Question 1

Explain why it is correct to say the Federal Reserve functions as the government's bank but it is incorrect to say it controls the government's budget.

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Question 2

What are the potential problems that can result if central bankers set a target of a zero rate of inflation?

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Question 3

If governments operated like businesses, meaning their goal was to maximize profits, why would they likely never give up the power to print money to any other institution?

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Question 4

What are the specific objectives of most central bankers?

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Question 5

The autonomy of modern central banks means that governments cannot increase their spending by:

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The autonomy of modern central banks means that governments cannot directly control the money supply, including the printing of money, to finance their spending. This is because central banks, which are responsible for issuing currency, operate independently to ensure monetary policy is focused on long-term economic health rather than short-term political needs.

Question 6

If we think back to Chapter 11 when we discussed moral hazard, discuss how a government ceding the right to control the amount of currency to a central bank is a way to treat a potential moral hazard problem.

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Question 7

All of the following are true about central bank independence except that it:

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Central bank independence is typically established through legislation rather than being guaranteed by a country's constitution. This means it can be more easily altered by governmental actions, reflecting the practical aspects of monetary policy management and the need for flexibility in responding to economic conditions.

Question 8

One of the specific goals for central bankers is financial system stability. Considering the U.S., for example, would this imply that the Federal Reserve would always take action to prevent any single bank from failing? Explain.

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Question 9

Fiscal policymakers may actually welcome some inflation for all of the following reasons except:

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Inflation strengthens the independence of the fiscal policymakers by increasing their ability to adjust economic conditions through monetary policy. Therefore, fiscal policymakers would not welcome inflation if it weakened the independence of the central bank. A, B, and C are all reasons why fiscal policymakers may welcome inflation.

Question 10

What may be the reasons that explain the observation that during periods of hyperinflation economic growth actually slows or even contracts?

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Question 11

If one of the specific goals that central bankers focus on is economic growth, should they aim for the highest short-term growth rate the economy can achieve? Explain.

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Question 12

Discuss how the goals of central bankers can be linked to risk and the ability or inability of individuals to eliminate this risk.

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Question 13

Imagine you own a retail mail order business. You produce your catalog, where items and prices are listed, in January and you use the same catalog all year. The central bank in your country increases the money supply by an amount to cause inflation to average one percent each month. Ignoring any seasonality in sales (like the holiday season), what should happen to your sales as the year progresses and why?

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Question 14

Explain why inflation degrades the information content of prices.

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Question 15

How do the specific goals of interest rate and exchange rate stability differ in importance from the other specific goals mentioned for central bankers?

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Question 16

What are the three main functions a central bank performs in its role as a banker's bank?

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Question 17

If we look back in history, why has the role of creating money fallen to central banks?

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Question 18

We have a country, Fantasyland, where the current per capita real income is 20,000 units of output, and the current average growth rate is 2.0 percent. What will be the difference in the standard of living twenty years from now if Fantasyland grows at a rate of 3.5 percent and we assume population is constant?

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Question 19

If a government were to find that it cannot raise taxes any further, and that it cannot borrow any further from financial markets, the government:

Accepted Answer

When a government cannot raise taxes or borrow from financial markets, it can still increase spending by having the central bank purchase its bonds. This is a form of monetary financing where the central bank creates money to buy government bonds, effectively funding government expenditures.

Question 20

What do modern central bankers not do?

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Quiz 15: Central Banks in the World Today