Question 1

In gauging the stance of monetary policy, which of the following is true?

Accepted Answer

A) The Fed relies on forecasts more than incoming data because forecasts are highly reliable and incoming data may have random fluctuations. 
B) The Fed relies more on incoming data than forecasts because forecasts are often wide of the mark. 
C) Increasing globalization makes monetary policy easier to implement. 
D) Trends in incoming data can be picked up very quickly, usually in one month or less. 
A) The Fed relies on forecasts more than incoming data because forecasts are highly reliable and incoming data may have random fluctuations. 
B) The Fed relies more on incoming data than forecasts because forecasts are often wide of the mark. 
C) Increasing globalization makes monetary policy easier to implement. 
D) Trends in incoming data can be picked up very quickly, usually in one month or less.

Question 2

The relationship between M1 and economic activity during the mid-1980s was which of the following?

Accepted Answer

A) emphasized in guiding policy 
B) of absolutely no importance 
C) rather unstable 
D) stable and predictable 
A) emphasized in guiding policy 
B) of absolutely no importance 
C) rather unstable 
D) stable and predictable

Question 3

-Refer to Figure . If the Fed increases the money supply in response to the change in demand from D to D', then

Accepted Answer

A) the Fed is targeting the interest rate. 
B) the Fed's policy can be described as accommodating. 
C) the Fed is not targeting the money supply. 
D) All of the above are true. 
A) the Fed is targeting the interest rate. 
B) the Fed's policy can be described as accommodating. 
C) the Fed is not targeting the money supply. 
D) All of the above are true.

Question 4

In using an interest rate target,

Accepted Answer

A) the rate is raised if there is a desire to slow down the level of economic activity. 
B) the rate is lowered if there is a desire to speed things up. 
C) the Fed has eliminated monitoring the money aggregates. 
D) Both a and b are correct. 
A) the rate is raised if there is a desire to slow down the level of economic activity. 
B) the rate is lowered if there is a desire to speed things up. 
C) the Fed has eliminated monitoring the money aggregates. 
D) Both a and b are correct.

Question 5

In the case of recession, a detrimental effect of pressure on the Fed that causes it to act immediately is that it could possibly

Accepted Answer

A) add to the probabilities of a policy promoting economic growth. 
B) improve the data for the Fed. 
C) lead to inflation later. 
D) increase the likelihood of stability. 
A) add to the probabilities of a policy promoting economic growth. 
B) improve the data for the Fed. 
C) lead to inflation later. 
D) increase the likelihood of stability.

Question 6

Over the last decade or so, the Fed has emphasized the use of which of the following variables as an operating target?

Accepted Answer

A) M1 
B) the fed funds rate 
C) nonborrowed reserves 
D) borrowed reserves 
A) M1 
B) the fed funds rate 
C) nonborrowed reserves 
D) borrowed reserves

Question 7

Policy makers

Accepted Answer

A) have a lack of confidence in forecasts. 
B) can be near-sighted. 
C) are often impatient. 
D) All of the above are correct. 
A) have a lack of confidence in forecasts. 
B) can be near-sighted. 
C) are often impatient. 
D) All of the above are correct.

Question 8

Which of the following is a price index that measures changes in the prices of personal consumption expenditures where the relative weights of the items in the index change as consumers substitute out of relatively more expensive items and into relative cheaper items?

Accepted Answer

A) the consumer price index 
B) the price index for personal consumption expenditures 
C) the quality price index 
D) the GDP deflator 
A) the consumer price index 
B) the price index for personal consumption expenditures 
C) the quality price index 
D) the GDP deflator

Question 9

-Refer to Figure. Assume the Fed is targeting a particular interest rate (it). If money demand increases from D to D', what must the Fed do to maintain the interest rate target?

Accepted Answer

A) decrease money supply 
B) increase the interest rate 
C) increase the money supply 
D) The Fed cannot maintain it 
A) decrease money supply 
B) increase the interest rate 
C) increase the money supply 
D) The Fed cannot maintain it

Question 10

In describing forecasting, which of the following statements is false?

Accepted Answer

A) Even when forecasting errors are small, they can have a large impact when used for determining large aggregates in the economy such as GDP. 
B) Current economic conditions are given more weight than forecasts in formulating policy. 
C) Forecasting errors are usually very minor since forecasting is a nearly perfect science. 
D) Forecast errors can be fairly large. 
A) Even when forecasting errors are small, they can have a large impact when used for determining large aggregates in the economy such as GDP. 
B) Current economic conditions are given more weight than forecasts in formulating policy. 
C) Forecasting errors are usually very minor since forecasting is a nearly perfect science. 
D) Forecast errors can be fairly large.

Question 11

The __________ refers to the time that elapses from the point when the need for action is recognized and when a legislative solution is decided upon and set in motion.

Accepted Answer

A) impact lag 
B) policy lag 
C) recognition lag 
D) operating lag 
A) impact lag 
B) policy lag 
C) recognition lag 
D) operating lag

Question 12

Which of the following is true?

Accepted Answer

A) The Fed sets growth target ranges for several aggregates in order to be absolutely certain they are correct. 
B) Since the early 2000s, the Fed no longer sets growth target ranges for the aggregates because of the instability of the relationship between changes in the aggregates and changes in economic activity. 
C) The Fed uses M1 primarily in the execution of monetary policy because it is the aggregate most widely used to make transactions. 
D) The Fed now sets rigid growth rate rules to limit the degree of discretionary monetary policy. 
A) The Fed sets growth target ranges for several aggregates in order to be absolutely certain they are correct. 
B) Since the early 2000s, the Fed no longer sets growth target ranges for the aggregates because of the instability of the relationship between changes in the aggregates and changes in economic activity. 
C) The Fed uses M1 primarily in the execution of monetary policy because it is the aggregate most widely used to make transactions. 
D) The Fed now sets rigid growth rate rules to limit the degree of discretionary monetary policy.

Question 13

Which of the following statements is true?

Accepted Answer

A) The money supply and interest rates can be successfully targeted simultaneously. 
B) The money supply and interest rates cannot be successfully targeted simultaneously. 
C) Increases in the demand for money will cause interest rates to fall if the money supply is held constant. 
D) Increases in the demand for money will require the Fed to decrease the money supply to maintain an interest rate target. 
A) The money supply and interest rates can be successfully targeted simultaneously. 
B) The money supply and interest rates cannot be successfully targeted simultaneously. 
C) Increases in the demand for money will cause interest rates to fall if the money supply is held constant. 
D) Increases in the demand for money will require the Fed to decrease the money supply to maintain an interest rate target.

Question 14

A major difficulty for the Fed in controlling the economy is

Accepted Answer

A) the problem of timing; if the Fed acts now, that may lead to more problems later. 
B) that the public may not concur with tightening policies. 
C) that observers will second guess the Fed and exert political pressure on it. 
D) that too much information from the Fed scares the public. 
A) the problem of timing; if the Fed acts now, that may lead to more problems later. 
B) that the public may not concur with tightening policies. 
C) that observers will second guess the Fed and exert political pressure on it. 
D) that too much information from the Fed scares the public.

Question 15

The larger the supply of reserves and the lower the Fed funds rate, the

Accepted Answer

A) higher the concern about the economy. 
B) higher the interest rate. 
C) higher the monetary growth rate. 
D) lower the monetary growth rate. 
A) higher the concern about the economy. 
B) higher the interest rate. 
C) higher the monetary growth rate. 
D) lower the monetary growth rate.

Question 16

To prevent the interest rate from increasing, the Fed accommodates an increase in aggregate demand by which of these methods?

Accepted Answer

A) decreasing the supply of reserves 
B) increasing the supply of reserves 
C) not changing the supply of reserves 
D) decreasing the quantity supplied of reserves 
A) decreasing the supply of reserves 
B) increasing the supply of reserves 
C) not changing the supply of reserves 
D) decreasing the quantity supplied of reserves

Question 17

Which of the following statements is an explanation of why it takes time for a monetary policy change to make an impact in the economy?

Accepted Answer

A) With large firms, investment planning is frequently long run, and plans tend to be completed once started. 
B) Cycles are expected to enable the economy to pull out of a recession. 
C) Previous records indicate that demand will return. 
D) There is anticipation of government help down the road. 
A) With large firms, investment planning is frequently long run, and plans tend to be completed once started. 
B) Cycles are expected to enable the economy to pull out of a recession. 
C) Previous records indicate that demand will return. 
D) There is anticipation of government help down the road.

Question 18

Examples of greater Fed openness include all of the following except

Accepted Answer

A) an announcement of Fed policy changes immediately following any FOMC meeting. 
B) publication of minutes with a lag of 3 weeks instead of six to seven weeks. 
C) a release of a statement following FOMC meetings about the FOMC's view of the risks facing the economy. 
D) public attendance at FOMC meetings. 
A) an announcement of Fed policy changes immediately following any FOMC meeting. 
B) publication of minutes with a lag of 3 weeks instead of six to seven weeks. 
C) a release of a statement following FOMC meetings about the FOMC's view of the risks facing the economy. 
D) public attendance at FOMC meetings.

Question 19

Which of the following statements about FOMC decision-making is false?

Accepted Answer

A) Once the long-term policy stance is set, the focus of the FOMC shifts to the immediate period. 
B) The Fed looks at many indicators to assess current economic conditions and the economic outlook. 
C) Given its assessment of current conditions and the economic outlook, the FOMC comes up with short-term policy goals consistent with long-range goals. 
D) Short-term policy goals include only the short-term growth path for the fed funds rate. 
A) Once the long-term policy stance is set, the focus of the FOMC shifts to the immediate period. 
B) The Fed looks at many indicators to assess current economic conditions and the economic outlook. 
C) Given its assessment of current conditions and the economic outlook, the FOMC comes up with short-term policy goals consistent with long-range goals. 
D) Short-term policy goals include only the short-term growth path for the fed funds rate.

Question 20

The best known advocate for rules is Nobel-laureate ___________, who suggested that the money supply should grow at a steady publicly-stated rate.

Accepted Answer

A) Phil Gramm 
B) Alan Greenspan 
C) Milton Friedman 
D) John Snow 
A) Phil Gramm 
B) Alan Greenspan 
C) Milton Friedman 
D) John Snow

Exam 24: The Process of Monetary Policy Formation

In gauging the stance of monetary policy, which of the following is true?

The relationship between M1 and economic activity during the mid-1980s was which of the following?

-Refer to Figure . If the Fed increases the money supply in response to the change in demand from D to D', then

In using an interest rate target,

In the case of recession, a detrimental effect of pressure on the Fed that causes it to act immediately is that it could possibly

Over the last decade or so, the Fed has emphasized the use of which of the following variables as an operating target?

Policy makers

Which of the following is a price index that measures changes in the prices of personal consumption expenditures where the relative weights of the items in the index change as consumers substitute out of relatively more expensive items and into relative cheaper items?

-Refer to Figure. Assume the Fed is targeting a particular interest rate (it). If money demand increases from D to D', what must the Fed do to maintain the interest rate target?

In describing forecasting, which of the following statements is false?

The __________ refers to the time that elapses from the point when the need for action is recognized and when a legislative solution is decided upon and set in motion.

Which of the following is true?

Which of the following statements is true?

A major difficulty for the Fed in controlling the economy is

The larger the supply of reserves and the lower the Fed funds rate, the

To prevent the interest rate from increasing, the Fed accommodates an increase in aggregate demand by which of these methods?

Which of the following statements is an explanation of why it takes time for a monetary policy change to make an impact in the economy?

Examples of greater Fed openness include all of the following except

Which of the following statements about FOMC decision-making is false?

The best known advocate for rules is Nobel-laureate ___________, who suggested that the money supply should grow at a steady publicly-stated rate.

Introduction and Overview

Money and Its Role in the Economy

The Overseer: the Federal Reserve System

Financial Markets, Instruments, and Market Makers

Interest Rates and Bond Prices

The Structure of Interest Rates

Market Efficiency and the Flow of Funds Among Sectors

An Introduction to Financial Intermediaries and Risk

Commercial Banking Structure, Regulation, and Performance

Financial Innovation

Financial Instability and Strains on the Financial System

Regulation of the Banking System and the Financial Services Industry

The Debt Markets

The Stock Market

Securities Firms, Mutual Funds, and Financial Conglomerates

How Exchange Rates Are Determined

Forward, Futures, and Options Agreements

The International Financial System

The Fed, Depository Institutions, and the Money Supply Process

The Demand for Real Money Balances and Market Equilibrium

Financial Aspects of the Household, Business, Government, and Rest-Of-The-World Sectors

Aggregate Demand and Aggregate Supply

The Challenges of Monetary Policy

Policy Implementation

Monetary Policy in a Globalized Financial System

Filters

-Refer to Figure. Assume the Fed is targeting a particular interest rate (i_t). If money demand increases from D to D', what must the Fed do to maintain the interest rate target?