Question 1

The nominal anchor ________.

Accepted Answer

A)  acts like behavioural rule 
B)  leads to inflation 
C)  creates the time-inconsistency problem 
D)  avoids the natural rate of unemployment 
A)  acts like behavioural rule 
B)  leads to inflation 
C)  creates the time-inconsistency problem 
D)  avoids the natural rate of unemployment A

Question 2

According to the Taylor rule, the overnight interest rate should be set at ________.

Accepted Answer

A)  π + ior - 0.5(π - π   ) - 0.5(y - y) 
B)  π - ior - 0.5(π - π   ) - 0.5(y - y) 
C)  r + π 
D)  r - π 
E)  none of the above 
A)  π + ior - 0.5(π - π   ) - 0.5(y - y) 
B)  π - ior - 0.5(π - π   ) - 0.5(y - y) 
C)  r + π 
D)  r - π 
E)  none of the above E

Question 3

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

Accepted Answer

When nonborrowed reserves are held constant, increases in the demand for reserves result in the overnight rate increasing and decreases in the demand for nonborrowed reserves result in the overnight rate declining. Since fluctuations in demand do not cause monetary policy actions, the result is the overnight rate will fluctuate. See Figure 18-3 in the textbook.

Question 4

Concerns about a dual mandate include ________.

Accepted Answer

A)  over expansionary policy 
B)  policies that lead to large output fluctuations 
C)  time-inconsistency problems 
D)  decreases in output and unemployment 
A)  over expansionary policy 
B)  policies that lead to large output fluctuations 
C)  time-inconsistency problems 
D)  decreases in output and unemployment

Question 5

Interest rate stability is desirable because ________.

Accepted Answer

A)  fluctuations in interest rates create uncertainty 
B)  it leads to financial market stability 
C)  stability in the foreign exchange markets 
D)  all of the above 
A)  fluctuations in interest rates create uncertainty 
B)  it leads to financial market stability 
C)  stability in the foreign exchange markets 
D)  all of the above

Question 6

What are the advantages of monetary targeting?

Accepted Answer

One advantage of monetary targeting is t

Question 7

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

Accepted Answer

With a overnight rate target,

Question 8

If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because ________.

Accepted Answer

A)  of fluctuations in the demand for reserves 
B)  of fluctuations in the consumption function 
C)  bond values will tend to remain stable 
D)  of fluctuations in the business cycle 
A)  of fluctuations in the demand for reserves 
B)  of fluctuations in the consumption function 
C)  bond values will tend to remain stable 
D)  of fluctuations in the business cycle

Question 9

Why is the zero lower bound on interest rates a serious problem?

Accepted Answer

The other nonconvent

Question 10

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

Accepted Answer

A)  three-month T-bill; monetary 
B)  three-month T-bill; reserve 
C)  overnight rate; monetary 
D)  overnight rate; reserve 
A)  three-month T-bill; monetary 
B)  three-month T-bill; reserve 
C)  overnight rate; monetary 
D)  overnight rate; reserve

Question 11

Bank of Canada policy since 1989 suggests ________.

Accepted Answer

A)  that it is finally using a monetary aggregate as its intermediate target 
B)  that it is less concerned with fluctuations in the overnight interest rate 
C)  that it is more concerned with exchange rates than with interest rates 
D)  None of the above. 
A)  that it is finally using a monetary aggregate as its intermediate target 
B)  that it is less concerned with fluctuations in the overnight interest rate 
C)  that it is more concerned with exchange rates than with interest rates 
D)  None of the above.

Question 12

Price stability is often the primary goal of central banks. Describe the five other goals of monetary policy

Accepted Answer

The other objectives of monetary policy

Question 13

The Bank of Japan switched from targeting money supply growth to targeting interest rates because targeting money growth ________.

Accepted Answer

A)  led to volatility in real output and poor monetary policy performance 
B)  helped cause tight monetary policy that led to economic stagnation 
C)  failed to contain Japanese inflation in the 1980s 
D)  failed to end the Japanese "bubble economy" and speculation in land and stocks 
A)  led to volatility in real output and poor monetary policy performance 
B)  helped cause tight monetary policy that led to economic stagnation 
C)  failed to contain Japanese inflation in the 1980s 
D)  failed to end the Japanese "bubble economy" and speculation in land and stocks

Question 14

Define the two types of asset-price bubbles and explain why one of these is more is more problematic for the economy.

Accepted Answer

The two types of asset-price bubbles are

Question 15

In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?

Accepted Answer

A)  The unemployment rate increased sharply. 
B)  The unemployment rate remained constant. 
C)  The unemployment rate has declined substantially after a sharp increase. 
D)  The unemployment rate declined sharply immediately after the inflation targets were adopted. 
A)  The unemployment rate increased sharply. 
B)  The unemployment rate remained constant. 
C)  The unemployment rate has declined substantially after a sharp increase. 
D)  The unemployment rate declined sharply immediately after the inflation targets were adopted.

Question 16

What are some of the costs of cleaning up after a financial crisis?

Accepted Answer

High and persistent unemployme

Question 17

During the 1975-1981 period, although the Bank of Canada was successful in keeping actual M1 growth within the target range, ________.

Accepted Answer

A)  the inflation rate by the end of the 1970s was almost at the same level as when monetary gradualism was introduced in 1975 
B)  a series of financial innovations motivated individuals and firms to substitute out of M1 and into M2 
C)  the growth rate of M2 increased 
D)  All of the above. 
A)  the inflation rate by the end of the 1970s was almost at the same level as when monetary gradualism was introduced in 1975 
B)  a series of financial innovations motivated individuals and firms to substitute out of M1 and into M2 
C)  the growth rate of M2 increased 
D)  All of the above.

Question 18

What are credit booms and why might a policy of leaning against a credit boom be preferred to leaning against asset-price bubbles?

Accepted Answer

Credit booms occur when it becomes much

Question 19

Which of the following criteria must be satisfied when selecting an intermediate target?

Accepted Answer

A)  The variable must be measurable and frequently available. 
B)  The variable must be controllable with the use of the central bank's policy tools. 
C)  The variable must have a predictable impact on the policy goal. 
D)  Each of the above. 
A)  The variable must be measurable and frequently available. 
B)  The variable must be controllable with the use of the central bank's policy tools. 
C)  The variable must have a predictable impact on the policy goal. 
D)  Each of the above.

Question 20

Canada's adoption of inflation targeting led to an unemployment rate of ________.

Accepted Answer

A)  above 10 percent 
B)  nearly 8 percent 
C)  over 5 percent 
D)  5 percent 
A)  above 10 percent 
B)  nearly 8 percent 
C)  over 5 percent 
D)  5 percent

Exam 17: The Conduct of Monetary Policy: Strategy and Tactics

The nominal anchor ________.

According to the Taylor rule, the overnight interest rate should be set at ________.

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

Concerns about a dual mandate include ________.

Interest rate stability is desirable because ________.

What are the advantages of monetary targeting?

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

If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because ________.

Why is the zero lower bound on interest rates a serious problem?

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

Bank of Canada policy since 1989 suggests ________.

Price stability is often the primary goal of central banks. Describe the five other goals of monetary policy

The Bank of Japan switched from targeting money supply growth to targeting interest rates because targeting money growth ________.

Define the two types of asset-price bubbles and explain why one of these is more is more problematic for the economy.

In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?

What are some of the costs of cleaning up after a financial crisis?

During the 1975-1981 period, although the Bank of Canada was successful in keeping actual M1 growth within the target range, ________.

What are credit booms and why might a policy of leaning against a credit boom be preferred to leaning against asset-price bubbles?

Which of the following criteria must be satisfied when selecting an intermediate target?

Canada's adoption of inflation targeting led to an unemployment rate of ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

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