Question 1

The graph shown shows what happens when the Fed implements:

Accepted Answer

The answer of The graph shown shows what happens when...

Question 2

The aim of unconventional monetary policy tools is to:

Accepted Answer

Unconventional monetary policy tools, such as quantitative easing, are used to support the economy by increasing liquidity and lowering interest rates, especially when traditional credit channels are ineffective.

Question 3

A policy of targeting a particular quantity of money by buying financial assets from banks and other financial institutions with newly created money is called:

Accepted Answer

Quantitative easing is a monetary policy where a central bank buys financial assets to increase the money supply and encourage lending and investment.

Question 4

To avoid the law of diminishing control, the government could:

Accepted Answer

The best choice is for the government to change regulations when it is appropriate to do so. This will allow for flexibility and adaptability based on changing circumstances and avoid the law of diminishing control, which states that the effectiveness of a regulation decreases over time as people find ways to circumvent or undermine it. However, the government should also establish clear and consistent criteria for when and how regulations will be changed to promote transparency and predictability.

Question 5

Purchasing long-term government bonds from private financial corporations for the purpose of changing the mix of securities held by the Fed toward less liquid and more risky assets is called:

Accepted Answer

Credit easing involves purchasing long-term securities to change the composition of the Fed's balance sheet towards less liquid and riskier assets.

Question 6

The purpose of the Dodd-Frank Wall Street Reform Act was to:

Accepted Answer

The purpose of the Dodd-Frank Wall Street Reform Act was to force banks to limit their risk-taking in order to prevent another financial crisis like the one in 2008. The act established rules for transparency and accountability among financial institutions, and created a regulatory framework to oversee the financial industry. It also established the Consumer Financial Protection Bureau (CFPB) to protect consumers from predatory lending practices.

Question 7

Which of the following would not fall under the description of unconventional monetary policy by the Federal Reserve?

Accepted Answer

Lowering the reserve requirement for banks is a conventional monetary policy tool, whereas the other options involve more unconventional measures typically used in extraordinary circumstances.

Question 8

When the Fed is changing the quality of the assets it holds, this is called:

Accepted Answer

When the Fed is changing the quality of the assets it holds, it is called credit easing. Quantitative easing refers to when the Fed purchases large quantities of government securities or other securities to increase the money supply and stimulate economic growth. Operation twist refers to when the Fed buys and sells long-term and short-term securities to influence interest rates. Precommitment policy refers to when the central bank announces its future policy actions in advance to guide market expectations.

Question 9

Which of the following would have the impact shown in the accompanying graph?

Accepted Answer

The answer of Which of the following would have the...

Question 10

Quantitative easing involves all of the following except:

Accepted Answer

Quantitative easing involves purchasing longer-term bonds to increase the money supply and lower long-term interest rates. This leads to higher asset prices, but not higher long-term interest rates.

Question 11

Quantitative easing refers to:

Accepted Answer

Quantitative easing is a non-standard monetary policy where a central bank, such as the Federal Reserve, expands the money supply by purchasing government bonds or other securities to inject liquidity into the economy and stimulate lending and investment. This is done in order to combat deflationary pressures and support economic growth.

Question 12

The Fed sells short-term debt and uses the proceeds to buy long-term debt.This represents:

Accepted Answer

This is known as "operation twist," a monetary policy where the central bank sells short-term securities and buys long-term securities to flatten the yield curve and stimulate economic growth.

Question 13

Selling short-term treasury bills and buying longer-term treasury bonds without creating more new money is called:

Accepted Answer

Selling short-term treasury bills and buying longer-term treasury bonds without creating more new money is known as Operation Twist. This is a form of monetary policy in which the Federal Reserve sells short-term Treasury bills and uses the proceeds to buy longer-term bonds. The aim of this policy is to flatten the yield curve and push down long-term interest rates. It is different from quantitative easing, which involves the creation of new money to purchase assets.

Question 14

Which of the following is not one of the unconventional monetary policy tools used by the Fed?

Accepted Answer

The Dodd-Frank Act is a financial regulatory reform legislation, not a monetary policy tool.

Question 15

A problem with a precommitment policy is that it:

Accepted Answer

A precommitment policy can limit the Fed's flexibility in responding to unexpected events, as they are committed to following a specific plan. This can make it difficult to adjust to changing economic conditions and can be problematic if unexpected events occur.

Question 16

The recent regulation that was designed to limit risk-taking by banks by requiring them to report their holdings is called the:

Accepted Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted to promote financial stability by improving accountability and transparency in the financial system, including requiring banks to report their holdings to limit risk-taking.

Question 17

Which of the following would not address the moral hazard problem?

Accepted Answer

All other options directly address the moral hazard problem by either increasing regulation or separating banks from other financial institutions. Allowing the government to take over the policy-making decisions of the Federal Reserve would not address the moral hazard problem as it could potentially lead to political interference and the prioritization of short-term political goals over long-term economic stability.

Question 18

The main difference between quantitative easing and credit easing is that:

Accepted Answer

Credit easing involves changing the mix of the central bank's holdings to influence credit conditions, while quantitative easing focuses on increasing the overall size of the central bank's balance sheet.

Question 19

A general principle of regulation is:

Accepted Answer

Setting as few bad precedents as possible is a general principle of regulation because regulations can create unintended consequences and set a precedent for similar regulations in the future. Therefore, it is important for regulators to be cautious and ensure that their actions do not create negative outcomes or undesired precedents. Option A is incorrect because offsetting the moral hazard problem is not a general principle of regulation; instead, it is a specific issue that regulators must address. Option C is also incorrect because letting banks fail regardless of the effect on the economy is not a desired outcome, as it can lead to economic instability and negative consequences. Option D is incorrect because reducing regulations over time may not always be the best approach, as some regulations may still be necessary to ensure a stable and fair market.

Question 20

Buying financial assets from banks and other financial institutions with newly created money is referred to as:

Accepted Answer

Quantitative easing is a monetary policy where a central bank buys financial assets from banks and other financial institutions with newly created money to increase the money supply and encourage lending and investment.

Quiz 30: Financial Crises, Panics, and Unconventional Monetary Policy