Question 1

Compared to the United States,Japan's experience with monetary targeting during the 1978-1987 period 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.

Accepted Answer

Japan's experience with monetary targeting during the 1978-1987 period was generally more successful than that of the United States, as it managed to achieve lower inflation rates and smaller output fluctuations. This was due in part to Japan's more disciplined approach to monetary policy and its focus on long-term economic stability.

Question 2

In pursuing a strategy of monetary targeting,the central bank announces that it will achieve a certain value (the target)of the annual growth rate of a ________.
A)a monetary aggregate
B)a reserve aggregate
C)the monetary base
D)GDP

Accepted Answer

Monetary targeting is a monetary policy framework where the central bank sets a target for a specific monetary aggregate, such as M2 or M3, and adjusts its policy instruments to achieve the target growth rate of that aggregate. The choice B) reserve aggregate and C) the monetary base are not commonly used as targets in monetary targeting strategy, and D) GDP is not a monetary aggregate.

Question 3

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, the nominal federal funds rate target is calculated as follows:

Nominal federal funds rate target= equilibrium real federal funds rate+ inflation target+ 0.5*(inflation gap)+0.5*(output gap)

In this case,

Equilibrium real federal funds rate= 3%
Inflation target= 1%
Inflation gap= actual inflation rate - inflation target= 2% - 1% = 1%
Output gap= positive output gap= 2%

Therefore,

Nominal federal funds rate target= 3% + 1% + 0.5*(1%) + 0.5*(2%)= 6.5%

Hence, the choice is D, which is 6.5 percent.

Question 4

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

According to the Phillips curve, there is an inverse relationship between unemployment and inflation. When the unemployment rate equals the non-accelerating inflation rate of unemployment (NAIRU), inflation is expected to remain constant. This is because at the NAIRU, there is neither upward nor downward pressure on wages and prices, and the economy is said to be in long-run equilibrium. Any deviation from this level of unemployment can result in an increase or decrease in inflation rate.

Question 5

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 is the interest rate at which banks lend and borrow reserves from each other overnight, and it is set by the Federal Reserve through open market operations. The level of reserves held by banks is a key component of monetary policy, as it affects the ability of banks to lend and the overall level of money in the economy. Both the federal funds rate and reserve aggregates are measured accurately and are available daily with almost no delay, making them useful for the Federal Reserve to adjust its policy instrument in response to changing economic conditions. The three-month T-bill rate is less directly related to the Federal Reserve's policy instrument and is subject to market forces in addition to monetary policy.

Question 6

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

Transportability is not a relevant criterion for choosing a policy instrument. The other three (measurability, controllability, and predictability) are important because a policy instrument must be able to target a specific variable with a reasonable degree of accuracy in order to achieve its intended outcome. However, transportability has no bearing on whether a policy instrument is effective.

Question 7

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 8

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 the inflation rate rises, the central bank should increase the nominal interest rate by more than the increase in inflation to maintain real interest rates and avoid excessive inflation. This is known as a "hawkish" monetary policy stance. Therefore, the correct choice is A - increased by more than the inflation rate increase.

Question 9

One of the factors that contributed to the success German policymakers had using a monetary targeting type policy starting in the mid-1970s and continuing through the next two decades 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.

Accepted Answer

The success of German policymakers in using a monetary targeting policy was partly due to the flexibility of the money target, which allowed the Bundesbank to adjust its focus to other goals as necessary, rather than adhering to a rigid money growth rate or short-term inflation rate goals. This flexibility was crucial in adapting to economic changes and challenges.

Question 10

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.

Accepted Answer

When the Federal Reserve targets an interest rate, fluctuations in the demand for reserves can lead to a loss of control over a monetary aggregate. This is because to maintain the target interest rate, the Fed may need to supply more or fewer reserves to the banking system, which can change the amount of money in circulation.

Question 11

The European Central Bank (ECB)pursues a hybrid monetary policy strategy that has elements in common with the ________-targeting strategy previously used by the Bundesbank but also includes some elements of ________ targeting.
A)monetary;inflation
B)inflation;monetary
C)monetary;exchange rate
D)monetary;nominal GDP

Accepted Answer

The ECB's strategy combines elements of monetary targeting, similar to the Bundesbank's approach, with inflation targeting. This hybrid approach aims to maintain price stability while also considering money supply growth.

Question 12

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.

Accepted Answer

The Federal Reserve did not hit any of their monetary targets during this period because it is believed that controlling the money supply was not the primary intent, as they were more focused on controlling inflation and stabilizing the economy.

Question 13

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 Taylor rule suggests that the Fed should raise interest rates when inflation rises above the target or when real GDP rises above the output target, to prevent the economy from overheating.

Question 14

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 15

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 16

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 17

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 18

Real 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.

Accepted Answer

Real interest rates are calculated by subtracting the expected inflation rate from the nominal interest rate. However, expected inflation rates are difficult to determine accurately, making it challenging to measure real interest rates.

Question 19

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 20

Which of the following is NOT a requirement in selecting a policy instrument?
A)measurability
B)controllability
C)flexibility
D)predictability

Accepted Answer

Flexibility is not a strict requirement for selecting a policy instrument, whereas measurability, controllability, and predictability are essential to ensure the instrument can be effectively implemented and evaluated.

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

Compared to the United States,Japan's experience with monetary targeting during the 1978-1987 period performed

In pursuing a strategy of monetary targeting,the central bank announces that it will achieve a certain value (the target) of the annual growth rate of a ________.

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 tends to remain constant when

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

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

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?

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

One of the factors that contributed to the success German policymakers had using a monetary targeting type policy starting in the mid-1970s and continuing through the next two decades was that

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

The European Central Bank (ECB) pursues a hybrid monetary policy strategy that has elements in common with the -targeting strategy previously used by the Bundesbank but also includes some elements of targeting.

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

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.

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

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

The rate of inflation increases when

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

Real interest rates are difficult to measure because

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 .

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

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

Compared to the United States,Japan's experience with monetary targeting during the 1978-1987 period performed

In pursuing a strategy of monetary targeting,the central bank announces that it will achieve a certain value (the target) of the annual growth rate of a ________.

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 tends to remain constant when

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

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

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?

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

One of the factors that contributed to the success German policymakers had using a monetary targeting type policy starting in the mid-1970s and continuing through the next two decades was that

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

The European Central Bank (ECB) pursues a hybrid monetary policy strategy that has elements in common with the ________-targeting strategy previously used by the Bundesbank but also includes some elements of ________ targeting.

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

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.

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

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

The rate of inflation increases when

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

Real interest rates are difficult to measure because

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 ________.

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

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

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

The European Central Bank (ECB) pursues a hybrid monetary policy strategy that has elements in common with the -targeting strategy previously used by the Bundesbank but also includes some elements of targeting.

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.

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 .