Question 1

"The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to procyclical money growth.  Why?

Accepted Answer

A) True 
 B)False  True

Question 2

During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the crisis?

Accepted Answer

A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25. 
B) The Fed set up the Term Auction Facility to provide further liquidity to banks. 
C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P. Morgan. 
D) all of the above. 
A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25. 
B) The Fed set up the Term Auction Facility to provide further liquidity to banks. 
C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P. Morgan. 
D) all of the above. D

Question 3

The monetary base consists of

Accepted Answer

A) currency in circulation and reserves. 
B) government securities held by the Fed and discount loans. 
C) government securities held by the Fed and currency in circulation. 
D) discount loans and reserves. 
A) currency in circulation and reserves. 
B) government securities held by the Fed and discount loans. 
C) government securities held by the Fed and currency in circulation. 
D) discount loans and reserves. A

Question 4

An important lesson from the 2007-2009 financial crisis is that central banks and other regulators should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction. Intervention is always a mistake.

Accepted Answer

A) True 
 B)False

Question 5

The first country to mandate that its central bank adopt inflation targeting was

Accepted Answer

A) the United States. 
B) the United Kingdom. 
C) Canada. 
D) New Zealand. 
A) the United States. 
B) the United Kingdom. 
C) Canada. 
D) New Zealand.

Question 6

Which of the following statements is true?

Accepted Answer

A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity. 
B) Bubbles driven solely by irrational exuberance lead to a failure of financial institutions. 
C) Both A and B are correct. 
D) Neither A nor B is correct. 
A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity. 
B) Bubbles driven solely by irrational exuberance lead to a failure of financial institutions. 
C) Both A and B are correct. 
D) Neither A nor B is correct.

Question 7

An objective of the Federal Reserve in its conduct of monetary policy is high employment.

Accepted Answer

A) True 
 B)False

Question 8

Price stability is desirable because

Accepted Answer

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. 
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.

Question 9

If inflation and unemployment are of direct concern to Fed officials, why do they make such a big issue about money growth and interest rates? Why don't they just target the unemployment rate and the inflation rate directly? Explain.

Accepted Answer

The answer of If inflation and unemployment are of direct...

Question 10

Can the Fed control the money supply? Has it done so? What evidence can you provide to support your answer to each question?

Accepted Answer

The Federal Reserve (the Fed) has the ab

Question 11

Open market purchases by the Fed cause the federal funds rate to rise.

Accepted Answer

A) True 
 B)False

Question 12

When it comes to choosing an operating target, both the ________ rate and ________ aggregates are easily controllable using the Fed's policy tools.

Accepted Answer

A) federal funds; monetary 
B) federal funds; reserve 
C) three-month Treasury bill; monetary 
D) ten-year Treasury bond; reserve 
A) federal funds; monetary 
B) federal funds; reserve 
C) three-month Treasury bill; monetary 
D) ten-year Treasury bond; reserve

Question 13

If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom, what is the primary tool for accomplishing this?

Accepted Answer

A) Raising interest rates. 
B) Lowering interest rates. 
C) Increasing reserve requirements. 
D) Taking a short position in the overpriced asset. 
A) Raising interest rates. 
B) Lowering interest rates. 
C) Increasing reserve requirements. 
D) Taking a short position in the overpriced asset.

Question 14

What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy?

Accepted Answer

A) High unemployment 
B) Instability in foreign exchange markets 
C) Interest-rate stability 
D) All of the above 
A) High unemployment 
B) Instability in foreign exchange markets 
C) Interest-rate stability 
D) All of the above

Question 15

The federal funds rate is

Accepted Answer

A) the interest rate on loans from the Fed to a bank. 
B) the price the Fed pays for government securities. 
C) the interest rate on loans of reserves from one bank to another. 
D) the price banks pay the Fed for government securities. 
E) the interest rate on loans from a bank to the federal government. 
A) the interest rate on loans from the Fed to a bank. 
B) the price the Fed pays for government securities. 
C) the interest rate on loans of reserves from one bank to another. 
D) the price banks pay the Fed for government securities. 
E) the interest rate on loans from a bank to the federal government.

Question 16

An open market purchase

Accepted Answer

A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. 
B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. 
C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. 
D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall. 
A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. 
B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. 
C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. 
D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall.

Question 17

Under inflation targeting, a central bank must pursue policies that

Accepted Answer

A) keep the inflation rate at a target value of zero. 
B) keep the inflation rate at some specific target value. 
C) keep the inflation rate within a specific target range. 
D) lower the inflation rate, provided this can be done without raising the unemployment rate above a specified target value. 
A) keep the inflation rate at a target value of zero. 
B) keep the inflation rate at some specific target value. 
C) keep the inflation rate within a specific target range. 
D) lower the inflation rate, provided this can be done without raising the unemployment rate above a specified target value.

Question 18

Which of the following statements is true regarding the Fed's procedures for operating the discount window?

Accepted Answer

A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate. 
B) The Fed's operating procedures and paying interest on reserves creates more fluctuation in the federal funds rate than if they simply didn't pay interest on reserves. 
C) The Fed's operating procedures and paying interest on reserves has no impact on the fluctuation of the federal funds rate. 
D) None of the above is correct. 
A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate. 
B) The Fed's operating procedures and paying interest on reserves creates more fluctuation in the federal funds rate than if they simply didn't pay interest on reserves. 
C) The Fed's operating procedures and paying interest on reserves has no impact on the fluctuation of the federal funds rate. 
D) None of the above is correct.

Question 19

The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system.

Accepted Answer

A) increase; permanently 
B) increase; temporarily 
C) decrease; temporarily 
D) decrease; permanently 
A) increase; permanently 
B) increase; temporarily 
C) decrease; temporarily 
D) decrease; permanently

Question 20

An advantage of an intermediate targeting strategy is that it provides the Fed with

Accepted Answer

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) all of the above. 
E) only A and B of the above. 
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) all of the above. 
E) only A and B of the above.

Exam 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

"The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to procyclical money growth. Why?

During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the crisis?

The monetary base consists of

An important lesson from the 2007-2009 financial crisis is that central banks and other regulators should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction. Intervention is always a mistake.

The first country to mandate that its central bank adopt inflation targeting was

Which of the following statements is true?

An objective of the Federal Reserve in its conduct of monetary policy is high employment.

Price stability is desirable because

If inflation and unemployment are of direct concern to Fed officials, why do they make such a big issue about money growth and interest rates? Why don't they just target the unemployment rate and the inflation rate directly? Explain.

Can the Fed control the money supply? Has it done so? What evidence can you provide to support your answer to each question?

Open market purchases by the Fed cause the federal funds rate to rise.

When it comes to choosing an operating target, both the ________ rate and ________ aggregates are easily controllable using the Fed's policy tools.

If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom, what is the primary tool for accomplishing this?

What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy?

The federal funds rate is

An open market purchase

Under inflation targeting, a central bank must pursue policies that

Which of the following statements is true regarding the Fed's procedures for operating the discount window?

The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system.

An advantage of an intermediate targeting strategy is that it provides the Fed with

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

When it comes to choosing an operating target, both the rate and aggregates are easily controllable using the Fed's policy tools.

The Federal Reserve will engage in a matched sale-purchase transaction when it wants to reserves in the banking system.