Chapter 18 Conduct of Monetary Policy: Goals and Targets

T
1)

Multiple Choice
The objectives of the Federal Reserve in its conduct of monetary policy include (a) economic growth. (b) price stability. (c) high employment. (d) all of the above. Answer: D Question Status: Previous Edition

2)

The goals of monetary policy include (a) output stability. (b) price stability. (c) stability of the financial markets. (d) all of the above. (e) both (b) and (c) of the above. Answer: E Question Status: New

3)

The goals of monetary policy include (a) output stability. (b) stability in the foreign exchange markets. (c) maintenance of the gold standard. (d) all of the above. (e) both (a) and (b) of the above. Answer: B Question Status: New

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4)

Even if the Fed could completely control the money supply, monetary policy would have critics because (a) the Fed is asked to achieve many goals, some of which are incompatible with others. (b) the Feds goals do not include high employment, making labor unions a critic of the Fed. (c) the Feds primary goal is exchange rate stability, causing it to ignore domestic economic conditions. (d) it is required to keep Treasury security prices high. (e) all of the above. Answer: A Question Status: Study Guide

5)

High unemployment is undesirable because it (a) results in a loss of output. (b) always increases inflation. (c) always increases interest rates. (d) reduces the federal budget deficit. (e) reduces idle resources. Answer: A Question Status: New

6)

When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called (a) structural unemployment. (b) frictional unemployment. (c) cyclical unemployment. (d) underemployment. Answer: B Question Status: Previous Edition

7)

Unemployment resulting from a mismatch of workers skills and job requirements is called (a) frictional unemployment. (b) structural unemployment. (c) seasonal unemployment. (d) cyclical unemployment. (e) the natural rate of unemployment. Answer: B Question Status: New

8)

The goal for high employment should seek a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the (a) frictional level of unemployment. (b) structural level of unemployment. (c) natural rate level of unemployment. (d) Keynesian rate level of unemployment. Answer: C Question Status: Previous Edition

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9)

Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by (a) encouraging firms to invest. (b) encouraging people to save. (c) doing both (a) and (b) of the above. (d) doing neither (a) nor (b) of the above. Answer: C Question Status: Previous Edition

10)

Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by (a) encouraging firms to invest and people to save. (b) encouraging firms to limit their price increases. (c) doing both (a) and (b) of the above. (d) doing neither (a) nor (b) of the above. Answer: A Question Status: Previous Edition

11)

Supply-side economic policies seek to (a) increase taxes to encourage saving. (b) raise interest rates through contractionary monetary policy. (c) increase federal government expenditures. (d) increase consumption expenditures by increasing taxes. (e) increase saving and investment using tax incentives. Answer: E Question Status: New

12)

Price stability is desirable because (a) inflation creates uncertainty, making it difficult to plan for the future. (b) everyone is better off when prices are stable. (c) price stability increases the profitability of the Fed. (d) it guarantees full employment. Answer: A Question Status: Previous Edition

13)

Inflation results in (a) ease of planning for the future. (b) ease of comparing prices over time. (c) social harmony. (d) lower nominal interest rates. (e) difficulty interpreting relative price movements. Answer: E Question Status: New

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14)

Economists feel that countries recently suffering hyperinflations have experienced (a) reduced growth. (b) increased growth. (c) reduced prices. (d) lower interest rates. (e) none of the above. Answer: A Question Status: New

15)

The primary goal of the European Central Bank is (a) price stability. (b) exchange rate stability. (c) interest rate stability. (d) high employment. (e) all of the above. Answer: A Question Status: New

16)

The Federal Reserve desires interest rate stability because (a) it allows for less uncertainty about future planning. (b) interest-rate volatility often leads to demands to curtail the Feds power. (c) it guarantees full employment. (d) of both (a) and (b) of the above. Answer: D Question Status: Previous Edition

17)

Upward movements in interest rates (a) create great hostility toward the central bank and lead to demands that the central banks power be curtailed. (b) make it more difficult for construction firms to plan how many houses they should build. (c) reduce consumers willingness to purchase houses. (d) do all of the above. (e) do only (a) and (b) of the above. Answer: D Question Status: Previous Edition

18)

Upward movements in interest rates (a) create great hostility toward the central bank and lead to demands that the central banks power be curtailed. (b) make it more difficult for construction firms to plan how many houses they should build. (c) increase consumers willingness to purchase houses. (d) do all of the above. (e) do only (a) and (b) of the above. Answer: E Question Status: Previous Edition

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19)

Upward movements in interest rates do all of the following except (a) create great hostility toward the central bank and lead to demands that the central banks power be curtailed. (b) make it more difficult for construction firms to plan how many houses they should build. (c) increase consumers willingness to purchase houses. (d) both (a) and (b) of the above. Answer: C Question Status: Revised

20)

The Federal Reserve System was created to (a) make it easier to finance budget deficits. (b) promote financial market stability. (c) lower the unemployment rate. (d) promote rapid economic growth. (e) all of the above. Answer: B Question Status: New

21)

Which economic goals of monetary policy make planning for the future easier? (a) Price level stability (b) Interest rate stability (c) Exchange rate stability (d) All of the above (e) None of the above Answer: D Question Status: New

22)

Which set of goals can, at times, conflict in the short run? (a) High employment and economic growth (b) Interest rate stability and financial market stability (c) High employment and price level stability (d) Exchange rate stability and financial market stability (e) All of the above sets of goals can be in conflict Answer: C Question Status: New

23)

The central banks game plan can be described as follows: (a) The central bank uses its policy tools to adjust intermediate targets that directly impact its operating targets in a way that allows the central bank to achieve its goals. (b) The central bank uses its policy tools to adjust operating targets that directly impact its intermediate targets in a way that allows the central bank to achieve its goals. (c) The central bank uses its operating targets to adjust its intermediate targets that directly impact its policy tools in a way that allows the central bank to achieve its goals. (d) None of the above. Answer: B Question Status: Previous Edition

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28)

A potential operating target for the Fed is (a) the monetary base. (b) borrowed reserves. (c) the federal funds rate. (d) the nonborrowed monetary base. (e) all of the above. Answer: E Question Status: Study Guide

29)

Due to the lack of timely data for the price level and economic growth, the Feds strategy (a) targets the exchange rate, since the Fed can control this variable. (b) targets the price of gold, since it is closely related to economic activity. (c) uses an intermediate target, such as an interest rate. (d) stabilizes the consumer price index, since the Fed can control the CPI. (e) has been to abandon policy goals. Answer: C Question Status: Study Guide

30)

An advantage of an intermediate targeting strategy is that it provides the central bank with (a) more timely information regarding the effect of monetary policy. (b) a slow adjustment process. (c) a target that is precisely correlated with economic activity. (d) each of the above. (e) only (a) and (b) of the above. Answer: A Question Status: Previous Edition

31)

If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because (a) of fluctuations in the money demand function. (b) of fluctuations in the consumption function. (c) bond values will tend to remain stable. (d) of fluctuations in the business cycle. Answer: A Question Status: Previous Edition

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Figure 18-1 32) Referring to Figure 18-1, fluctuations in money demand between Md and Md cause (a) fluctuations of the money supply. (b) the interest rate to remain stable at i*. (c) interest rate fluctuations between i* and i. (d) interest rate fluctuations between i and i. (e) none of the above. Answer: D Question Status: New 33) Figure 18-1 depicts a situation of (a) interest rate stability. (b) stability of money demand. (c) instability of money supply. (d) interest rate instability. (e) none of the above. Answer: D Question Status: New 34) In Figure 18-1, the central bank is targeting (a) the interest rate. (b) the money supply. (c) money demand. (d) all of the above. (e) none of the above. Answer: B Question Status: New

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35)

If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent, (a) fluctuations in the money supply will be small. (b) fluctuations in the money supply will be large. (c) the Fed will probably quickly abandon this policy, as it did in the 1960s. (d) the Fed will probably quickly abandon this policy, as it did in the 1950s. Answer: B Question Status: Previous Edition

36)

Money demand fluctuations 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. (e) all of the above. Answer: C Question Status: Study Guide

Figure 18-2 37) Referring to Figure 18-2, if the central bank wishes to keep the interest rate at the target value i*, it must (a) (b) (c) (d) (e) increase the money supply to Ms when money demand increases to Md. allow the interest rate to increase when money demand increases. hold the money supply constant at Ms* when money demand falls to Md. allow the interest rate to decrease when money demand decreases. none of the above.

Answer: A Question Status: New

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38)

Referring to Figure 18-2, an interest rate target requires that the central bank (a) increase the money supply when money demand falls. (b) increase the money supply when interest rates fall. (c) reduce the money supply when money demand increases. (d) reduce the money supply when interest rates fall. (e) hold the money supply constant when money demand changes. Answer: D Question Status: New

39)

Referring to Figure 18-2, when money demand fluctuates between Md and Md, a policy of interest rate targeting results in (a) interest rate fluctuations between i and i. (b) money supply fluctuations between Ms and Ms. (c) interest rate fluctuations between i* and i. (d) money supply fluctuations between M* and Ms. (e) no fluctuations in either the interest rate or money supply. Answer: B Question Status: New

40)

Referring to Figure 18-2, the target interest rate i* is attained when (a) money demand is Md* and the money supply is Ms. (b) money demand is Md and the money supply is Ms. (c) money demand is Md and the money supply is Ms*. (d) money demand is Md* and the money supply is Ms. (e) money demand is Md and the money supply is Ms*. Answer: B Question Status: New

41)

Interest rates are difficult to measure because (a) data on them are not timely available. (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. Answer: B Question Status: Previous Edition

42)

Economists question the desirability of a real interest rate target because (a) the Fed does not have direct control over real interest rates. (b) changes in real interest rates have little effect on economic activity. (c) real interest rates are extremely difficult to measure. (d) all of the above are correct. (e) only (a) and (c) of the above. Answer: E Question Status: Study Guide

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43)

Which of the following criteria need not be satisfied for choosing an intermediate target? (a) The variable must be measurable. (b) The variable must be controllable. (c) The variable must be predictable. (d) The variable must be transportable. Answer: D Question Status: Previous Edition

44)

Which of the following criteria must be satisfied when selecting an intermediate target? (a) The variable must be measurable and frequently available. (b) The variable must be controllable with the use of the central banks policy tools. (c) The variable must have a predictable impact on the policy goal. (d) Each of the above. Answer: D Question Status: Previous Edition

45)

Which of the following is not a requirement in selecting an intermediate target? (a) Measurability (b) Controllability (c) Flexibility (d) Predictability Answer: C Question Status: Previous Edition

46)

A problem with using nominal GDP as an intermediate target is that (a) data for nominal GDP are available quarterly. (b) data for nominal GDP are highly accurate. (c) data for nominal GDP are not related to inflation and economic growth. (d) all of the above. (e) both (b) and (c) of the above. Answer: A Question Status: New

47)

Which of the following best explains why the Federal Reserve does not use nominal GDP as an intermediate target? (a) Nominal GDP has little connection with Fed policy goals. (b) Nominal GDP is unaffected by open market operations. (c) The Fed has little direct control over nominal GDP. (d) None of the above. Answer: C Question Status: Previous Edition

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48)

When it comes to choosing an operating target, 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 Answer: D Question Status: Previous Edition

49)

When it comes to choosing an operating target, both the _____ rate and _____ aggregates are easily controllable using the Feds policy tools. (a) federal funds; monetary (b) federal funds; reserve (c) three-month T-bill; monetary (d) thirty-year T-bond; reserve Answer: B Question Status: Previous Edition

50)

If the desired intermediate target is an interest rate, then the preferred operating target will be a(n) _____ variable like the _____. (a) interest rate; three-month T-bill rate (b) interest rate; federal funds rate (c) monetary aggregate; monetary base (d) monetary aggregate; nonborrowed base Answer: B Question Status: Previous Edition

51)

If the desired intermediate target is a monetary aggregate, then the preferred operating target will be a(n) _____ variable like the _____. (a) interest rate; three-month T-bill rate (b) interest rate; federal funds rate (c) reserve aggregate; monetary base (d) reserve aggregate; narrow money supply M1 Answer: C Question Status: Previous Edition

52)

If the desired intermediate target is a monetary aggregate, which of the following would be the most preferred operating target? (a) The federal funds interest rate (b) The 90-day T-bill rate (c) The 180-day T-bill rate (d) The monetary base Answer: D Question Status: Previous Edition

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53)

If the desired intermediate target is an interest rate, the preferred operating target would be (a) the federal funds interest rate. (b) the monetary base. (c) nonborrowed reserves. (d) borrowed reserves. (e) the discount rate. Answer: A Question Status: New

54)

In its earliest years, the Federal Reserves guiding principle for the conduct of monetary policy was known as the (a) real bills doctrine. (b) liberal liquidity doctrine. (c) free reserves doctrine. (d) conservative liquidity doctrine. (e) the quantity theory of money. Answer: A Question Status: Revised

55)

The guiding principle for the conduct of monetary policy that held that as long as loans were being made for productive purposes, then providing reserves to the banking system to make sure these loans would not be inflationary became known as the (a) free reserves doctrine. (b) Benjamin Strong doctrine. (c) efficient liquidity doctrine. (d) real bills doctrine. Answer: D Question Status: Previous Edition

56)

The real bills doctrine was the guiding principle for the conduct of monetary policy during the (a) 1910s. (b) 1940s. (c) 1950s. (d) 1960s. Answer: A Question Status: Previous Edition

57)

The guiding principle for the conduct of monetary policy that held that as long as loans were being made for productive purposes, then providing reserves to the banking system to make sure these loans would not be inflationary directed Fed policymaking during the (a) 1960s. (b) 1950s. (c) 1940s. (d) 1910s. Answer: D Question Status: Previous Edition

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58)

The policy that meant the Fed would make loans to member commercial banks whenever they showed up at the discount window with eligible paper was known as (a) free reserves targeting. (b) the real bills doctrine. (c) nonborrowed reserves targeting. (d) leaning against the wind. Answer: B Question Status: Previous Edition

59)

By the end of World War I, the Feds policies of rediscounting eligible paper and keeping interest rates low led to (a) accelerating inflation. (b) stable prices and strong economic growth, as predicted by the real bills doctrine. (c) recession as reserves were steadily drained from the banking system. (d) none of the above. Answer: A Question Status: Previous Edition

60)

The Feds operating strategy that led to double-digit inflation following the end of World War I was known as (a) the free-reserves policy. (b) the federal-funds targeting strategy. (c) the real-bills doctrine. (d) pegging the money supply. Answer: C Question Status: Previous Edition

61)

The Feds policy of rediscounting eligible paper to keep interest rates low in order to help the Treasury finance World War I caused (a) inflation to accelerate. (b) aggregate output to decline sharply. (c) the Fed to rethink the efficacy of the real bills doctrine. (d) both (a) and (b) of the above. (e) both (a) and (c) of the above. Answer: E Question Status: Study Guide

62)

The Fed accidentally discovered open market operations in the early (a) 1920s. (b) 1910s. (c) 1900s. (d) 1890s. Answer: A Question Status: Previous Edition

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63)

The Fed accidentally discovered open market operations when (a) it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system. (b) it purchased securities for income and found that its purchases injected reserves into the banking system. (c) it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system. (d) none of the above occurred. Answer: B Question Status: Previous Edition

64)

The Fed accidentally discovered open market operations when (a) it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system. (b) it purchased securities for income following the 19201921 recession. (c) it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system. (d) it reinterpreted a key provision of the Federal Reserve Act. Answer: B Question Status: Previous Edition

65)

By the end of the _____, open market operations had become the most important monetary policy tool available to the Fed. (a) 1910s (b) 1920s (c) 1930s (d) 1940s Answer: B Question Status: Previous Edition

66)

The Federal Reserves lack of response to banking panics during the Great Depression can be attributed to (a) lack of concern for the smaller banks that experienced most of the failures. (b) the assumption that failures were due to bad practices or management. (c) political infighting within the Federal Reserve System. (d) all of the above. (e) none of the above. Answer: D Question Status: New

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67)

The Feds mistakes of the early 1930s were compounded by its decision to (a) raise the discount rate in 19361937. (b) raise reserve requirements in 19361937. (c) lower reserve requirements in 19361937. (d) raise the monetary base in 19361937. (e) lower the monetary base in 19361937. Answer: B Question Status: Study Guide

68)

In the 1930s, the Fed (a) failed to perform its role as lender of last resort. (b) raised reserve requirements in three steps in 193637. (c) was given broad authority over reserve requirements. (d) all of the above. (e) only (a) and (b) of the above. Answer: D Question Status: Previous Edition

69)

In the 1930s, the Fed (a) failed to perform its role as lender of last resort. (b) raised reserve requirements in three steps in 193637. (c) convinced Congress to eliminate the Feds authority over reserve requirements. (d) all of the above. (e) only (a) and (b) of the above. Answer: E Question Status: Previous Edition

70)

In the 1930s, the Fed (a) did not have enough power to perform the role of lender of last resort. (b) raised reserve requirements in three steps in 193637. (c) was given less authority over reserve requirements. (d) all of the above. (e) only (a) and (b) of the above. Answer: B Question Status: Previous Edition

71)

During World War II, whenever interest rates would _____ and the price of bonds would begin to _____, the Fed would make open market purchases. (a) rise; rise (b) rise; fall (c) fall; rise (d) fall; fall Answer: B Question Status: Previous Edition

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72)

During World War II, whenever interest rates would rise and the price of bonds would begin to fall, the Fed would (a) lower reserve requirements. (b) raise reserve requirements. (c) make open market purchases of government securities. (d) make open market sales of government securities. Answer: C Question Status: Previous Edition

73)

During World War II, the Fed in effect relinquished its control of monetary policy through its policy of (a) continually lowering reserve requirements. (b) continually raising reserve requirements. (c) pegging interest rates. (d) targeting free reserves. Answer: C Question Status: Previous Edition

74)

The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits (a) only during World War I. (b) during the 1980s. (c) during the Great Depression. (d) during World War I and World War II. (e) throughout the entire existence of the Fed. Answer: D Question Status: New

75)

The Fed-treasury Accord of March 1951 provided the Fed greater freedom to (a) let interest rates increase. (b) let unemployment increase. (c) let inflation accelerate. (d) let exchange rates fall. (e) let exchange rates increase. Answer: A Question Status: Study Guide

76)

During the 1950s, the Fed targeted (a) M1. (b) M2. (c) the monetary base. (d) money market conditions. (e) discounting of eligible paper. Answer: D Question Status: New

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77)

During the 1950s, Fed monetary policy targeted (a) the monetary base. (b) nonborrowed reserves. (c) discount loans. (d) interest rates. (e) the exchange rate. Answer: D Question Status: New

78)

Targeting interest rates can be procyclical because (a) an increase in income increases interest rates, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. (b) an increase in interest rates increases income, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. (c) an increase in the monetary base increases the money supply, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. (d) an increase in income increases the monetary base and money supply, causing the Fed to buy bonds to increase interest rates and income. (e) none of the above. Answer: A Question Status: New

79)

Targeting interest rates can be procyclical because (a) a decrease in income decreases interest rates, causing the Fed to sell bonds, decreasing the monetary base and money supply, leading to further decreases in income. (b) a decrease in interest rates decreases income, causing the Fed to sell bonds, decreasing the monetary base and money supply, leading to further decreases in income. (c) a decrease in the monetary base decreases the money supply, causing the Fed to sell bonds, decreasing the monetary base and money supply, leading to further decreases in income. (d) a decrease in income decreases the monetary base and money supply, causing the Fed to sell bonds to decrease interest rates and income. (e) none of the above. Answer: A Question Status: New

80)

High inflation can spiral out of control when (a) expected inflation increases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation. (b) expected inflation decreases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation. (c) expected inflation increases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation. (d) expected inflation decreases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation. (e) none of the above. Answer: A Question Status: New

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81)

In practice, the Feds policy of targeting money market conditions in the 1960s proved to be (a) countercyclical, helping to stabilize the economy. (b) procyclical, destabilizing the economy. (c) procyclical, helping to stabilize the economy. (d) countercyclical, destabilizing the economy. Answer: B Question Status: Previous Edition

82)

In practice, the Feds policy of targeting _____ in the 1960s proved to be ______, destabilizing the economy. (a) money market conditions; countercyclical (b) money market conditions; procyclical (c) monetary aggregates; countercyclical (d) monetary aggregates; procyclical Answer: B Question Status: Revised

83)

Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasized (a) free-reserve targeting. (b) interest-rate targeting. (c) a real-bills doctrine. (d) price-index targeting. Answer: B Question Status: Previous Edition

84)

Although the Fed professed employment of _____ targeting during the 1970s, its behavior suggests that it emphasized _____ targeting (a) free reserve; interest rate (b) interest rate; monetary aggregate (c) monetary aggregate; interest rate (d) free reserve; monetary aggregate Answer: C Question Status: Previous Edition

85)

The Feds use of the federal funds rate as an operating target in the 1970s (a) resulted in countercyclical monetary policy. (b) resulted in too slow growth in M1 throughout the decade. (c) resulted in procyclical monetary policy. (d) resulted in too rapid growth in M1 throughout the decade. (e) resulted in none of the above. Answer: C Question Status: Previous Edition

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86)

The Feds use of the _____ as an operating target in the 1970s resulted in _____ monetary policy. (a) federal funds rate; countercyclical (b) federal funds rate; procyclical (c) M1 money supply; countercyclical (d) M1 money supply; procyclical Answer: B Question Status: Revised

87)

In the 1970s, the Fed selected an interest rate as an operating target rather than a reserve aggregate primarily because it (a) had no interest in targeting a monetary aggregate, as evidenced by its unwillingness to target a reserve aggregate. (b) was still very concerned with achieving interest rate stability. (c) was committed to targeting free reserves. (d) was committed to the real bills doctrine. Answer: B Question Status: Previous Edition

88)

The Fed operating procedures employed between 1979 and 1982 resulted in _____ swings in the federal funds rate and _____ swings in the M1 growth rate. (a) increased; increased (b) increased; decreased (c) decreased; decreased (d) decreased; increased Answer: A Question Status: Previous Edition

89)

Explanations for the Feds poor monetary control during 19791982 include (a) the acceleration of financial deregulation. (b) the back to back recessions in 1980 and 19811982. (c) the Feds desire to fight inflation without taking all the criticism for the high interest rate policy. (d) all of the above reasons. (e) only (a) and (b) of the above. Answer: D Question Status: Previous Edition

90)

Explanations for the Feds poor monetary control during 19791982 include (a) the slow down in financial innovation after passage of the Monetary Control Act of 1980. (b) the suspension of credit controls in mid-1979. (c) the Feds desire to fight inflation without taking all the criticism for the high interest rate policy. (d) only (a) and (b) of the above. Answer: C Question Status: Previous Edition

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91)

Explanations for the Feds poor monetary control during 19791982 include (a) the acceleration of financial deregulation. (b) the suspension of credit controls in mid-1979. (c) the Feds desire to fight inflation without taking all the criticism for the high interest rate policy. (d) only (a) and (b) of the above. (e) only (a) and (c) of the above. Answer: E Question Status: Previous Edition

92)

Explanations for the Feds poor monetary control during 19791982 include (a) the suspension of credit controls in mid-1979. (b) the slow down in financial innovation after passage of the Monetary Control Act of 1980. (c) the imposition of credit controls in 1980. (d) only (a) and (b) of the above. Answer: C Question Status: Previous Edition

93)

The fluctuations in both money supply growth and the federal funds rate during 19791982 suggest that the Fed (a) had shifted to borrowed reserves as an operating target. (b) had shifted to total reserves as an operating target. (c) had shifted to the monetary base as an operating target. (d) never intended to target monetary aggregates. Answer: D Question Status: Revised

94)

The fluctuations in both money supply growth and the federal funds rate during 19791982 suggest that the Fed (a) never intended to target monetary aggregates. (b) used the announced strategy of targeting the federal funds rate as a smokescreen to fight the back to back recessions in 1980 and 19811982. (c) had shifted to borrowed reserves as an operating target. (d) had shifted to the monetary base as an operating target. Answer: A Question Status: Revised

95)

The fluctuations in both money supply growth and the federal funds rate during 19791982 suggest that the Fed (a) never intended to target monetary aggregates. (b) used the announced strategy of targeting the federal funds rate as a smokescreen to fight the back to back recessions in 1980 and 19811982. (c) had shifted to the monetary base as an operating target. (d) all of the above. (e) both (a) and (b) of the above. Answer: A Question Status: Revised

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96)

The fluctuations in both money supply growth and the federal funds rate during 19791982 suggest that the Fed (a) never intended to target monetary aggregates. (b) used the announced strategy of targeting monetary aggregates as a smokescreen to fight inflation. (c) had shifted to borrowed reserves as an operating target. (d) both (a) and (b) of the above. Answer: D Question Status: Revised

97)

The Feds failure to exercise effective control over the money supply during the 19791982 period (a) proves that such control is not possible. (b) resulted because forces outside of its control removed the link between open market operations and the money supply. (c) occurred despite evidence of a strong link between open market operations and the money supply. (d) stems from the Treasury-Federal Reserve Accord. Answer: C Question Status: Previous Edition

98)

The fluctuations in both money supply growth and the federal funds rate between October 1982 and the early 1990s indicates that the Fed had shifted to _____ as an operating target. (a) borrowed reserves (b) nonborrowed reserves (c) excess reserves (d) required reserves Answer: A Question Status: Previous Edition

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The fluctuations in both money supply growth and the federal funds rate between October 1982 and the early 1990s suggested that the Fed had shifted to targeting (a) nonborrowed reserves. (b) interest rates. (c) monetary aggregates. (d) the price of gold. Answer: B Question Status: Previous Edition

100) Fed policy between October 1982 and the early 1990s suggests (a) that it used a monetary aggregate as its intermediate target. (b) that it was less concerned with fluctuations in the federal funds rate than in the 19791982 period. (c) that it was more concerned with exchange rates than with interest rates. (d) none of the above. Answer: D Question Status: Previous Edition

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101) Fed policy between October 1982 and the early 1990s indicates that (a) interest rate targeting finally gave way to a strategy of targeting the monetary base. (b) it was pursuing a policy of interest rate targeting. (c) it was less concerned with inflation when compared to the 1970s. (d) only (a) and (b) of the above are true. Answer: B Question Status: Previous Edition 102) The strengthening of the dollar between 1980 and 1985 contributed to a ______ in American competitiveness, putting pressure on the Fed to pursue a more _______ monetary policy. (a) increase; neutral (b) increase; expansionary (c) increase; contractionary (d) decrease; expansionary (e) decrease; contractionary Answer: D Question Status: Study Guide 103) A borrowed reserves target is (a) procyclical because increases in income increase interest rates and discount loans, causing the Fed to increase the monetary base. (b) countercyclical because increases in income increase interest rates and discount loans, causing the Fed to increase the monetary base. (c) procyclical because increases in income reduce interest rates and discount loans, causing the Fed to reduce the monetary base. (d) countercyclical because increases ion income reduce interest rates and discount loans, causing the fed to reduce the monetary base. (e) neutral because economic activity has no effect on incentives to borrow from the Fed. Answer: A Question Status: New 104) Fed policy since the early 1990s indicates that (a) monetary aggregates continue to be rejected as intermediate target. (b) it is pursuing a policy of targeting the federal funds rate. (c) it is pursuing a policy of targeting the exchange rate. (d) only (a) and (b) of the above are true. (e) only (a) and (c) of the above are true. Answer: D Question Status: Previous Edition 105) Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the (a) monetary base. (b) money supply. (c) federal funds interest rate. (d) exchange rate. Answer: C Question Status: Previous Edition

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106) Since the early 1990s, the Fed has conducted monetary policy by setting a target for the (a) level of borrowed reserves. (b) growth in nominal GDP. (c) federal funds rate. (d) inflation rate. (e) monetary base. Answer: C Question Status: Revised 107) The Fed can engage in preemptive strikes against a rise in inflation by _____ the federal funds interest rate; it can act preemptively against negative demand shocks by _____ the federal funds interest rate. (a) raising; lowering (b) raising; raising (c) lowering; lowering (d) lowering; raising Answer: A Question Status: Previous Edition 108) From late 1992 until February 1994, the Fed kept the federal funds interest rate (a) targeted at a constant 6 percent. (b) targeted at a constant 5 percent. (c) targeted at a constant 3 percent. (d) within a narrow band between 5 and 6 percent. (e) within a narrow band between 3 and 4 percent. Answer: C Question Status: Previous Edition 109) The Federal reserve from late 1992 until February 1994 (a) kept the federal funds interest rate targeted at a constant 3 percent. (b) kept the federal funds interest rate low because of its concern that a credit crunch was putting a drag on the economy. (c) abandoned its policy of keeping the federal funds interest rate target a secret. (d) did all of the above. (e) did only (a) and (b) of the above. Answer: E Question Status: Previous Edition 110) The Federal reserve from late 1992 until February 1994 (a) kept the federal funds interest rate targeted at a constant 5 percent. (b) kept the federal funds interest rate low because of its concern that a credit crunch was putting a drag on the economy. (c) abandoned its policy of keeping the federal funds interest rate target a secret. (d) did all of the above. (e) did only (a) and (b) of the above. Answer: B Question Status: Previous Edition

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111) In February 1994, the Fed (a) raised its federal funds interest rate target. (b) abandoned its policy of keeping the federal funds interest rate target a secret. (c) lowered its federal funds interest rate target by 3/4s of a percentage point following the collapse of Long-Term Capital Management. (d) did both (a) and (b) of the above. (e) did both (b) and (c) of the above. Answer: D Question Status: Previous Edition 112) In February 1994, the Fed (a) lowered its federal funds interest rate target. (b) abandoned its policy of keeping the federal funds interest rate target a secret. (c) raised its federal funds interest rate target by 3/4s of a percentage point following the collapse of Long-Term Capital Management. (d) did both (a) and (b) of the above. (e) did both (b) and (c) of the above. Answer: B Question Status: Previous Edition 113) Starting in February 1994, the Fed (a) abandoned its policy of keeping the federal funds interest rate target a secret. (b) lowered the federal funds interest rate target to deal with a possible slowing in the economy. (c) began a preemptive strike against inflation by raising the federal funds interest rate in steps to 6 percent by early 1995. (d) did both (a) and (b) of the above. (e) did both (a) and (c) of the above. Answer: E Question Status: Previous Edition 114) In early 1996, the Fed (a) lowered the federal funds interest rate target to deal with a possible slowing in the economy. (b) abandoned its policy of keeping the federal funds interest rate target a secret. (c) raised its federal funds interest rate target by 3/4s of a percentage point following the collapse of Long-Term Capital Management. (d) did both (a) and (b) of the above. (e) did both (b) and (c) of the above. Answer: A Question Status: Previous Edition

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115) In early 1996, the Fed (a) lowered the federal funds interest rate to deal with a possible slowing in the economy. (b) began a preemptive strike against inflation by raising the federal funds interest rate in steps to 6 percent by early 1995. (c) abandoned its policy of keeping the federal funds interest rate target a secret. (d) did both (a) and (b) of the above. (e) did both (b) and (c) of the above. Answer: A Question Status: Previous Edition 116) In early 1996, the Fed (a) began a preemptive strike against inflation by raising the federal funds interest rate in steps to 6 percent by early 1995. (b) lowered the federal funds interest rate to deal with a possible slowing in the economy. (c) decided to keep the federal funds interest rate target at a constant 5 percent. (d) did none of the above. Answer: B Question Status: Previous Edition 117) Between early 1996 and late 1998, the Fed (a) lowered the federal funds interest rate to deal with a possible slowing in the economy. (b) took the dramatic step lowering the federal funds interest rate by 3/4s of a percentage point following the collapse of Long-Term Capital Management in the fall of 1998. (c) kept the federal funds interest rate targeted at a constant 5 percent. (d) did both (a) and (b) of the above. (e) did none of the above. Answer: D Question Status: Previous Edition 118) In the fall of 1998, the Fed (a) raised the federal funds interest rate to deal with a strengthening economy, discounting concerns about the financial crises in other countries. (b) took the dramatic step lowering the federal funds interest rate by 3/4s of a percentage point following the collapse of Long-Term Capital Management in the fall of 1998. (c) took the dramatic step lowering the federal funds interest rate by 3/4s of a percentage point because of the financial crises in East Asia and Russia. (d) both (b) and (c) of the above. (e) did none of the above. Answer: D Question Status: Revised

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119) In 1999, the Fed (a) raised the federal funds interest rate to deal with a strengthening economy. (b) took the dramatic step lowering the federal funds interest rate by 3/4s of a percentage point following the collapse of Long-Term Capital Management in the fall of 1998. (c) lowered the federal funds interest rate because of concerns about the potential for a world-wide financial crisis in the wake of financial problems in both Asia and Russia. (d) did none of the above. Answer: A Question Status: Previous Edition 120) Federal Reserve monetary policy from 1990 to the present has been characterized by (a) a return to a federal funds operating target. (b) a policy of preemptive strikes to head off future inflationary pressure. (c) a return to monetary aggregate operating targets. (d) both (a) and (b) of the above. (e) both (b) and (c) of the above. Answer: D Question Status: Study Guide 121) International policy coordination refers to (a) central banks in major nations acting without regard to the global consequences of their policies. (b) central banks in major nations pursuing only domestic objectives. (c) central banks adopting policies in pursuit of joint objectives. (d) central banks all adopting identical policies. (e) all central banks holding domestic interest rates constant. Answer: C Question Status: New 122) International policy coordination exists when (a) all central banks adopt identical unemployment rate goals. (b) all central banks adopt identical growth rate goals. (c) central banks hold exchange rates constant. (d) central banks adopt policies in pursuit of common goals. (e) all of the above. Answer: D Question Status: New 123) According to the Taylor rule, the Fed should raise the federal funds interest rate when (a) inflation rises above the Feds inflation target. (b) real GDP rises above the Feds output target. (c) real GDP drops below the Feds output target. (d) both (a) and (b) occur. (e) both (a) and (c) occur. Answer: D Question Status: Revised

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124) According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation _____ the Feds inflation target or when real GDP _____ the Feds output target. (a) rises above; drops below (b) drops below; drops below (c) rises above; rises above (d) drops below; rises above Answer: C Question Status: Revised 125) Using Taylors 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 should be (a) 5 percent. (b) 5.5 percent. (c) 6 percent. (d) 6.5 percent. (e) 7 percent. Answer: D Question Status: New 126) Using Taylors 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. (e) 4 percent. Answer: B Question Status: New 127) Using Taylors rule, when the equilibrium real federal funds rate is 2 percent, the output gap is negative 3 percent, the actual inflation rate is 1.5 percent, and the target inflation rate is 2 percent, the nominal federal funds rate should be (a) 1.25 percent. (b) 1.5 percent. (c) 1.75 percent. (d) 2.00 percent. (e) 2.25 percent Answer: C Question Status: New

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128) Using Taylors rule, when the equilibrium real federal funds rate is 2 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 should be (a) 5 percent. (b) 5.5 percent. (c) 6 percent. (d) 6.5 percent. (e) 7 percent. Answer: B Question Status: New 129) 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. (e) the unemployment rate falls faster than the NAIRU falls. Answer: B Question Status: New 130) 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. (e) the unemployment and the NAIRU increase by equal amounts. Answer: C Question Status: New

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Essay Questions
Explain and demonstrate graphically how targeting a monetary aggregate can result in interest rate instability. Answer: In the figure below, when the money supply is held constant, increases in money demand result in increased interest rates, and decreases in money demand result in fall interest rates. The target money supply is the vertical money supply line. Since fluctuations in demand do not cause monetary policy actions, the result is the interest rate fluctuations shown in the graph.

2)

Explain and demonstrate graphically how targeting interest rates can result in fluctuations in monetary aggregates. Answer: With an interest rate target, fluctuations in money demand require offsetting changes in the monetary base, and thus monetary aggregates, to keep the interest rate constant, as shown in the graph below. In the graph, the interest rate target is shown. Increases in money demand are matched by increases in money supply to keep the interest rate at the target. Decreases in money demand are matched by decreases in money supply to keep the interest rate at target.

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3)

Explain how targeting interest rates can result in inflation spiraling out of control. Answer: If a central bank has an interest rate target, and increasing inflation causes increases in inflationary expectations, and through the Fisher effect, increases in nominal interest rates, the central bank will respond with increases in the money supply in an attempt to lower interest rates. However, the monetary expansion will increase inflation, starting the cycle again. As long as the central bank pursues the interest rate target, inflation will continue to spiral upward. Explain the Taylor rule, including the formula for setting the federal funds rate, and the components of the formula. If the Fed were to use this rule, how many goals would it use to set monetary policy? Answer: The Taylor rule specifies that the target federal funds rates should be set to equal the equilibrium rate, plus the rate of inflation for the Fisher effect, plus one-half times the output gap, plus one-half times the inflation gap. The formula is Federal funds rate = equilibrium federal funds rate + inflation rate + (output gap) + (inflation gap) The output gap is the percentage deviation of real GDP from potential full-employment real GDP. The inflation gap is the difference between actual inflation and the central banks target rate of inflation. The equilibrium real federal funds rate is the real rate consistent with full employment in the long run. The inflation rate is the actual rate of inflation. The Taylor rule sets the federal funds rate recognizing the goals of low inflation and full employment (or equilibrium long-run growth).

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