AD curve for 2010 and 2011, with and without monetary policy actions; and equilibrium real GDP and the price level in 2011 with and without policy.

Question 14

If the Central bank targets the interest rate, and the money demand curve shifts to the left, then the Central bank can

A) maintain the interest rate target with no change in the money supply.
B) maintain the interest rate target, but at a lower quantity of the money supply.
C) not maintain the interest rate target.
D) maintain the interest rate target, but at a higher quantity of the money supply.

Question 15

Which of the following is a major reason why real estate prices affected inflation in Dubai?

A) Inflation had slowed in the other Emirates.
B) Rents represent almost half of the CPI in the UAE.
C) The UAE's GDP is underpinned by oil prices.
D) Dubai World struck a US$25bn debt restructuring deal.