Deck 21: The Conduct of Monetary Policy

Question 1

During the last two decades,

A)the Fed has abandoned its policy goal of financial market and institution stability.
B)the Fed has not been called upon to avert financial panics.
C)the Fed has been unable to avert several banking panics.
D)the Fed has moved several times to avert financial panics.

Answer 1

the Fed has moved several times to avert financial panics.

Question 2

When financial markets and institutions are not efficient in matching savers and borrowers,

A)interest rates fall, which discourages saving even further.
B)interest rates fall, which discourages investment even further.
C)resources are lost.
D)investment rises.

Answer 2

resources are lost.

Question 3

Which of the following countries experienced hyperinflation during the 1920s?

A)The United States
B)Canada
C)Germany
D)England

Answer 3

Germany

Question 4

The Employment Act of 1946 codified the federal government's commitment to

A)promote high employment consistent with price stability.
B)promote high employment irrespective of the effects on price stability.
C)guarantee a job to every unemployed person.
D)fine companies that engage in excessive layoffs during recessions.

Question 5

Federal deposit insurance

A)has increased the severity of banking panics.
B)was never made available to savings-and-loan associations.
C)was ended by Congress in 1990.
D)helped cause the crisis in financial institutions during the late 1980s and early 1990s.

Question 6

The unemployment that is caused by changes in the economy, such as shifts in manufacturing techniques, increased use of computers and electronic machines, and increases in the production of services instead of goods, is called

A)frictional unemployment.
B)structural unemployment.
C)cyclical unemployment.
D)natural unemployment.

Question 7

Inflation is an economic problem because it

A)leads inevitably to unemployment.
B)makes prices less useful as signals for resource allocation.
C)leads to recession.
D)results in rapid increases in the money supply.

Question 8

By the end of the 1990s and 2000s,

A)the reputation of the Fed had declined substantially.
B)the influence and prestige of the Fed had increased.
C)Paul Volcker had replaced Alan Greenspan as Chairman of the Board of Governors.
D)the inflation rate had soared, calling into question the Fed's monetary policy.

Question 9

Which of the following is considered to be a goal of monetary policy?

A)A low federal budget deficit
B)Fair wages
C)Price stability
D)An end to poverty

Question 10

Which of the following is NOT considered to be a goal of monetary policy?

A)Fair wages
B)High employment
C)Economic growth
D)Price stability

Question 11

Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel. Sally Jones is considered by economists to be

A)naturally unemployed.
B)cyclically unemployed.
C)structurally unemployed.
D)frictionally unemployed.

Question 12

Increases in interest rates are often blamed on

A)Congress.
B)the President.
C)the Fed.
D)the U.S. Treasury.

Question 13

Interest rate fluctuations

A)are usually not considered to be of much importance and are largely ignored by the Fed.
B)have the paradoxical effect of increasing the rate of economic growth.
C)make it difficult for households and firms to plan for the future.
D)have largely been eliminated by the Fed during the past two decades.

Question 14

Which of the following statements about the natural rate of unemployment is correct?

A)In the 1960s, economists thought the natural rate was 4%.
B)Today, most economists believe the natural rate is zero.
C)When unemployment is at its natural rate, then only frictional unemployment remains.
D)When unemployment is at its natural rate, then only structural unemployment remains.

Question 15

The Fed was created

A)after financial panics in the late 1800s and early 1900s.
B)after the stock market crash of 1929.
C)to help finance government expenditures during World War II.
D)to help channel funds to the residential mortgage market.

Question 16

Most economists believe that a zero rate of unemployment

A)is obtainable with the correct monetary policy.
B)would result in a better functioning economy.
C)is inconsistent with a well-functioning economy.
D)is obtainable only if the inflation rate is also zero.

Question 17

John Smith leaves his job in New York to go to California in hopes of finding a better one. If John Smith is unemployed while searching for a job in California, economists would consider him to be

A)frictionally unemployed.
B)structurally unemployed.
C)cyclically unemployed.
D)naturally unemployed.

Question 18

When all workers who want jobs have them and the demand for and supply of labor are in equilibrium,

A)the unemployment rate will be zero.
B)unemployment is at its natural rate.
C)the economy will be experiencing high rates of inflation.
D)frictional unemployment will be zero.

Question 19

Rates of inflation in the hundreds or thousands of percent per year are known as

A)super inflation.
B)megainflation.
C)hyperinflation.
D)overinflation.

Question 20

High employment spurs economic growth because high employment

A)usually reduces inflation.
B)discourages foreign imports.
C)often leads to a high birth rate.
D)often leads to high rates of investment.

Question 21

Intermediate targets are

A)interim goals set on the way to fully achieving policy goals.
B)targets for policy goals that are of secondary importance.
C)targets the Fed hopes to achieve by June of each year.
D)financial variables the Fed believes will help it to achieve policy goals.

Question 22

An important problem facing the Fed is that

A)it has goals for economic growth and price stability, but no direct control over real output or the price level.
B)it lost effective control over the monetary base.
C)it has been given responsibility for meeting policy goals, but true control over monetary policy remains with Congress.
D)it has been given responsibility for meeting policy goals, but true control over monetary policy remains with the President.

Question 23

Which of the following best states the relationship among the Fed's policy goals?

A)Although difficult to attain, the goals are mutually consistent.
B)Conflicts among the Fed's policy goals often arise.
C)The goals are always in conflict; attempting to attain one goal involves decreasing the likelihood of attaining the other goals.
D)The Fed focuses exclusively on the goal of low inflation and ignores the other goals.

Question 24

The impact lag facing the Fed is

A)the delay before open market operations are able to affect the monetary base.
B)the delay before the Fed's announcement of a new policy has an impact on the decisions of the public.
C)the time required for monetary policy changes to affect output, employment, and prices.
D)the delay before the impact of a recession on output and prices becomes clear to the Fed.

Question 25

Which of the following is an intermediate target?

A)M1
B)Reserves
C)Federal funds rate
D)Inflation rate

Question 26

Using a monetary aggregate for an intermediate target

A)will cause the inflation rate to accelerate.
B)will cause interest rates to fluctuate.
C)requires the use of an interest rate as an operating target.
D)is required by the Federal Reserve Act.

Question 27

The Fed's monetary policy tools

A)have proven to be of little value in helping the Fed to achieve its monetary policy goals.
B)have allowed the Fed to achieve its monetary policy goals directly.
C)have allowed the Fed to achieve its monetary policy goals indirectly.
D)are no longer as effective in achieving its monetary policy goals, due to restrictive legislation passed by Congress in the 1990s.

Question 28

Which chair of the Fed advocated that the Fed engage in inflation targeting?

A)Greenspan
B)Bernanke
C)Volcker
D)Martin

Question 29

The quantity of M1 demanded varies inversely with market interest rates because

A)higher market interest rates lead the public to demand more money to make investments with.
B)high interest rates discourage investments in fixed capital.
C)market interest rates represent the opportunity cost of holding M1.
D)high interest rates encourage banks to make more loans.

Question 30

The information lag facing the Fed is

A)the difficulty of becoming informed quickly of changes in public opinion about which policy goal is most important.
B)the delay in receiving accurate information about the state of the economy.
C)the delay in Congress and the President communicating their policy goals for the Fed to act on.
D)the time required for monetary policy changes to affect output, employment, and prices.

Question 31

A consequence of the impact lag is that the Fed

A)may not know the impact of a change in policy.
B)might not be able to correct a mistaken policy soon enough.
C)may not have current information about the state of the economy.
D)may see the impact of a change in policy on inflation, but not economic growth.

Question 32

A falling dollar makes U.S. goods

A)more expensive abroad and increases the volume of U.S. exports.
B)less expensive abroad and increases the volume of U.S. exports.
C)less expensive abroad and decreases the volume of U.S. exports.
D)more expensive abroad and decreases the volume of U.S. exports.

Question 33

Which of the following is an operating target?

A)M1
B)M2
C)Reserves
D)The inflation rate

Question 34

The Fed's goal of interest rate stability

A)was formally abandoned in 1998.
B)is motivated by political pressure as well as by a desire for a stable saving and investment environment.
C)is undermined by actions the Fed takes to further its goal of stability in financial markets and institutions.
D)is undermined by actions the Fed takes to further its goal of price stability.

Question 35

In 1995, then Senator Connie Mack of Florida introduced a bill that

A)would force the Fed to focus almost entirely on achieving price stability.
B)would force the Fed to rely entirely on interest rate targets.
C)would force the Fed to keep the unemployment rate below 5%.
D)place the Secretary of the Treasury on the Board of Governors.

Question 36

The Fed controls intermediate target variables only indirectly mainly because

A)they are also subject to influence by other parts of the federal government.
B)private-sector decisions also influence these variables.
C)of information lags.
D)of impact lags.

Question 37

The Fed has attempted to solve the problems of being unable to directly control the variables that determine economic performance and the timing lags in observing and reacting to economic fluctuations by

A)pressing Congress for legislation which would expand its powers.
B)using targets to meet its goals.
C)abandoning some goals in order to achieve others.
D)devising new monetary policy tools.

Question 38

A rising dollar makes U.S. goods

A)more expensive abroad and increases the volume of U.S. exports.
B)less expensive abroad and increases the volume of U.S. exports.
C)less expensive abroad and decreases the volume of U.S. exports.
D)more expensive abroad and decreases the volume of U.S. exports.

Question 39

The Fed uses operating targets as well as intermediate targets because

A)the Federal Reserve Act of 1913 requires it to do so.
B)the Fed controls intermediate targets only indirectly.
C)the public is much more unfamiliar with the variables used as operating targets, so for policy to be effective intermediate targets must also be announced.
D)if one set of targets proves ineffective in attaining policy goals, the other set is available.

Question 40

The Fed's inability to instantaneously observe changes in inflation and economic growth result in

A)information lag.
B)impact lag.
C)policy lag.
D)jet lag.

Question 41

As a result of the Korean War and the Fed's pegging of the interest rate on Treasury securities,

A)the monetary base contracted.
B)the monetary base expanded.
C)the prices of short-term Treasury securities rose.
D)the inflation rate declined.

Question 42

Which of the following statements is true concerning the Fed's ability to measure potential intermediate targets over a short period of time?

A)The Fed can perfectly measure the relevant interest rates, but cannot perfectly measure the relevant monetary aggregates.
B)The Fed can perfectly measure the relevant monetary aggregates, but cannot perfectly measure the relevant interest rates.
C)The Fed can perfectly measure both the relevant monetary aggregates and the relevant interest rates.
D)The Fed cannot perfectly measure either the relevant monetary aggregates or the relevant interest rates.

Question 43

If the Fed is targeting interest rates, during an economic downturn it will

A)use open market purchases to lower interest rates.
B)use open market sales to raise interest rates.
C)avoid open market operations so as not to interfere with the adjustment of interest rates.
D)impose limitations on the interest rates that banks may charge on credit cards.

Question 44

Ordinarily, if the Fed chooses an interest rate as an intermediate target,

A)it is worried about inflation.
B)it is worried about unemployment.
C)it will choose a monetary aggregate as an operating target.
D)it will choose an interest rate as an operating target.

Question 45

During World War II, the Fed pegged interest rates in order to

A)stabilize the money supply.
B)help the Treasury finance the war effort.
C)control the inflation rate.
D)encourage home buying.

Question 46

If the financial side of the economy is stable,

A)the demand for money and nonmoney assets is unstable.
B)money supply targets are preferred.
C)interest rate targets are preferred.
D)the real side of the economy must be unstable.

Question 47

The Fed's interest in targets emerged

A)because the Federal Reserve Act mandated that targets be specified.
B)following its difficulties during the Great Depression.
C)in the early 1950s, following its struggle with the U.S. Treasury for control of monetary policy.
D)in an attempt to deal with accelerating inflation during the late 1970s.

Question 48

Which of the following statements concerning the measurability of interest rates is true?

A)Information on nominal interest rates is available to the Fed with a two-week lag.
B)The relevant interest rates are instantaneously measurable by the Fed.
C)The Fed is more interested in measuring the nominal interest rate than in measuring the real interest rate.
D)The Fed is unable to continuously measure the real interest rate.

Question 49

During the postwar period, which of the following goals has been emphasized by the Fed?

A)Stablizing share prices on the New York Stock Exchange
B)Stabilizing economic growth
C)Stabilizing the value of the dollar versus the yen
D)Stabilizing short-term nominal interest rates

Question 50

Using an interest rate for an intermediate target

A)will cause the quantity of money to fluctuate.
B)will often lead to a recession.
C)requires the use of a monetary aggregate as an operating target.
D)is required by the Federal Reserve Act.

Question 51

The Fed has ignored advice to use a broad variable such as the stock of nonfinancial credit or nominal GDP as an intermediate target because

A)such broad targets are not allowable under the provisions of the Federal Reserve Act.
B)such broad targets are not easily measurable.
C)such broad targets are not easily controllable.
D)of congressional pressure to use M1 as the intermediate target.

Question 52

The main reason the Fed cannot control the real interest rate is that

A)it cannot control expectations of inflation.
B)M1 fluctuates too widely to allow interest rates to be easily controlled.
C)M2 fluctuates too widely to allow interest rates to be easily controlled.
D)the real interest rate is mainly determined by the behavior of banks.

Question 53

If the Fed chooses M1 as its intermediate target, it will likely choose as its operating target

A)a reserve aggregate.
B)the federal funds rate.
C)M2.
D)either a reserve aggregate or the federal funds rate, depending on whether the economy is in an expansion or a recession.

Question 54

The onset of the Korean War in 1950 made it more difficult for the Fed to peg the interest rate on Treasury securities because

A)the economy moved into recession.
B)the inflation rate declined.
C)the tax rate on personal income was raised.
D)the federal government increased its borrowing.

Question 55

If the relationship between consumer and business spending and investment decisions and the interest rate is stable,

A)the demand for money and nonmoney assets must be unstable.
B)money supply targets are preferred.
C)interest rate targets are preferred.
D)the real side of the economy must be unstable.

Question 56

If shifts in the money demand relationship occur frequently, targeting the money supply will lead to

A)higher interest rates.
B)lower interest rates.
C)money supply fluctuations that will destabilize the economy.
D)interest rate fluctuations that will destabilize the economy.

Question 57

To peg the interest rate below its equilibrium level, the Fed must

A)sell securities to drive security market prices up.
B)sell securities to drive security market prices down.
C)buy securities to drive security market prices up.
D)buy securities to drive security market prices down.

Question 58

Which of the following statements is correct?

A)The Fed exercises complete control over the money supply, but only partial control over the real interest rate.
B)The Fed exercises complete control over the real interest rate, but only partial control over the money supply.
C)The Fed exercises complete control over both the real interest rate and the money supply.
D)The Fed exercises complete control over neither the real interest rate nor the money supply.

Question 59

If the Fed is targeting interest rates, then during an economic downturn it will take actions that will

A)raise interest rates, thus spurring economic growth.
B)raise interest rates, thus slowing economic growth.
C)lower interest rates, thus spurring economic growth.
D)lower interest rates, thus slowing economic growth.

Question 60

Which of the following is considered a significant drawback of using interest rate targets?

A)Monetary aggregates are clearly preferable on the basis of the criterion of controllability.
B)Monetary aggregates are clearly preferable on the basis of the criterion of measurability.
C)A Fed policy to stabilize interest rates may be inconsistent with the Fed's goal of maintaining steady economic growth.
D)The Fed's influence over nominal interest rates is weaker than its influence over real interest rates.

Question 61

Most critics believe that the Fed's early attempt at monetary targeting under Arthur Burns failed because he used

A)free reserves as an operating target.
B)the federal funds rate as an operating target.
C)M1 instead of M2 as an intermediate target.
D)M2 instead of M1 as an intermediate target.

Question 62

In October 1982, the Fed

A)began to pay more attention to the federal funds rate.
B)stated that nonborrowed reserves would be the operating target.
C)tightened its control over money growth.
D)began to pay more attention to the growth in monetary aggregates.

Question 63

When Paul Volcker became chair of the Fed in 1979, his primary commitment was to

A)reduce inflation.
B)reduce unemployment.
C)increase economic growth.
D)restore financial market stability.

Question 64

The Fed's monetary policy during Arthur Burns's tenure

A)was countercyclical, as opposed to the procyclical policy pursued by William McChesney Martin.
B)was procyclical, as opposed to the countercyclical policy pursued by William McChesney Martin.
C)was countercyclical, as was the policy pursued by William McChesney Martin.
D)was procyclical, as was the policy pursued by William McChesney Martin.

Question 65

As a result of targeting free reserves, the Fed will tend to

A)expand the money supply during expansions and contract the money supply during recessions.
B)contract the money supply during expansions and expand the money supply during recessions.
C)expand the money supply during both expansions and recessions.
D)contract the money supply during both expansions and recessions.

Question 66

During the term of Arthur Burns as chairman of the Fed, the FOMC gave top priority to

A)fighting unemployment.
B)stabilizing M1.
C)stabilizing M2.
D)stabilizing the federal funds rate.

Question 67

The Humphrey-Hawkins Act of 1978 resulted from political discontent over

A)the high unemployment rates of the late 1970s.
B)the low interest rates of the late 1970s, which were discouraging saving.
C)the procyclical monetary policy being conducted by the Fed.
D)the countercyclical monetary policy being conducted by the Fed.

Question 68

During an economic expansion

A)excess reserves will fall, discount loans will rise, and free reserves will rise.
B)excess reserves will rise, discount loans will rise, and free reserves will rise.
C)excess reserves will fall, discount loans will rise, and free reserves will fall.
D)excess reserves will fall, discount loans will fall, and free reserves will rise.

Question 69

The Fed's difficulties in producing greater monetary control after October 1979 were attributable to

A)fluctuations in the economy and in financial markets.
B)using free reserves as an operating target.
C)the agreement with the Treasury to peg interest rates.
D)using nonborrowed reserves as an operating target.

Question 70

The fluctuations in the growth rate of M1 during 1979-1982 were

A)substantial, as a result of the stabilizing of the federal funds rate.
B)substantial, but below those experienced under Burns and Miller.
C)substantial and were greater than those experienced under Burns and Miller.
D)very small compared to those experienced before and since.

Question 71

Under the Federal Reserve-Treasury Accord of 1951,

A)the Fed promised to peg interest rates at a level agreed on with the Treasury.
B)the Fed stopped pegging interest rates.
C)the Secretary of the Treasury was removed from the Board of Governors.
D)the Treasury lost its power to set required reserve ratios.

Question 72

The Fed had particular difficulty during the 1970s in attempting to control both the federal funds rate and monetary aggregates because

A)of fluctuations in consumer and business spending.
B)the federal funds rate is inherently unstable.
C)of the impact of the savings-and-loan crisis.
D)actions of the nonbank public made the money multiplier very unstable.

Question 73

Why did Monetarist critics of the Fed welcome the appointment of Arthur Burns as chairman of the Board of Governors in 1970?

A)Burns promised to make fighting unemployment his top priority.
B)Burns promised to use the federal funds rate as an operating target.
C)Burns promised to use monetary aggregates as targets.
D)Burns promised to stabilize the exchange value of the dollar.

Question 74

According to William McChesney Martin, an increase in free reserves indicated

A)an easing of money market conditions.
B)a tightening of money market conditions.
C)that inflation was likely to decline.
D)that interest rates would be falling.

Question 75

Under Paul Volcker, the Fed

A)pegged the federal funds rate.
B)used free reserves as an operating target.
C)used nonborrowed reserves as an operating target.
D)tightened its control over money growth.

Question 76

Under William McChesney Martin, the Fed began to target free reserves, which are

A)another name for excess reserves.
B)the difference between excess reserves and borrowed reserves.
C)the difference between borrowed reserves and discount loans.
D)the difference between total reserves and borrowed reserves.

Question 77

Since 1987, the Fed

A)has placed greater emphasis on hitting its target for M1 growth.
B)has pegged the federal funds rate.
C)no longer announces targets for M1 growth.
D)has concentrated on the T-bill rate as its intermediate target.

Question 78

During the time William McChesney Martin was chair of the Fed, free reserves were used

A)as an indicator, but not as a target.
B)as a target, but not as an indicator.
C)as both an indicator and as a target.
D)as neither an indicator nor as a target.

Question 79

Rising inflation in early 1951 is attributable, at least in part, to

A)the Fed's allowing interest rates to rise.
B)the Fed's allowing interest rates to fall.
C)increased spending by the federal government to fight poverty.
D)the Fed's having lost control of the money supply process.

Question 80

Using the federal funds rate as an operating target

A)will reduce its stability.
B)may lead to a procyclical policy.
C)will tend to reduce the inflation rate, but at the cost of higher unemployment.
D)will increase the stability of M1 and M2.