Deck 16: The Conduct of Monetary Policy: Strategy and Tactics

Question 1

Which of the following is an advantage to money targeting?

A)There is an immediate signal on the achievement of the target.
B)It does not rely on a stable money-inflation relationship.
C)It implies lack of transparency.
D)It implies smaller output fluctuations.

Answer 1

There is an immediate signal on the achievement of the target.

Question 2

Compared to the United States,Japan's experience with monetary targeting performed

A)better with regard to the inflation rate and output fluctuations.
B)worse with regard to the inflation rate and output fluctuations.
C)better with regard to the inflation rate,but worse with regard to output fluctuations.
D)worse with regard to the inflation rate,but better with regard to output fluctuations.

Answer 2

better with regard to the inflation rate and output fluctuations.

Question 3

Which of the following is not 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)There is an immediate signal on the achievement of the target.
D)Inflation targeting reduces the effects of inflation shocks.

Answer 3

There is an immediate signal on the achievement of the target.

Question 4

Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending.Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations.

A)demand: tighten
B)demand; loosen
C)supply; tighten
D)supply; loosen

Question 5

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 6

Explain what inflation targeting is.What are the advantages and disadvantages of this type of monetary policy strategy?

Question 7

The monetary policy strategy that provides an immediate signal on target achievement is

A)exchange-rate targeting.
B)monetary targeting.
C)inflation targeting.
D)the implicit nominal anchor.

Question 8

The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as

A)monetary targeting.
B)inflation targeting.
C)policy with an implicit nominal anchor.
D)exchange-rate targeting.

Question 9

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 real economic activity.

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

Question 10

During the years 1979 to 1982,the Federal Reserve's announced policy was monetary targeting.During this time period the Federal Reserve

A)hit all of their monetary targets.
B)did not hit any of their monetary targets because it is believed that controlling the money supply was not the intent of the Federal Reserve.
C)did not hit any of their monetary targets because they were unrealistic.
D)hit about half of their monetary targets.

Question 11

Which of the following is the best description of the monetary policy strategy followed by the European Central Bank (ECB)?

A)The ECB follows monetary targeting.
B)The ECB follows inflation targeting.
C)The ECB has a hybrid strategy with elements of both monetary targeting and inflation targeting.
D)The ECB has a Fed-like "just do it" approach.

Question 12

The monetary policy strategy that relies on a stable money-income relationship is

A)exchange-rate targeting.
B)monetary targeting.
C)inflation targeting.
D)the implicit nominal anchor.

Question 13

If the relationship between the monetary aggregate and the goal variable is weak,then

A)monetary aggregate targeting is superior to exchange-rate targeting.
B)monetary aggregate targeting is superior to inflation targeting.
C)inflation targeting is superior to exchange-rate targeting.
D)monetary aggregate targeting will not work.

Question 14

Which of the following is not a disadvantage 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 a lack of transparency.

Question 15

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 16

The first country to adopt inflation targeting was

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

Question 17

Which of the following is a disadvantage to monetary targeting?

A)It relies on a stable money-inflation relationship.
B)There is a delayed signal about the achievement of a target.
C)It implies larger output fluctuations.
D)It implies a lack of transparency.

Question 18

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 19

Under monetary targeting,a central bank announces an annual growth rate target for ________.

A)a monetary aggregate
B)a reserve aggregate
C)the monetary base
D)GDP

Question 20

One of the factors that contributed to the success German policymakers had using a monetary targeting type policy was that

A)they used a rigid target for the money growth rate.
B)they implemented policy so their inflation rate goal was met in the short run.
C)the money target was flexible to allow the Bundesbank to concentrate on other goals as needed.
D)they rarely communicated the intentions of policy to the public in order to keep the public from panicking.

Question 21

Which of the following is not a disadvantage of of the Fed's "just do it" approach to monetary policy?

A)There is low transparency of policy.
B)There is low accountability for central bankers.
C)This type of policy relies on the policy-makers in charge.
D)It relies on a stable money-inflation relationship.

Question 22

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

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

Question 23

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 Fed.

Question 24

The monetary policy strategy that provides the least accountability is

A)exchange-rate targeting.
B)monetary targeting.
C)inflation targeting.
D)the implicit nominal anchor.

Question 25

Due to the lack of timely data for the price level and economic growth,the Fed's strategy

A)targets the exchange rate,since the Fed 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 Fed can control the CPI.

Question 26

Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets

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

Question 27

Estimates suggest that,in the United States economy,it takes just over ________ for monetary policy to affect output and just over ________ for monetary policy to affect the inflation rate.

A)1 year; 2 years
B)2 years; 1 year
C)1 year; 6 months
D)6 months; 1 year

Question 28

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

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

Question 29

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 30

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; federal funds rate
C)monetary aggregate; monetary base
D)monetary aggregate; nonborrowed base

Question 31

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)federal funds; monetary
D)federal funds; reserve

Question 32

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 transportable.

Question 33

If the desired intermediate target is a monetary aggregate,which of the following would be the most preferred policy instrument?

A)The federal funds rate
B)The 90-day T-bill rate
C)The 180-day T-bill rate
D)The monetary base

Question 34

Explain the Federal Reserve's "just do it" approach to monetary policy.What are the advantages and disadvantages to this type of strategy?

Question 35

If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent,

A)fluctuations of nonborrowed reserves will be small.
B)fluctuations of nonborrowed reserves will be large.
C)the Fed will probably quickly abandon this policy,as it did in the 1960s.
D)the Fed will probably quickly abandon this policy,as it did in the 1950s.

Question 36

Which of the following is an advantage of the Fed's "just do it" approach to monetary policy?

A)It does not rely on the money-inflation relationship.
B)It is simplistic and has clarity.
C)There is increased accountability of central bankers.
D)There is an immediate signal if the target has been achieved.

Question 37

Which of the following is not an operating instrument?

A)Nonborrowed reserves
B)Monetary base
C)Federal funds interest rate
D)Discount rate

Question 38

The monetary policy strategy that suffers a lack of transparency is

A)exchange-rate targeting.
B)monetary targeting.
C)inflation targeting.
D)the implicit nominal anchor.

Question 39

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

A)interest rate; three-month T-bill rate
B)interest rate; federal funds rate
C)reserve aggregate; monetary base
D)reserve aggregate; narrow money supply M1

Question 40

When compared to the Fed's ________ anchor approach,________ targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles.

A)nominal; inflation
B)implicit; monetary
C)nominal; monetary
D)implicit; inflation

Question 41

A central bank has ________ chance to identify a credit-driven bubble compared to an irrational exuberance bubble.

A)a greater
B)less of a
C)about the same level of a
D)a greater,less or about the same level of a

Question 42

When asset prices increase above their fundamental values it is called an ________.

A)asset-price bubble
B)irrational bubble
C)asset-price spike
D)irrational spike

Question 43

Suppose interest rates are kept very low for a long time such that there is a spike in the amount of lending.Everything else held constant,this could cause ________ bubble.

A)an irrational exuberance
B)a credit-driven
C)a stock
D)a debt-driven

Question 44

________ bubble is driven entirely by unrealistic optimistic expectations.

A)An irrational exuberance
B)A credit-driven
C)A stock
D)A debt-driven

Question 45

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 46

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 47

The guiding principle for the conduct of monetary policy that held that as long as loans were being made for "productive" purposes,then providing reserves to the banking system to make these loans would not be inflationary became known as the

A)free reserves doctrine.
B)Benjamin Strong doctrine.
C)efficient liquidity doctrine.
D)real bills doctrine.

Question 48

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 49

Which of the following is NOT an argument against using monetary policy to prick asset-price bubbles?

A)The effect of increasing interest rates on asset prices is uncertain.
B)A bubble may only exist in some asset-prices and monetary policy will affect all asset prices.
C)Using monetary policy to prick an asset-price bubble may have adverse effect on the aggregate economy.
D)Even though credit-drive bubbles are easier to identify,they are still relatively hard to identify.

Question 50

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

Question 51

According to the Taylor rule,the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target.

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

Question 52

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 53

Using Taylor's rule,when the equilibrium real federal funds 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 federal funds rate should be

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

Question 54

A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending.

A)a decrease; a decrease; an increase
B)a decrease; an increase; an increase
C)an increase; an increase; a further increase
D)a decrease; a decrease; a further decrease

Question 55

Everything else held constant,a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble.

A)less
B)about the same amount of
C)more
D)either more,less,or the same amount of

Question 56

In its earliest years,the Federal Reserve's guiding principle for the conduct of monetary policy was known as the

A)real bills doctrine.
B)liberal liquidity doctrine.
C)free reserves doctrine.
D)quantity theory of money.

Question 57

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

Question 58

Using Taylor's rule,when the equilibrium real federal funds 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 federal funds rate target should be

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

Question 59

If the desired intermediate target is an interest rate,the preferred policy instrument would be

A)the federal funds rate.
B)the monetary base.
C)nonborrowed reserves.
D)borrowed reserves.
E)the discount rate.

Question 60

Explain the Taylor rule,including the formula for setting the federal funds rate target,and the components of the formula.If the Fed were to use this rule,how many goals would it use to set monetary policy?

Question 61

The Fed-Treasury Accord of March 1951 provided the Fed greater freedom to

A)let interest rates increase.
B)let unemployment increase.
C)let inflation accelerate.
D)let exchange rates increase.

Question 62

The Fed's mistakes of the early 1930s were compounded by its decision to

A)raise reserve requirements in 1936-1937.
B)lower reserve requirements in 1936-1937.
C)raise the monetary base in 1936-1937.
D)lower the monetary base in 1936-1937.

Question 63

The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits

A)only during World War I.
B)during the Great Depression.
C)during World War I and World War II.
D)throughout the entire existence of the Fed.

Question 64

During World War II,whenever interest rates would ________ and the price of bonds would begin to ________,the Fed would make open market purchases.

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

Question 65

High inflation can spiral out of control when

A)expected inflation increases nominal interest rates,causing the Fed to buy bonds,increasing the money supply and further increasing inflation.
B)expected inflation decreases nominal interest rates,causing the Fed to buy bonds,increasing the money supply and further increasing inflation.
C)expected inflation increases nominal interest rates,causing the Fed to sell bonds,increasing the money supply and further increasing inflation.
D)expected inflation decreases nominal interest rates,causing the Fed to sell bonds,increasing the money supply and further increasing inflation.

Question 66

Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s,its behavior suggests that it emphasized

A)free-reserve targeting.
B)interest-rate targeting.
C)a real-bills doctrine.
D)price-index targeting.

Question 67

During World War II,whenever interest rates would rise and the price of bonds would begin to fall,the Fed would

A)lower reserve requirements.
B)raise reserve requirements.
C)make open market purchases of government securities.
D)make open market sales of government securities.

Question 68

The Fed accidentally discovered open market operations when

A)it came to the rescue of failing banks in the early 1930s,and found that its purchases of bank loans injected reserves into the banking system.
B)it purchased securities for income following the 1920-1921 recession.
C)it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system.
D)it reinterpreted a key provision of the Federal Reserve Act.

Question 69

In practice,the Fed's policy of targeting ________ in the 1960s proved to be ________,destabilizing the economy.

A)money market conditions; countercyclical
B)money market conditions; procyclical
C)monetary aggregates; countercyclical
D)monetary aggregates; procyclical

Question 70

During World War II,the Fed in effect relinquished its control of monetary policy through its policy of

A)continually lowering reserve requirements.
B)continually raising reserve requirements.
C)pegging interest rates.
D)targeting free reserves.

Question 71

During the 1950s,the Fed targeted

A)M1.
B)M2.
C)the monetary base.
D)money market conditions.

Question 72

In the 1970s,the Fed selected an interest rate as an operating target rather 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 achieving interest rate stability.
C)was committed to targeting free reserves.
D)was committed to the real bills doctrine.

Question 73

The Fed's use of the federal funds rate as an operating target in the 1970s resulted in

A)countercyclical monetary policy.
B)too slow growth in M1 throughout the decade.
C)procyclical monetary policy.
D)too rapid growth in M1 throughout the decade.

Question 74

The Fed's use of the ________ as an operating target in the 1970s resulted in ________ monetary policy.

A)federal funds rate; countercyclical
B)federal funds rate; procyclical
C)M1 money supply; countercyclical
D)M1 money supply; procyclical

Question 75

In practice,the Fed's policy of targeting money market conditions in the 1960s proved to be

A)countercyclical,helping to stabilize the economy.
B)procyclical,destabilizing the economy.
C)procyclical,helping to stabilize the economy.
D)countercyclical,destabilizing the economy.

Question 76

The real bills doctrine was the guiding principle for the conduct of monetary policy during the

A)1910s.
B)1940s.
C)1950s.
D)1960s.

Question 77

Although the Fed professed employment of ________ targeting during the 1970s,its behavior suggests that it emphasized ________ targeting.

A)free-reserve; interest-rate
B)interest-rate; monetary aggregate
C)monetary aggregate; interest-rate
D)free reserve; monetary aggregate

Question 78

The Fed accidentally discovered open market operations in the early

A)1920s.
B)1910s.
C)1900s.
D)1890s.

Question 79

Targeting interest rates can be procyclical because

A)an increase in income increases interest rates,causing the Fed to buy bonds,increasing the monetary base and money supply,leading to further increases in income.
B)an increase in interest rates increases income,causing the Fed to buy bonds,increasing the monetary base and money supply,leading to further increases in income.
C)an increase in the monetary base increases the money supply,causing the Fed to buy bonds,increasing the monetary base and money supply,leading to further increases in income.
D)an increase in income increases the monetary base and money supply,causing the Fed to buy bonds to increase interest rates and income.

Question 80

During the 1950s,Fed monetary policy targeted

A)the monetary base.
B)the exchange rate.
C)discount loans.
D)interest rates.