Question 1

Which of the below statements is FALSE?

Accepted Answer

Monetarists actually believe that changes in interest rates should not be allowed to affect policy on reserves, as they see interest rates as a result of changes in the money supply rather than a determinant of it. The other statements are true.

Question 2

During 1997/1998, with strong economic growth and unemployment decreasing, Alan Greenspan and the Fed were faced with a dilemma. What was this dilemma?

Accepted Answer

The dilemma faced by Alan Greenspan and the Fed during 1997/1998 was whether to tighten monetary policy to slow down the rapidly growing economy. The strong economic growth and decreasing unemployment indicated an overheating of the economy, which would lead to inflation. To combat this, the Fed had to decide whether to raise interest rates to slow economic growth and keep inflation in check. Therefore, the best choice is A.

Question 3

A "weak" dollar contributes to inflation, as U.S. buyers pay more for the many goods they do import.

Accepted Answer

A weak dollar means it takes more dollars to purchase goods from other countries, which increases the cost of imports and contributes to inflation.

Question 4

The Fed's policy necessarily represents trade-offs among its various goals, which have different levels of relative importance at different times, depending on the state of the economy.

Accepted Answer

The Fed's goals, including price stability, maximum employment, and moderate long-term interest rates, often compete with each other and require the Fed to make difficult decisions and trade-offs depending on the current state of the economy.

Question 5

The Fed's policy beginning in 1983 was to keep the growth in borrowed reserves within some specified range. As a result, the Fed ________.

Accepted Answer

The Fed supplied reserves through open market purchases when borrowed reserves rose to maintain the growth within the specified range.

Question 6

Interestingly, in recent years, many central banks have adopted inflation, despite certain problems in measurement, as a key intermediate variable.

Accepted Answer

In recent years, many central banks have indeed adopted inflation as a key intermediate variable, despite some measurement problems associated with it. Inflation is considered an important indicator of the state of the economy, and central banks often use it as a target for monetary policy.

Question 7

During the late 1990s and the 2000s, due to the moderately strong U.S. dollar, strong U.S. economic growth and weak or anemic economic growth in much of the rest of the world, the United States experienced a very large but decreasing trade deficit.

Accepted Answer

During the late 1990s and the 2000s, the U.S. experienced a very large and generally increasing trade deficit, not a decreasing one, due to factors like a strong U.S. dollar and strong U.S. economic growth compared to weaker growth in other parts of the world.

Question 8

The Fed can be certain how much impact any change in reserves will have on short-term rates.

Accepted Answer

While the Fed can use changes in reserves as a tool to influence short-term rates, the actual impact may vary depending on multiple factors such as market conditions, inflation expectations, and overall economic environment.

Question 9

The Fed has numerous and complex goals related to conditions in the overall economy, which include price stability, high employment, economic growth, and stability in interest rates and the dollar's value in foreign currencies.

Accepted Answer

The statement is correct. The Federal Reserve's goals include maintaining price stability, promoting maximum employment, fostering economic growth, and ensuring stable interest rates and foreign currency exchange rates.

Question 10

In the mid 1980s, two developments of note occurred. The first was the need for the Fed, which it publicly acknowledged, to become concerned with the level and stability of the U.S. dollar's foreign currency exchange rate. What was the second development?

Accepted Answer

The second development of note in the mid 1980s was the shocking fall in equity prices around the world in October 1987, also known as Black Monday.

Question 11

The goals are numerous, but the Fed's capabilities are limited to the simple menu of (1) trying to raise the rate of growth in the money supply by providing more reserves to banks, and (2) trying to reduce the rate of monetary expansion by reducing the reserves in the banking system.

Accepted Answer

The statement accurately describes the limited capabilities of the Federal Reserve in terms of their ability to influence the money supply through the manipulation of bank reserves. The Fed can either increase or decrease reserves to encourage or discourage banks from lending and thus impact the growth rate of the money supply. However, the Fed cannot directly control the money supply or achieve other specific economic goals such as full employment or balanced growth.

Question 12

Policies expanding the money supply and stimulating growth are beneficial for all circumstances.

Accepted Answer

Policies aimed at expanding the money supply and stimulating growth can be beneficial in certain circumstances, such as during a recession or when the economy is in a liquidity trap. However, if implemented inappropriately or without considering the current economic situation, these policies can lead to inflation and other negative consequences. Therefore, the statement that such policies are beneficial for all circumstances is false.

Question 13

Observability refers to the notion that an operating target must have an expected connection with the intermediate target, which itself must eventually affect the economy in a way that is consistent with the Fed's goals.

Accepted Answer

Observability in the context of systems and software engineering refers to the ability to monitor and understand the internal state of a system based on its external outputs. The definition provided mixes concepts related to economic policy and central banking goals, which are unrelated to the technical definition of observability.

Question 14

Overall, according to the Keynesian view of the economy, a ________ in the fed funds rate should lead to a(n) ________ level of output and employment in the economy.

Accepted Answer

According to the Keynesian view, a decline in the fed funds rate, which is the interest rate at which depository institutions lend reserves to each other overnight, is generally expected to lead to lower interest rates overall. This, in turn, encourages borrowing and investment, leading to higher levels of output and employment in the economy. Therefore, none of the provided options accurately reflects the Keynesian perspective.

Question 15

Which of the below has occurred during the 21st Century?

Accepted Answer

The Fed increased its funds rate between regularly scheduled FOMC meetings in January 2008.

Question 16

During the early 1990s, what did the Fed succeed in doing?

Accepted Answer

The Fed successfully reduced rates across the maturity spectrum during the early 1990s to aid an economic expansion.

Question 17

One historic consequence of the policy of supplying reserves according to movements in the fed funds rate was that the Fed did not concern itself ________.

Accepted Answer

The policy of supplying reserves according to movements in the fed funds rate meant that the Fed was focused on the level of the federal funds rate and did not concern itself with the behavior of the level of reserves, or of the monetary base and other monetary aggregates, which expanded in an erratic way.

Question 18

The expansion in the monetary aggregates was particularly rapid from 1975 to 1978, and that expansion (along with the oil shocks) led to ________.

Accepted Answer

The rapid expansion in monetary aggregates led to serious inflation and a decline in the dollar's value. This is because an increase in the money supply typically leads to higher prices and reduces the purchasing power of each unit of currency. The oil shocks also contributed to inflation during this period by driving up the cost of energy and other goods.

Question 19

Overall during Greenspan's tenure there were two recessions, ________.

Accepted Answer

During Greenspan's tenure, there were two recessions - one in 1991 and a very mild recession in 2001 after the 9/11 terrorist attack. Option A is incorrect as there was no recession during the 1987 crash, just a market correction. Option C is incorrect as there was no recession during the 9/11 terrorist attack, just a short-lived economic slowdown. Option D is incorrect as there were two recessions during Greenspan's tenure.

Question 20

As of 1995, what did the Fed succeed in doing?

Accepted Answer

The Fed helped achieve a desirable strong growth and a low inflation that was referred to as the "new paradigm." This refers to the period of economic growth and stability in the 1990s, where the Fed's policies played a crucial role in promoting low inflation and strong economic growth.

Quiz 5: Monetary Policy in the United States