Deck 28: Monetary Policy

Question 1

The monetary policy instrument the Reserve Bank of Australia chooses to use is the

A)cash rate.
B)required reserves rate.
C)quantity of money.
D)exchange rate.

Answer 1

A

Question 2

The Reserve Bank fights inflation via open market operations, the supply of reserves curve shifts
And the supply of money curve shifts _.

A)leftward; rightward
B)rightward; leftward
C)rightward; rightward
D)leftward; leftward

Answer 2

D

Question 3

As the sole issuer of Australian money, the Reserve Bank of Australia can set any one of three variables:

A)the monetary base, the exchange rate and the short- term interest rate.
B)the inflation rate, the unemployment rate and the real economic growth rate.
C)the exchange rate, the interest rate and the inflation rate.
D)the rate of inflation, the interest rate and the unemployment rate.

Answer 3

A

Question 4

In an AS/AD figure, lowering the cash rate initially shifts the

A)AD curve rightward.
B)AD curve leftward.
C)long- run AS curve leftward.
D)long- run AS curve rightward.

Question 5

The key aim of monetary policy is to

A)maintain price stability.
B)change tax rates to boost saving.
C)change government spending to spur innovation.
D)change tax rates to boost investment.

Question 6

The Reserve Bank's open market operations directly influence

A)banks.
B)firms.
C)consumers.
D)the government.

Question 7

In the above figure, if the economy is initially at point a, the short- run effect of a cut in the cash rate is given by the movement from point

A)a to point c, keeping output and the unemployment rate constant.
B)a to point b, increasing output and decreasing the unemployment rate.
C)a to point d, decreasing output and increasing the unemployment rate.
D)a to point b, increasing output and the unemployment rate.

Question 8

The cash rate is the interest rate

A)on the 30- year Treasury bond.
B)on the 3- month Treasury bill.
C)also known as the prime rate.
D)banks charge each other on overnight loans.

Question 9

Which of the following issues is a concern that critics express about the use of an inflation target?

A)It encourages a focus on inflation at the expense of employment and real GDP growth.
B)It encourages a focus on real GDP growth at the expense of employment and of inflation.
C)The policy control rests in the hands of elected officials rather than in the hands of public servants.
D)The policy control rests in the hands of public servants rather than in the hands of elected officials.

Question 10

If the Reserve Bank of Australia sells Australian government securities,

A)the Australian Treasury gains some revenue.
B)the cash rate rises.
C)bank reserves increase.
D)None of the above answers is correct.

Question 11

A decrease in the cash rate

A)lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand.
B)decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate demand.
C)increases other short- term interest rates, decreases investment, and decreases aggregate demand.
D)lowers other short- term interest rates, raises the real interest rate, and increases aggregate demand.

Question 12

The key goal of monetary policy is to

A)reverse the productivity growth slowdown.
B)maintain low inflation.
C)keep the budget deficit small and/or the budget surplus large.
D)lower taxes.

Question 13

If the Reserve Bank of Australia raises the interest rate, the first effect in an AS/AD figure is a
Shift of the curve.

A)leftward; AD
B)rightward; SAS
C)leftward; SAS
D)rightward; AD

Question 14

The Reserve Bank of Australia lowers the cash rate. A mechanism through which aggregate demand increases is that the lower cash rate

A)raises the exchange rate so that net exports decrease, which increases investment, thereby increasing aggregate demand.
B)decreases other short- term interest rates, which increases investment, thereby increasing aggregate demand.
C)increases other short- term interest rates, which decreases investment, thereby decreasing aggregate demand.
D)decreases other short- term interest rates, which decreases investment, thereby increasing aggregate demand.

Question 15

An inflation rate targeting rule

A)has been adopted by the Reserve Bank in response to the financial crisis of 2008- 2009.
B)will not work if the Reserve Bank continues to use open market operations.
C)reduces uncertainty about monetary policy.
D)means that the inflation rate must exceed 5 per cent in order for the rule to be effective.

Question 16

When the Reserve Bank increases the cash rate,

A)the quantity of reserves, the quantity of deposits, and bank loans all increase.
B)the quantity of reserves, the quantity of deposits, and bank loans all decrease.
C)both the quantity of reserves and the quantity of deposits decrease, while bank loans increase.
D)the quantity of reserves decreases, while the quantity of deposits and bank loans both increase.

Question 17

The Reserve Bank of Australia engages in open market operations and sells government securities. The result is

A)a higher cash rate.
B)an unchanged cash rate because other interest rates did not change.
C)a lower cash rate.
D)More information is needed to determine what happens to the cash rate.

Question 18

During the financial crisis of 2008- 2009, the U.S. Federal Reserve and some other central banks were concerned about

A)keeping the interest rate from falling too far.
B)the public's rush to deposit currency into banks.
C)providing the banking system with enough liquidity.
D)the bubble that was forcing asset prices higher.

Question 19

In the short run, the Reserve Bank of Australia faces a tradeoff between

A)real GDP growth and potential GDP growth.
B)economic growth and employment.
C)inflation and price stability.
D)inflation and unemployment.

Question 20

Which of the following is NOT a short- run effect of a decrease in the cash rate?

A)The inflation rate increases.
B)Aggregate supply increases.
C)Aggregate demand increases.
D)Net exports increase.

Question 21

By law, the objectives of the Reserve Bank of Australia are

A)to keep the cash rate below 2 per cent a year and the unemployment rate at its natural rate.
B)to conduct monetary policy in a way that will best contribute to the objectives of the stability of the currency, the maintenance of full employment, and the economic prosperity and welfare of the Australian people.
C)to keep the unemployment rate below 5 per cent, the inflation rate between 1 and 3 per cent a year, and long- term interest rates below 4 per cent a year.
D)to keep the labour force participation rate above 80 per cent, the inflation rate below 2 per cent a year, and the exchange rate fluctuating by less than 3 per cent a year.

Question 22

If the Reserve Bank of Australia wished to eliminate an inflationary gap, which of the following would be an appropriate policy?

A)Buy government securities
B)Raise the cash rate
C)Lower the cash rate
D)Decrease the government budget deficit

Question 23

If the Reserve Bank of Australia wants to lower the cash rate, it can

A)buy government securities on the open market.
B)instruct banks to print more money.
C)sell government securities in the open market.
D)decrease the budget deficit.

Question 24

Open market operations by the Reserve Bank of Australia lead to

A)changes in the number of banks.
B)changes in the cash rate.
C)immediate changes in aggregate supply.
D)shifts in the demand curve for reserves.

Question 25

Long- term interest rates are _ than short- term rates because long- term loans are than short- term loans.

A)lower; riskier
B)lower; safer
C)higher; riskier
D)higher; safer

Question 26

In the above figure, suppose the economy is at point B. Which of the following policy options for the Reserve Bank of Australia will move the economy towards its LAS?

A)Decrease taxes
B)Lower the cash rate
C)Decrease the government's budget deficit
D)Raise the cash rate

Question 27

When the Reserve Bank of Australia raises the cash rate, in the foreign exchange market people
Dollars and the price of the dollar on the foreign exchange market.

A)sell; rises
B)sell; falls
C)buy; falls
D)buy; rises

Question 28

What is the cash rate?

A)The interest rate on interbank loans that members of the Real- Time Gross Settlement (RTGS)system pay to each other
B)The interest rate that the Reserve Bank of Australia pays when it buys securities from credit unions
C)The interest rate that the Reserve Bank of Australia charges building societies
D)The percentage change in the volume of loans that take place overnight

Question 29

If the Reserve Bank of Australia wants to raise the cash rate it will

A)buy government securities in order to increase the quantity of reserves.
B)sell government securities in order to decrease the quantity of reserves.
C)sell government securities in order to increase the quantity of reserves.
D)buy government securities in order to decrease the quantity of reserves.

Question 30

If the Reserve Bank of Australia increases the quantity of reserves, a new equilibrium is reached by a

A)movement up the demand for reserves curve.
B)leftward shift of the demand for reserves curve.
C)rightward shift of the demand for reserves curve.
D)movement down the demand for reserves curve.

Question 31

In the above figure, suppose point C is the original equilibrium. If the Reserve Bank of Australia increases the cash rate, the new equilibrium is given by point

A)A.
B)B.
C)C (that is, the equilibrium does not change).
D)D.

Question 32

Which of the following is a problem in pursuing monetary policy?

A)The response of expenditure plans to changes in the real interest rate depends on many factors that make the response hard to predict.
B)The lag between a change in the quantity of money and its effect on economic activity may be long.
C)The real long- term interest rate that influences spending plans is linked only loosely to the cash rate.
D)All of the above answers are correct.

Question 33

One problem with the ripple effect from the Reserve Bank's monetary policy is

A)that changing the cash rate seldom has an effect on the markets for reserves and loanable funds.
B)the fact that the monetary policy transmission process is long and drawn out.
C)the frequent misalignment of the spread between the cash rate and the cash rate target.
D)the tight relationship that the cash rate has with the aggregate spending.

Question 34

When the Reserve Bank of Australia lowers the cash rate, the Australian dollar on the foreign exchange market and .

A)depreciates; the increase in imports is greater than the increase in exports
B)depreciates; aggregate demand decreases
C)appreciates; aggregate demand decreases
D)depreciates; aggregate demand increases

Question 35

Uncertainty about monetary policy

A)can keep investment low.
B)is why the central banks do not use inflation rate targeting.
C)makes deposits in banks more desirable because they become safer.
D)was the factor that started the financial crisis in 2008.

Question 36

Suppose the equilibrium real interest rate is 2 per cent per year, inflation is 2.5 per cent and the output gap is 1 per cent. Using the Taylor rule, what is the cash rate?

A)5.25 per cent
B)3.5 per cent
C)3 per cent
D)5.5 per cent

Question 37

When the Reserve Bank increases the cash rate, the Australian interest rate differential and the Australian exchange rate _ .

A)rises; appreciates
B)falls; depreciates
C)falls; appreciates
D)rises; depreciates

Question 38

Consumer confidence in the economy rises and, as a result, real GDP increases above potential GDP. To move GDP back to potential GDP, the Reserve Bank of Australia should

A)increase the government's budget deficit.
B)lower the cash rate.
C)raise the cash rate.
D)decrease the government's budget deficit.

Question 39

Which of the following statements about the cash rate is FALSE?

A)The cash rate and the 10- year government bond rate trend in the same direction.
B)The higher the cash rate, the greater the quantity of money.
C)The cash rate is never less than the 10- year government bond rate.
D)The cash rate and the Treasury bill rate move closely together.

Question 40

An open market sale of government securities by the Reserve Bank of Australia shifts the reserves curve _ .

A)supply of; leftward
B)demand for; rightward
C)supply of; rightward
D)demand for; leftward

Question 41

How is consultation between the Reserve Bank of Australia and the Australian Government on monetary policy arranged?

A)The Reserve Bank of Australia Act requires regular consultations between the Governor and the Treasurer.
B)Consultations are arranged through the House of Representatives Economics Committee.
C)Consultations are arranged at the discretion of the Treasurer.
D)No consultation is required or needed.

Question 42

Refer to the above graphs. Everything else remaining the same, which graph BEST illustrates the effect of a Reserve Bank of Australia open market purchase of government securities?

A)(a)
B)(b)
C)(c)
D)(d)

Question 43

The Taylor rule states that the

A)use of an exchange rate target, although costly, is economically efficient.
B)Reserve Bank should adjust the cash rate to take account of deviations of inflation from its target and real GDP from potential GDP.
C)Reserve Bank should target the monetary base and not the cash rate.
D)None of the above is correct.

Question 44

Monetary policy includes adjustments in _ so as to change .

A)the cash rate; aggregate demand.
B)the cash rate; short- run aggregate supply.
C)the quantity of money; short- run aggregate supply.
D)open market operations; long- run aggregate supply.

Question 45

In the short- run, lowering the cash rate will shift the _ and real GDP.

A)aggregate demand curve rightward; increase
B)aggregate supply curve rightward; increase
C)aggregate demand curve leftward; increase
D)aggregate demand curve leftward; decrease

Question 46

Suppose that several Asian countries enter a recession, decreasing Australian exports. To move Australian GDP back to potential GDP, the Reserve Bank of Australia should

A)decrease the government's budget deficit.
B)raise the cash rate.
C)increase the government's budget deficit.
D)lower the cash rate.

Question 47

When the Reserve Bank of Australia raises the cash rate,

A)the value of the Australian dollar falls in the foreign exchange market.
B)the value of the Australian dollar rises in the foreign exchange market.
C)consumption increases.
D)net exports increase.

Question 48

If the Reserve Bank of Australia wants to decrease the quantity of money, it can

A)purchase Australian government securities.
B)sell Australian government securities.
C)decrease the government budget deficit.
D)raise income tax rates.

Question 49

Which of the following increases the quantity of money?

A)An individual's purchase of a government security from the Reserve Bank
B)An increase in the government's budget deficit
C)The Reserve Bank's purchase of a government security
D)An individual's cash withdrawal from a bank

Question 50

When the Reserve Bank of Australia lowers the cash rate, aggregate demand

A)decreases.
B)stays the same.
C)increases.
D)could increase, decrease or stay the same.

Question 51

In the above figure, if the economy is initially at point c, the short- run effect of a hike in the cash rate is given by the movement from point

A)c to point d, increasing output and decreasing the unemployment rate.
B)c to point d, decreasing output and increasing the unemployment rate.
C)c to point b, increasing output and decreasing the unemployment rate.
D)c to point a, keeping output and the unemployment rate constant.

Question 52

During the financial crisis of 2008- 2009, the U.S. Federal Reserve's action to supply reserves to the banking system was an attempt to

A)limit the troubling rise in asset prices.
B)help the U.S. Treasury finance the budget.
C)make certain that banks had enough liquidity to avoid collapse.
D)increase the public's belief that their deposits were insured.

Question 53

The Reserve Bank fights recession via open market operations, the supply of loanable funds curve shifts and the aggregate demand curve shifts .

A)rightward; rightward
B)rightward; leftward
C)leftward; rightward
D)leftward; leftward

Question 54

If the Reserve Bank of Australia is concerned with inflation it will _ the cash rate in order to
Aggregate demand.

A)lower; decrease
B)lower; increase
C)raise; increase
D)raise; decrease

Question 55

Which of the following is NOT an objective of the Reserve Bank's monetary policy?

A)Price level stability
B)Stability of currency
C)Maximum employment
D)Zero per cent unemployment

Question 56

A decrease in the cash rate leads to

A)a fall in the exchange rate.
B)an increase in exports.
C)an increase in the quantity of money.
D)All of the above answers are correct.

Question 57

If the Reserve Bank of Australia buys Australian government securities,

A)the cash rate will fall.
B)the discount rate will rise.
C)the cash rate will rise.
D)bank reserves will decrease.

Question 58

Suppose the inflation rate is 3 per cent and the output gap is - 1 per cent. Assuming the equilibrium real interest rate is 2 per cent, using the Taylor rule what target should the Reserve Bank set for the cash rate?

A)4 per cent
B)1 per cent
C)6 per cent
D)5 per cent

Question 59

Refer to the above graphs. Everything else remaining the same, which graph BEST illustrates the effect of a Reserve Bank of Australia open market sale of government securities?

A)(a)
B)(b)
C)(c)
D)(d)

Question 60

If the Reserve Bank of Australia carries out an open market operation to buy Australian government securities, the cash rate and the quantity of reserves .

A)rises; decreases
B)falls; decreases
C)rises; increases
D)falls; increases

Question 61

The Reserve Bank fights inflation via open market operations, the supply of loanable funds curve shifts and the aggregate demand curve shifts .

A)leftward; leftward
B)leftward; rightward
C)rightward; rightward
D)rightward; leftward

Question 62

The Reserve Bank's monetary policy objective of maintenance of full employment means

A)keeping the unemployment rate close to the natural unemployment rate.
B)cyclical unemployment should not necessarily be minimised.
C)a zero per cent natural unemployment rate.
D)a zero per cent unemployment rate.

Question 63

The cash rate is the

A)ratio of the value of securities bought by the Reserve Bank of Australia to securities outstanding.
B)the interest rate on interbank loans that members of the Real- Time Gross Settlement (RTGS)system pay to each other.
C)ratio of the value of securities sold by the Reserve Bank of Australia to securities outstanding.
D)interest rate that the Reserve Bank of Australia charges banks on loans.

Question 64

If the Reserve Bank of Australia fears inflation it will undertake an open market of securities, the cash rate will and the long- term real interest rate will .

A)purchase; fall; rise
B)sale; rise; fall
C)sale; rise; rise
D)purchase; rise; fall

Question 65

Which aggregate supply- aggregate demand diagram above shows the effect on real GDP and the price level of monetary policy when it is used to fight a recession?

A)Only Figure A
B)Only Figure B
C)Both Figure A and Figure B
D)Neither Figure A nor Figure B

Question 66

The Taylor rule uses three variables to determine the target for the cash rate. Which of the following is NOT one of those variables?

A)Output gap
B)Monetary base
C)Equilibrium real interest rate
D)Inflation rate

Question 67

The Taylor rule

A)is the rule actually followed by the Reserve Bank of Australia.
B)shows how the Reserve Bank of Australia could set the cash rate.
C)ignores price level stability to focus on responding to fluctuations in real GDP.
D)focuses on only fluctuations in real GDP.

Question 68

If the Reserve Bank of Australia carries out an open market operation and sells Australian government securities, the cash rate and the quantity of reserves .

A)falls; decreases
B)falls; increases
C)rises; decreases
D)rises; increases

Question 69

If the Reserve Bank follows the Taylor rule and the economy goes into a recession, the Reserve Bank will

A)reduce tax rates.
B)lower the cash rate.
C)increase government expenditures.
D)None of the above answers is correct.

Question 70

In the above figure, the economy experiences a decrease in aggregate demand so that the aggregate demand curve shifts from AD0 to AD1. If the Reserve Bank of Australia wants to offset this change, it will _ .

A)increase government expenditures
B)sell government securities on the open market
C)lower taxes
D)purchase government securities on the open market

Question 71

By using open market operations, the Reserve Bank

A)adjusts the supply of reserves to keep the cash rate equal to its target.
B)adjusts the demand for reserves to keep bank rates in line with the cash rate target.
C)adjusts the supply of and demand for reserves to keep the cash rate equal to its target.
D)controls banks' demand for reserves, thereby keeping the cash rate equal to its target.

Question 72

If the aggregate demand curve shifts rightward following a decrease in the cash rate, what can be concluded if the short- run aggregate supply curve is rather steep?

A)There is significant unemployment and slack in the economy.
B)There will be a significant increase in real GDP with little impact on the price level.
C)There will be a significant increase in both real GDP and the price level.
D)There will be little increase in real GDP but a significant increase in the price level.

Question 73

One criticism of the Reserve Bank of Australia's focus on an inflation target is that

A)if inflation edges above the target range, the Bank decreases aggregate demand and could create a recession.
B)if inflation falls below the target range a recession will result.
C)it makes setting expectations of inflation difficult.
D)the Reserve Bank of Australia pays too much attention to unemployment and real GDP growth and not enough to inflation control.

Question 74

Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which of the following takes the longest to change?

A)Cash rate
B)Monetary base
C)Inflation rate
D)Exchange rate

Question 75

In the above figure, if the economy is initially at point d, the short- run effect of a cut in the cash rate is given by the movement from point

A)d to point b, keeping output and the unemployment rate constant.
B)d to point a, increasing output and decreasing the unemployment rate.
C)d to point c, increasing output and decreasing the unemployment rate.
D)d to point b, increasing output and decreasing the unemployment rate.

Question 76

If the interest rate on Treasury bills is higher than the cash rate, the quantity of overnight loans supplied and the _ Treasury bills increases.

A)increases; demand for
B)decreases; demand for
C)increases; supply of
D)decreases; supply of

Question 77

Which of the following benefits flow from the application of an inflation target band?

A)The monetary authorities can change the target range whenever they feel it is appropriate.
B)People can make decisions with an understanding that inflation rates will remain relatively low.
C)Financial market traders have a clearer understanding of the Reserve Bank's intentions.
D)Both B and C

Question 78

When the Reserve Bank increases the cash rate,

A)the supply of bank loans decreases, while the supply of loanable funds and the real interest rate both increase.
B)both the supply of bank loans and the supply of loanable funds decrease, thereby increasing the real interest rate.
C)both the supply of bank loans and the supply of loanable funds increase, while the real interest rate increases.
D)both the supply of bank loans and the supply of loanable funds increase, thereby decreasing the real interest rate.

Question 79

Who are the members of the Reserve Bank of Australia's Board?

A)The Treasurers from each state and territory as well as the Commonwealth Treasurer
B)The Treasurer, the Governor and four Deputy Governors
C)The Bank's Governor, Deputy Governor, the Secretary to the Treasury and six external members
D)The Prime Minister, the Treasurer and the Bank's Governor

Question 80

Currently the Reserve Bank of Australia targets

A)both the cash rate and the monetary base simultaneously.
B)the cash rate.
C)the price level.
D)the exchange rate.