Deck 24: Monetary Policy: a Summing up

Question 1

There are how many members of the Board of Governors in the Federal Reserve system?

A)15
B)12
C)7
D)4
E)none of the above

Answer 1

C

Question 2

In the United States,day-to-day decisions about monetary policy are carried out by

A)the Board of Governors.
B)the Chairman of the Board of Governors.
C)the Federal Open Market Committee.
D)the Open Market desk in New York.
E)none of the above

Answer 2

D

Question 3

Which of the following is part of M1 and part of M2?

A)currency
B)travelers checks
C)checkable deposits
D)all of the above
E)none of the above

Answer 3

D

Question 4

The nominal interest

A)will never be negative.
B)can be negative if inflation is unexpected.
C)can be negative if the inflation rate is greater than the nominal interest rate.
D)can be negative if deflation occurs.
E)can be negative when the real interest rate is negative.

Question 5

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

A)a rise in the cost of primary raw materials,like leather for shoes
B)an artificial rise in the capital gains tax
C)the need to take more trips to the bank
D)miscalculations due to money illusion
E)All of the above

Question 6

The Humphrey-Hawkins Act requires the Fed to promote

A)stable prices.
B)maximum employment.
C)moderate long-term interest rates.
D)all of the above
E)none of the above

Question 7

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

A)seignorage
B)bracket creep
C)a higher capital gains tax
D)indexed wages
E)none of the above

Question 8

An asset is considered liquid if it

A)can be used as a store of value.
B)has a guaranteed rate of return.
C)is indexed to the rate of inflation.
D)acts as a medium of exchange.
E)none of the above

Question 9

There are how many members of the Federal Open Market Committee?

A)15
B)14
C)12
D)7
E)5

Question 10

Suppose individuals decide to reduce their holdings of money market funds.Further assume that these decisions put funds into checkable deposits.Given this information,we know that

A)the demand for M1 would increase and the demand for M2 would decrease.
B)the demand for M1 would decrease and the demand for M2 would decrease.
C)the demand for M1 would increase and the demand for M2 would increase.
D)the demand for M1 would decrease and the demand for M2 would increase.
E)none of the above

Question 11

Since the 1980s,"NOW" accounts have been included in

A)M1,but not M2.
B)M2,but not M1.
C)both M1 and M2.
D)the monetary base and M1,but not M2.
E)neither M1 nor M2.

Question 12

The maximum number of individuals a U.S.president can appoint to the Board of governors is

A)15.
B)12.
C)7.
D)4 .
E)none of the above

Question 13

Suppose the annual inflation rate is 10%,and an asset bought at the beginning of the year for $100,000 is sold for $115,000.If the capital-gains tax rate is 30%,what is the (approximate)effective tax rate on the sale of this asset?

A)10%
B)20%
C)25%
D)30%
E)4%

Question 14

Monetary policy affects which of the following variables in the long run?

A)the level of output
B)the rate of unemployment
C)the rate of inflation
D)the real interest rate
E)all of the above

Question 15

Each governor of the Federal Reserve is

A)appointed by the President to a 4-year term.
B)appointed by the President to a 14-year term.
C)appointed by the President for life.
D)elected by the Presidents of banks and savings institutions.

Question 16

Which of the following is part of "M2" but not "M1"?

A)money market mutual fund shares
B)saving deposits
C)time deposits (under $100,000)
D)all of the above
E)none of the above

Question 17

Which of the following is a function of money?

A)medium of exchange
B)provides protection from inflation
C)it is a flow variable
D)all of the above
E)none of the above

Question 18

M2 is also referred to as which of the following?

A)currency
B)narrow money
C)near money
D)high powered money
E)none of the above

Question 19

Which of the following is considered a benefit of inflation?

A)the option of a negative real interest rate
B)money illusion
C)seignorage
D)all of the above
E)none of the above

Question 20

M1 consists of

A)currency only.
B)currency plus travelers checks only.
C)currency plus checkable deposits only.
D)checkable deposits only.
E)none of the above

Question 21

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

A)the level of output but not its composition
B)both the level and composition of output
C)only the price level
D)the level of output AND the price level
E)none of the above

Question 22

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 no change in the real interest rate.
C)an increase in inflation and an increase in output growth.
D)a proportionate increase in inflation.

Question 23

Which of the following has the tightest relation with inflation?

A)H,the monetary base
B)M1
C)M2
D)M3

Question 24

Broad money is represented by

A)H.
B)M1.
C)M2.
D)higher powered money.
E)the monetary base.

Question 25

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

A)the level of output but not its composition
B)both the level and composition of output
C)the nominal interest rate
D)the real interest rate
E)none of the above

Question 26

A change in the reserve requirement changes

A)the monetary base.
B)the money multiplier.
C)the discount rate.
D)all of the above
E)none of the above

Question 27

Which of the following would cause a reduction in M1?

A)an increase in the required ratio of reserves to deposits.
B)a reduction in the discount rate.
C)an open market operation where the Fed sells bonds.
D)all of the above
E)none of the above

Question 28

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

A)the level of output but not its composition
B)both the level and composition of output
C)only the price level
D)only the nominal interest rate,not the real interest rate
E)none of the above

Question 29

The existence of inflation does which of the following?

A)facilitates the downward adjustment of real wages
B)reduces shoe-leather costs
C)reduces tax distortions
D)reduces the costs associated with money illusion

Question 30

In 2010,the average inflation rate in the OECD countries was

A)1.2%.
B)2.3%.
C)5.2%.
D)3.8%.
E)10.5%.

Question 31

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)reduces the costs associated with money illusion

Question 32

The existence of inflation does which of the following?

A)reduces tax distortions
B)allows governments to benefit from seignorage
C)reduces shoe-leather costs
D)reduces the costs associated with money illusion

Question 33

Which of the following is NOT a tool of the Fed?

A)the discount rate
B)reserve requirements
C)open market operations
D)the proportion of money held as currency

Question 34

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

A)a progressive income tax system
B)a regressive income tax system
C)a flat income tax system
D)none of the above

Question 35

Chairmen of the Federal Reserve Board

A)serve 14-year terms as chairmen.
B)serve 4-year renewable terms as chairmen.
C)also serve as members of the administration.
D)serve 4-year non-renewable terms as chairmen.
E)none of the above

Question 36

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

A)a change in the discount rate.
B)open market operations.
C)a change in the reserve requirement.
D)a public announcement about a change in the targeted federal funds rate.
E)all of the above

Question 37

The discount rate represents the interest rate on

A)overnight loans between banks.
B)three-month U.S.securities.
C)municipal bonds.
D)one-year discount bonds.
E)none of the above

Question 38

Which of the following statements about Fed management of the money supply is correct?

A)over the past thirty years,the Fed has always stayed within its pre-announced target rates for growth in M2.
B)the most common tool used by the Fed is a change in the required ratio of reserves to deposits.
C)the rate at which the Fed lends money to banks is called the "Federal Funds rate."
D)the Fed must report each week to Congress on the conduct of monetary policy.
E)none of the above

Question 39

In the medium run,an increase in inflation causes

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

Question 40

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

A)i = i* + a(π* - π)- b(un - u).
B)i = i* + a(π - π *)+ b(u - un).
C)i = i* + a(π* - π)- b(u - un).
D)none of the above

Question 41

To deal with dangerous behavior in the financial system,macro prudential tools can be used to aim directly at

A)borrowers.
B)lenders.
C)banks and other financial institutions.
D)none of the above
E)all of the above

Question 42

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

Question 43

Which of the following would cause an increase in M1?

A)a reduction in the required ratio of reserves to deposits
B)an increase in the discount rate
C)an open market operation where the Fed buys bonds
D)all of the above
E)none of the above

Question 44

Bracket creep would be more likely occur in which of the following?

A)a progressive income tax system
B)a regressive income tax system
C)a flat income tax system
D)none of the above

Question 45

For this question,assume that the Fed sets monetary policy according to the Taylor rule.Suppose current U.S.macroeconomic conditions are represented by the following: π > π?* and u < un.Given this information,we would expect that the Fed will

A)implement a monetary contraction.
B)implement a monetary expansion.
C)maintain its current stance of monetary policy.
D)more information is need to answer this question.

Question 46

Explain the costs imposed by an increase in inflation.

Question 47

LTV ratio appears to be positively related to

A)bond price.
B)stock price.
C)housing price.
D)none of the above
E)all of the above

Question 48

From 2000 to 2007,which country had the highest nominal house price increase?

A)Spain
B)Portugal
C)Greece
D)Italy

Question 49

From 2000 to 2007,which country had the maximum LTV allowed?

A)United Kingdom
B)Australia
C)Netherlands
D)Canada
E)United States

Question 50

In the medium run,a reduction in inflation causes

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

Question 51

For this question,assume that the Fed sets monetary policy according to the Taylor rule.Suppose current U.S.macroeconomic conditions are represented by the following: π = π?* and u < un.Given this information,we would expect that the Fed will

A)implement a monetary contraction.
B)implement a monetary expansion.
C)maintain its current stance of monetary policy.
D)more information is need to answer this question.

Question 52

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

Question 53

For this question,assume that the Fed sets monetary policy according to the Taylor rule.Suppose current U.S.macroeconomic conditions are represented by the following: π = π?* and u > un.Given this information,we would expect that the Fed will

A)implement a monetary contraction.
B)implement a monetary expansion.
C)maintain its current stance of monetary policy.
D)more information is need to answer this question.

Question 54

An economy is said to be in the liquidity trap when the short-term ________ is down to zero.

A)real interest rate on corporate bonds
B)nominal interest rate on government bonds
C)nominal interest rate on corporate bonds
D)real interest rate on government bonds

Question 55

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

Question 56

For this question,assume that the Fed sets monetary policy according to the Taylor rule.Suppose current U.S.macroeconomic conditions are represented by the following: π > π?* and u = un.Given this information,we would expect that the Fed will

A)implement a monetary contraction.
B)implement a monetary expansion.
C)maintain its current stance of monetary policy.
D)more information is need to answer this question.

Question 57

Reducing the maximum LTV is likely to ______demand and thus ______the housing price increase.

A)decrease,slow down
B)increase,slow down
C)decrease,speed up
D)increase,speed up

Question 58

For this question,assume that the Fed sets monetary policy according to the Taylor rule.Suppose current U.S.macroeconomic conditions are represented by the following: π < π?* and u = un.Given this information,we would expect that the Fed will

A)implement a monetary contraction.
B)implement a monetary expansion.
C)maintain its current stance of monetary policy.
D)more information is need to answer this question.

Question 59

For this question,assume that the Fed sets monetary policy according to the Taylor rule.Suppose current U.S.macroeconomic conditions are represented by the following: π < π?* and u > un.Given this information,we would expect that the Fed will

A)implement a monetary contraction.
B)implement a monetary expansion.
C)maintain its current stance of monetary policy.
D)more information is need to answer this question.

Question 60

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 61

What are the lessons from the crisis for monetary policy?

Question 62

Discuss and explain each of the instruments of monetary policy.

Question 63

Discuss the relationships among the various monetary aggregates.

Question 64

Discuss the change of the design of monetary policy over time.

Question 65

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

Question 66

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

Question 67

Explain what is meant by shoe-leather costs.

Question 68

Until the 1990s,how was monetary policy typically conducted in advanced countries?

Question 69

What are some of the questions about the macro prudential tools?

Question 70

Discuss the current debate on the optimal inflation target.