Question 1

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 2

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 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

Taylor's rule is given by: 
Nominal federal funds rate target = Equilibrium real federal funds rate + Inflation rate target + 0.5*(Inflation rate target - Actual inflation rate) + 0.5*(Output gap)

Plugging in the values, we get: 
Nominal federal funds rate target = 3% + 1% + 0.5*(1%-2%) + 0.5*(2%) 
Nominal federal funds rate target = 3% + 1% - 0.5% + 1% 
Nominal federal funds rate target = 5.5%

Therefore, the nominal federal funds rate target should be 5.5%, which is closest to option D) 6.5%.

Question 4

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 5

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 6

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 7

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

The Taylor Principle states that when the inflation rate rises, the central bank should raise the nominal interest rate by more than the increase in the inflation rate in order to maintain real interest rates and control inflation. Therefore, choice A is the correct answer as the nominal interest rate should be increased by more than the inflation rate increase.

Question 8

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. Expected inflation is difficult to accurately determine, as it is influenced by a variety of factors such as government policies, global events, and consumer behavior. Therefore, real interest rates are inherently difficult to measure accurately.

Question 9

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 answer of During the years 1979 to 1982,the Federal...

Question 10

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 involves setting a target for a certain monetary aggregate, such as M1 or M2, and adjusting monetary policy to achieve that target. The central bank may also use other monetary aggregates as intermediate targets. Reserve aggregates and the monetary base are not typically used as the primary target in monetary targeting. GDP is an output measure and is not directly targeted by monetary policy.

Question 11

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 12

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 level of unemployment at which inflation is stable or constant. 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 prices, leading to lower inflation. If the unemployment rate is below the NAIRU, there is upward pressure on wages and prices, leading to higher inflation. If the unemployment rate increases faster than the NAIRU increases, it would lead to a decrease in inflation.

Question 13

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 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

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 16

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 criterion for choosing a policy instrument. The remaining criteria (measurability, controllability, and predictability) are all important in selecting an effective policy instrument.

Question 17

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 18

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 hybrid monetary policy strategy has elements in common with the targeting strategy previously used by the Bundesbank, which focused on controlling inflation through monetary policy. The ECB also includes some elements of targeting, such as targeting the growth of the monetary aggregates. Therefore, the best choice is A) monetary; inflation.

Question 19

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 20

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

If the Fed targets an interest rate, fluctuations in the demand for reserves can cause the Fed to lose control over the monetary aggregate because the Fed will have to adjust the supply of reserves to accommodate the changing demand, which could in turn affect the interest rate target. This is known as the "interest rate channel" of monetary policy transmission. By targeting an interest rate, the Fed is indirectly influencing the monetary aggregate, rather than directly controlling it like they would with targeting the monetary base or nominal GDP.

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

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

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

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

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.

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

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.

Real interest rates are difficult to measure because

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

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 ________.

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 .

The rate of inflation tends to remain constant 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

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

The rate of inflation increases when

Which of the following criteria need NOT be satisfied for choosing 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.

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.

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

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