Question 1

Which of the following criteria need not be satisfied for choosing a policy instrument?
A)The variable must be measurable.
B)The variable must be controllable.
C)The variable must be predictable.
D)The variable must be transportable.

Accepted Answer

The variable being transportable is not a necessary criteria for choosing a policy instrument. The other three criteria (measurability, controllability, and predictability) are necessary for effective policy implementation.

Question 2

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.

Accepted Answer

The early years of the Federal Reserve were characterized by the use of the real bills doctrine as the guiding principle for monetary policy. This doctrine held that the central bank should only lend to member banks against sound commercial paper, or "real bills," in order to ensure that credit was flowing to productive sectors of the economy rather than fueling speculative investment. This approach was criticized for being too restrictive and for causing credit shortages during periods of economic downturn, leading to the eventual adoption of the more flexible open market operations policy.

Question 3

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.

Accepted Answer

The Fed's decision to raise reserve requirements in 1936-1937 tightened the money supply and contributed to the recession of 1937-1938, which slowed the economy's recovery from the Great Depression. This policy mistake further exacerbated the Fed's earlier errors in the early 1930s.

Question 4

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.

Accepted Answer

According to Taylor's rule, nominal federal funds rate target = equilibrium real federal funds rate + current inflation rate + 0.5(inflation gap) + 0.5(output gap)
Where, inflation gap = actual inflation rate - target inflation rate
And, output gap = (actual GDP - potential GDP)/potential GDP

Given, 
Equilibrium real federal funds rate = 3%
Positive output gap = 2%
Target inflation rate = 1%
Actual inflation rate = 2%

Therefore, 
Inflation gap = 2% - 1% = 1%
Output gap = (unknown actual GDP - potential GDP)/potential GDP = 2%
Nominal federal funds rate target = 3% + 2% + 0.5(1%) + 0.5(2%) = 6.5%

Thus, the nominal federal funds rate target should be 6.5 percent.

Question 5

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.

Accepted Answer

The rate of inflation tends to increase when the unemployment rate is less than the Non-Accelerating Inflation Rate of Unemployment (NAIRU), as this situation typically indicates that the economy is overheating, leading to upward pressure on wages and prices.

Question 6

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

Accepted Answer

The answer of Explain and demonstrate graphically how targeting the...

Question 7

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

Accepted Answer

During World War II, when interest rates would rise and the price of bonds would begin to fall, the Federal Reserve (Fed) would make open market purchases to stabilize the economy and support the war effort by keeping interest rates low.

Question 8

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.

Accepted Answer

This guiding principle is known as the real bills doctrine. It held that by providing reserves to the banking system to support loans made for productive purposes, the resulting increase in the money supply would not be inflationary because the additional money would be backed by tangible goods and services, represented by the short-term commercial paper (real bills) held as collateral by the banks. The doctrine was advocated by central bankers such as Benjamin Strong, who was governor of the Federal Reserve Bank of New York from 1914 to 1928.

Question 9

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

Accepted Answer

The federal funds rate and reserve aggregates are measured accurately and are available daily with almost no delay, making them the best choice. The three-month T-bill rate is not as closely tied to monetary policy as the federal funds rate, and the monetary aggregates can be difficult to measure accurately in real-time.

Question 10

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.

Accepted Answer

The answer of Using Taylor's rule,when the equilibrium real federal...

Question 11

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?

Accepted Answer

The answer of Explain the Taylor rule,including the formula for...

Question 12

The real bills doctrine was the guiding principle for the conduct of monetary policy during the
A)1910s.
B)1940s.
C)1950s.
D)1960s.

Accepted Answer

The real bills doctrine was the guiding principle for the conduct of monetary policy during the 1910s, particularly in the United States. Under this doctrine, central banks would only lend money against short-term, self-liquidating commercial and industrial bills of exchange, rather than against government bonds or securities. This approach was meant to ensure that credit was directed towards productive economic activity, rather than speculative or inflationary purposes. While the real bills doctrine fell out of favor in subsequent decades, it was a dominant influence on monetary policy in the early 20th century.

Question 13

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

Accepted Answer

The answer of Explain and demonstrate graphically how targeting nonborrowed...

Question 14

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

Accepted Answer

If nominal interest rates are increased by less than the inflation rate, real interest rates (nominal interest rates adjusted for inflation) will fall, making borrowing cheaper in real terms. This situation indicates that monetary policy is too loose, as it does not sufficiently counteract inflation by making borrowing more expensive.

Question 15

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

Accepted Answer

The answer of According to the Taylor rule,the Fed should...

Question 16

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.

Accepted Answer

The NAIRU (Non-Accelerating Inflation Rate of Unemployment) is the unemployment rate at which the economy is at its natural rate of unemployment, and inflation is neither accelerating nor decelerating. Therefore, when the unemployment rate equals the NAIRU, the rate of inflation tends to remain constant. If the unemployment rate is above the NAIRU, there is downward pressure on wages and inflation, and if the unemployment rate is below the NAIRU, there is upward pressure on wages and inflation. If the unemployment rate increases faster than the NAIRU increases, it could result in lower inflation.

Question 17

Which of the following is not a requirement in selecting a policy instrument?
A)Measurability
B)Controllability
C)Flexibility
D)Predictability

Accepted Answer

The answer of Which of the following is not a...

Question 18

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

Accepted Answer

According to the Taylor Principle, when inflation rises, central banks should increase the nominal interest rate by more than the increase in inflation. This helps to keep inflation expectations anchored and prevents it from spiraling out of control. Therefore, option A is the correct answer.

Question 19

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.

Accepted Answer

The Fed stumbled upon the concept of open market operations when it bought securities to generate income after the 1920-1921 recession, inadvertently discovering that such purchases could influence the banking system's reserves.

Question 20

The Fed accidentally discovered open market operations in the early
A)1920s.
B)1910s.
C)1900s.
D)1890s.

Accepted Answer

The Federal Reserve accidentally discovered the power of open market operations in the early 1920s. This discovery was a pivotal moment in the development of monetary policy tools, allowing the Fed to influence the economy by buying and selling government securities to adjust the federal funds rate.

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

Which of the following criteria need not be satisfied for choosing a policy instrument?

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

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

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

The rate of inflation increases when

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

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

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

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

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

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?

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

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

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 .

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.

The rate of inflation tends to remain constant when

Which of the following is not a requirement in selecting a policy instrument?

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

The Fed accidentally discovered open market operations when

The Fed accidentally discovered open market operations in the early