Deck 18: The Conduct of Monetary Policy: Strategy and Tactics

Question 1

Which of the following countries have hierarchical mandates?

A) Reserve Bank of New Zealand
B) Bank of Canada
C) Bank of England
D) all of the above

Answer 1

D

Question 2

The natural rate of output is also known as ________.

A) potential output
B) NAIRU
C) structural output
D) GDP

Answer 2

A

Question 3

Increases in interest rates ________.

A) cause large capital losses
B) could lead to bank failures
C) affect consumers' willingness to buy houses
D) all of the above

Answer 3

D

Question 4

Describe the time-inconsistency problem as it pertains to monetary policy outcomes.

Question 5

Concerns about a dual mandate include ________.

A) over expansionary policy
B) policies that lead to large output fluctuations
C) time-inconsistency problems
D) decreases in output and unemployment

Question 6

Interest rate stability is desirable because ________.

A) fluctuations in interest rates create uncertainty
B) it leads to financial market stability
C) stability in the foreign exchange markets
D) all of the above

Question 7

The nominal anchor ________.

A) acts like behavioural rule
B) leads to inflation
C) creates the time-inconsistency problem
D) avoids the natural rate of unemployment

Question 8

The first country to adopt inflation targeting was ________.

A) the United Kingdom
B) Canada
C) New Zealand
D) Australia

Question 9

Current estimates of NAIRU place it between ________ and ________.

A) 4 percent; 6 percent
B) 4 percent; 20 percent
C) 1 percent; 3 percent
D) 1 percent; 4 percent

Question 10

Price stability is often the primary goal of central banks.Describe the five other goals of monetary policy

Question 11

Hierarchical mandates ________.

A) puts the goal of price stability first and then allows for other goals
B) requires all goals to be met simultaneously
C) is only used by the Bank of Canada
D) is only used by the Federal Reserve

Question 12

In the long-run,there is no trade-off between ________ and ________.

A) inflation; unemployment
B) inflation; price stability
C) unemployment; price stability
D) unemployment; economic growth

Question 13

High unemployment ________.

A) results in lower GDP
B) leads to increased human misery
C) cannot be a target of monetary policy
D) A and B only

Question 14

The importance of a nominal anchor is to ________.

A) limit the time-inconsistency problem
B) reduce inflation
C) promote low inflation
D) allow discretionary day-to-day monetary policy

Question 15

Inflation leads to ________.

A) price instability
B) lower economic growth
C) public hostility
D) all of the above

Question 16

The type of monetary policy that is used in Canada,New Zealand,and the United Kingdom is ________.

A) monetary targeting
B) inflation targeting
C) targeting with an implicit nominal anchor
D) interest-rate targeting

Question 17

Price stability is defined as ________.

A) low inflation
B) low and stable inflation
C) stable inflation
D) core inflation

Question 18

Which of the following is not an element of inflation targeting?

A) A public announcement of medium-term numerical targets for inflation
B) An institutional commitment to price stability as the primary long-run goal
C) An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy
D) Increased accountability of the central bank for attaining its inflation objectives

Question 19

Canada's adoption of inflation targeting led to an unemployment rate of ________.

A) above 10 percent
B) nearly 8 percent
C) over 5 percent
D) 5 percent

Question 20

The natural rate of unemployment ________.

A) is consistent with full employment
B) is equal to zero
C) equals structural employment
D) is the same as frictional employment

Question 21

The United Kingdom uses ________ as its nominal anchor.

A) inflation target
B) monetary aggregates
C) interest rate target
D) none of the above

Question 22

Which of the following is an advantage of inflation targeting?

A) There is simplicity and clarity of the target.
B) Inflation targeting does not rely on a stable money-inflation relationship.
C) It is understood by the public and is transparent.
D) All of the above.

Question 23

Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) The performance has been quite good.

Question 24

Inflation targeting has the potential to reduce the likelihood that the central bank will fall into the time-inconsistency trap of trying to ________ output and employment in the short run by pursuing overly ________ monetary policy.

A) lower; tight
B) expand; expansionary
C) lower; expansionary
D) expand; tight

Question 25

In both New Zealand and Canada,what has happened to the unemployment rate since the countries adopted inflation targeting?

A) The unemployment rate increased sharply.
B) The unemployment rate remained constant.
C) The unemployment rate has declined substantially after a sharp increase.
D) The unemployment rate declined sharply immediately after the inflation targets were adopted.

Question 26

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on economic growth.

A) below; high
B) below; low
C) above; high
D) above; low

Question 27

What are the advantages inflation targeting?

Question 28

Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) It increases accountability of the central bank.

Question 29

What are the disadvantages inflation targeting?

Question 30

Tight monetary policy in New Zealand ________.

A) brought inflation down to below 2 percent
B) reduced unemployment
C) experienced a growth rate occasionally greater than 5 percent
D) all of the above

Question 31

Inflation targeting includes ________.

A) a public announcement of medium-term targets for inflation
B) an institutional commitment to price stability as the primary long run goal
C) an information-inclusive approach in which many variables are used in making decisions about monetary policy
D) all of the above

Question 32

Peak inflation in the United Kingdom was ________ in ________.

A) 9 percent; 1991
B) 4 percent; 1997
C) 12 percent; 1991
D) 8 percent; 1995

Question 33

The Reserve Bank of New Zealand ________.

A) is one of the most independent central banks
B) as the sole objective of price stability
C) negotiates with the minister of finance to make a Policy Targets Agreement
D) all of the above

Question 34

Which of the following is a disadvantage of inflation targeting?

A) There is transparency.
B) Inflation targeting does not rely on a stable money-inflation relationship.
C) It imposes a rigid rule.
D) Inflation targeting reduces the effects of inflation shocks.

Question 35

Which of the following is a disadvantage of inflation targeting?

A) There is simplicity and clarity of the target.
B) Inflation targeting does not rely on a stable money-inflation relationship.
C) There is a delayed signal on the achievement of the target.
D) Inflation targeting reduces the effects of inflation shocks.

Question 36

Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) It is easily understood by the public.

Question 37

Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) There is transparency.

Question 38

Which of the following is a disadvantage of inflation targeting?

A) There is simplicity and clarity of the target.
B) Inflation targeting does not rely on a stable money-inflation relationship.
C) It imposes a rigid rule.
D) Inflation targeting reduces the effects of inflation shocks.

Question 39

Which of the following is disadvantage of inflation targeting?

A) There is simplicity and clarity of the target.
B) Inflation targeting does not rely on a stable money-inflation relationship.
C) It may lead to larger output fluctuations.
D) Inflation targeting reduces the effects of inflation shocks.

Question 40

New Zealand adopted inflation targeting in ________.

A) 1990
B) 1991
C) 1992
D) 1994

Question 41

Explain and demonstrate graphically how targeting the overnight rate can result in fluctuations in nonborrowed reserves.

Question 42

Which of the following is a potential operating instrument for the central bank?

A) The monetary base
B) The exchange rate
C) The inflation rate
D) The bank rate

Question 43

What criteria apply when choosing a policy instrument?

Question 44

Which of the following is not an operating instrument?

A) Nonborrowed reserves
B) Monetary base
C) Overnight funds interest rate
D) Bank rate

Question 45

Which of the following is not an operating instrument?

A) Nonborrowed reserves
B) Monetary base
C) Overnight interest rate
D) Bank rate

Question 46

Which of the following criteria must be satisfied when selecting an intermediate target?

A) The variable must be measurable and frequently available.
B) The variable must be controllable with the use of the central bank's policy tools.
C) The variable must have a predictable impact on the policy goal.
D) Each of the above.

Question 47

If the central bank targets a monetary aggregate,it is likely to lose control over the interest rate because ________.

A) of fluctuations in the demand for reserves
B) of fluctuations in the consumption function
C) bond values will tend to remain stable
D) of fluctuations in the business cycle

Question 48

Fluctuations in the demand for reserves cause the Bank of Canada to lose control over a monetary aggregate if the Bank of Canada targets ________.

A) a monetary aggregate
B) the monetary base
C) an interest rate
D) nominal GDP

Question 49

If the desired intermediate target is an interest rate,then the preferred policy instrument will be a(n)________ variable like the ________.

A) interest rate; three-month T-bill rate
B) interest rate; overnight rate
C) monetary aggregate; monetary base
D) monetary aggregate; nonborrowed base

Question 50

Which of the following best explains why the Bank of Canada does not use nominal GDP as an intermediate target?

A) Nominal GDP has little connection with Bank policy goals.
B) Nominal GDP is unaffected by open market operations.
C) The Bank has little direct control over nominal GDP.
D) None of the above.

Question 51

Which of the following criteria need not be satisfied for choosing an intermediate target?

A) The variable must be measurable.
B) The variable must be controllable.
C) The variable must be predictable.
D) The variable must be stable.

Question 52

The target inflation range set by the Bank of England is ________.

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

Question 53

Which of the following is not a requirement in selecting an intermediate target?

A) Measurability
B) Controllability
C) Flexibility
D) Predictability

Question 54

Due to the lack of timely data for the price level and economic growth,the Bank of Canada's strategy ________.

A) targets the exchange rate, since the Bank of Canada can control this variable
B) targets the price of gold, since it is closely related to economic activity
C) uses an intermediate target, such as an interest rate
D) stabilizes the consumer price index, since the Bank of Canada can control the CPI

Question 55

Interest rates are difficult to measure because ________.

A) data on them are not available in a timely manner
B) real interest rates depend on the hard-to-determine expected inflation rate
C) they fluctuate too often to be accurate
D) they cannot be controlled by the Bank of Canada

Question 56

A potential policy instrument for the Bank of Canada is ________.

A) the monetary base
B) borrowed reserves
C) the overnight funds rate
D) the nonborrowed monetary base
E) All of the above

Question 57

Which of the following is a potential operating instrument for the central bank?

A) Nonborrowed reserves
B) The overnight funds rate
C) The monetary base
D) Each of the above

Question 58

Which of the following is a potential operating instrument for the central bank?

A) The monetary base
B) The M1 money supply
C) GDP
D) The Bank rate

Question 59

When it comes to choosing an policy instrument,both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay.

A) three-month T-bill; monetary
B) three-month T-bill; reserve
C) overnight rate; monetary
D) overnight rate; reserve

Question 60

Explain and demonstrate graphically how targeting nonborrowed reserves can result in overnight rate instability.

Question 61

In the 1975-1981 period,the Bank of Canada used ________ as the operating target and ________ as the intermediate target of monetary policy.

A) an interest rate; a monetary aggregate
B) a monetary aggregate; an interest rate
C) the monetary base; a monetary aggregate
D) a monetary aggregate; inflation

Question 62

If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate,then real interest rates will ________ and monetary policy will be too ________.

A) rise; tight
B) rise; loose
C) fall; tight
D) fall; loose

Question 63

When interest rates in the United States increased sharply in late 1979,the Bank of Canada responded by an extremely restrictive monetary policy to ________.

A) resist depreciation of the Canadian dollar
B) resist the possible inflationary shock from import prices
C) Both A and B of the above.
D) None of the above.

Question 64

In the 1975-1981 period,the Bank of Canada selected a monetary aggregate as an intermediate target than an interest rate primarily because it ________.

A) was concerned about inflation
B) was still very concerned with achieving interest rate stability
C) was committed to the real bills doctrine
D) was committed to keeping the foreign exchange and domestic bonds markets functioning smoothly

Question 65

During the 1975-1981 period,although the Bank of Canada was successful in keeping actual M1 growth within the target range,________.

A) the inflation rate by the end of the 1970s was almost at the same level as when monetary gradualism was introduced in 1975
B) the inflation rate remained high
C) the demand for M1 became unstable
D) All of the above.

Question 66

In the 1975-1981 period,the Bank of Canada used ________ as the intermediate target of monetary policy.

A) the growth rate of M1
B) the growth rate of M2
C) the interest rate
D) the exchange rate

Question 67

Using Taylor's rule,when the equilibrium real overnight rate is 3 percent,the positive output gap is 2 percent,the target inflation rate is 1 percent,and the actual inflation rate is 2 percent,the nominal overnight rate target should be ________.

A) 5 percent
B) 5.5 percent
C) 6 percent
D) 6.5 percent

Question 68

During the 1960s and early 1970s,the Bank of Canada used ________ as the intermediate target in the conduct of monetary policy.

A) the interest rate
B) the exchange rate
C) the monetary base
D) None of the above

Question 69

Using Taylor's rule,when the equilibrium real overnight rate is 2 percent,there is no output gap,the actual inflation rate is zero,and the target inflation rate is 2 percent,the nominal overnight rate should be ________.

A) 0 percent
B) 1 percent
C) 2 percent
D) 3 percent

Question 70

According to the Taylor Principle,when the inflation rate rises,the nominal interest rate should be ________ by ________ than the inflation rate increase.

A) increased; more
B) increased; less
C) decreased; more
D) decreased; less

Question 71

During the 1960s and early 1970s,the Bank of Canada's policy of using interest rates at the intermediate target was ________.

A) expansionary and resulted in double digit inflation
B) contractionary and resulted in a decrease in the inflation rate
C) neither expansionary nor contractionary
D) None of the above

Question 72

The Bank of Canada formally abandoned monetary targeting ________.

A) in November 1982
B) because of the uncertainty about the stability of M1
C) because of the uncertainty about monetary aggregates as reliable guides to monetary policy
D) All of the above.

Question 73

During the 1975-1981 period,although the Bank of Canada was successful in keeping actual M1 growth within the target range,________.

A) the inflation rate by the end of the 1970s was almost at the same level as when monetary gradualism was introduced in 1975
B) a series of financial innovations motivated individuals and firms to substitute out of M1 and into M2
C) the growth rate of M2 increased
D) All of the above.

Question 74

During the 1975-1981 period,the Bank of Canada decided to target the growth rate of M1 because it ________.

A) was the most prominent measure of money
B) had a stable demand
C) had a predictable relationship with income and prices
D) All of the above.

Question 75

The rate of inflation tends to remain constant when ________.

A) the unemployment rate is above the NAIRU
B) the unemployment rate equals the NAIRU
C) the unemployment rate is below the NAIRU
D) the unemployment rate increases faster than the NAIRU increases

Question 76

According to the Taylor rule,the Bank of Canada should raise the overnight interest rate when inflation ________ the Bank of Canada's inflation target or when real GDP ________ the Bank of Canada's output target.

A) rises above; drops below
B) drops below; drops below
C) rises above; rises above
D) drops below; rises above

Question 77

In the 1975-1981 period,the Bank of Canada selected an interest rate as an operating target than a reserve aggregate primarily because it ________.

A) had no interest in targeting a monetary aggregate, as evidenced by its unwillingness to target a reserve aggregate
B) was still very concerned with interest rate stability
C) was committed to the real bills doctrine
D) was committed to keeping the foreign exchange and domestic bonds markets functioning smoothly
E) None of the above

Question 78

During the 1960s and early 1970s,the Bank of Canada used ________ as the intermediate target(s),to keep the foreign exchange and domestic bonds markets functioning smoothly.

A) the exchange rate and the interest rate
B) the interest rate
C) the monetary base
D) None of the above

Question 79

The rate of inflation increases when ________.

A) the unemployment rate equals the NAIRU
B) the unemployment rate exceeds the NAIRU
C) the unemployment rate is less than the NAIRU
D) the unemployment rate increases faster than the NAIRU increases

Question 80

During the 1982-1988 period,the Bank of Canada looked at a list of factors in order to design and implement monetary policy.This list included ________.

A) the interest rate
B) the exchange rate
C) the money supply
D) All of the above.
E) Only A and B of the above.