Deck 24: The Process of Monetary Policy Formation

Question 1

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

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.

Answer 1

B

Question 2

Which of the following is false?

A)As data reports are published, policymakers ask themselves if the data is consistent with our economic outlook and desires or if the data signaling that the economy's performance has deviated markedly from what was expected.
B)The problem with assessing data is that many monthly data releases are quite volatile or noisy, possessing a large element of irregular variance that makes the data unreliable as policy indicators.
C)As a result of potentially large month-to-month fluctuations, it is often necessary to have two to three months of data on hand before the underlying cyclical or trend movements in an individual data series become evident.
D)Because data is so unreliable and hard to interpret, the Fed relies much more on forecasts in determining whether or not policy should be changed.

Answer 2

D

Question 3

The __________ refers to the time it takes policymakers to realize that a change in the economy's performance has occurred.

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

Answer 3

C

Question 4

The __________ refers to the time that elapses between when an action is taken and when that action has a significant influence on economic variables.

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

Question 5

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.

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

Question 6

If revised data estimates suggest that some other course of action should have and would have been taken if the revised data were available, this is called

A)policy lag.
B)policy regret.
C)policy reformulation.
D)policy cancellation.

Question 7

Monetary policy refers to

A)changes in taxes and government spending to ensure sustainable growth, high employment, and low inflation.
B)attempts by the Fed to stabilize the economy and to ensure sufficient money and credit for an expanding economy.
C)the set of regulations used to oversee depository institutions.
D)None of the above is correct.

Question 8

A(n) __________ is a target that is midway between the policy instruments and the ultimate policy goals.

A)monetary target
B)policy directive
C)operating target
D)intermediate target

Question 9

A(n) __________ is a target that is amenable to control by the policy tools and is highly correlated with the intermediate target.

A)monetary target
B)policy directive
C)operating target
D)ultimate target

Question 10

The statement that emerges from the FOMC Meeting and that is used to guide monetary policy until the next FOMC meeting is called the

A)monetary target.
B)policy directive.
C)operating target.
D)intermediate target.

Question 11

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

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

Question 12

The Fed can use which of the following as an intermediate target?

A)the level of real GDP
B)the level of nominal GDP
C)both an interest rate and a monetary aggregate at the same time
D)either a monetary aggregate or an interest rate but not at the same time

Question 13

Which of the following is false?

A)The Fed currently provides projections about the growth rates of the monetary aggregates and domestic nonfinancial debt (DNFD).
B)In the early 1990s, the aggregate that was most strongly correlated with the level of economic activity was domestic nonfinancial debt (DNFD).
C)In the 1970s, the Fed targeted M1 in formulating monetary policy.
D)In the mid-1980s, the Fed targeted M2 and M3 in formulating monetary policy

Question 14

Which of the following makes timely and appropriate monetary policy more difficult to determine?

A)The fact that the FOMC meets only 8 times per year.
B)The fact that there are lags in the policy process.
C)The fact that there are 12 Federal Reserve Banks that have to each contribute to the formulation of monetary policy.
D)All of the above are correct.

Question 15

Which of the following is not necessarily a desirable characteristic of an intermediate target variable?

A)The variable should be a monetary aggregate.
B)The variable should be reliably, and thus predictably, related to the goal variables.
C)Policymakers should be able to observe the intermediate target regularly.
D)The Fed should be able to hit the targeted range of the intermediate variable.

Question 16

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

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

Question 17

Which of the following statements is false?

A)The breakdown in the traditional relationships between the monetary aggregates and economic activity caused an abandonment of the use of monetary aggregates as either targets or information variables in the early 1990s.
B)In July 2000, the Fed even stopped providing projections about the growth rates of the monetary aggregates and domestic non-financial debt (DNFD).
C)At the eight FOMC meetings per year, emphasis is placed on long-term goals.
D)Long-term forecasts include target ranges for inflation and unemployment.

Question 18

Policymakers tend to give greater weight to which of the following?

A)forecasts rather than incoming data
B)incoming data rather than forecasts
C)historical records of business cycles
D)views of what they believe is politically possible

Question 19

Beginning in the mid-1980s, depository institutions became increasingly _______ to borrow reserves from the Fed.

A)more likely
B)reluctant
C)able
D)unable

Question 20

Which of the following is true?

A)The policy lag refers to the time that elapses from the point when a significant and unexpected change in the economy's performance occurs to when policymakers recognize that such a change has occurred.
B)Most recently the Fed has emphasized the use of one or more of the monetary aggregates as an operating target.
C)Policymakers put more emphasis on economic forecasts than on incoming data because incoming data are often revised.
D)The comparison between the economy's expected performance and policymakers' policy goals guide monetary policy actions.

Question 21

A major difficulty for the Fed in controlling the economy is

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 22

The Fed's attempt to reduce inflation may have a negative short-run impact of

A)increased unemployment and reduced growth.
B)reduced output growth and higher inflation.
C)lower inflation and higher employment.
D)lower productivity and lower employment.

Question 23

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

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 24

When the Fed selects a variable that is midway between its current policy and its eventual goal, that variable is called

A)an intermediate target.
B)an operating target.
C)a policy target.
D)a recognition target.

Question 25

Changes in the relationship between a given monetary aggregate and the level of economic activity is believed to be partly caused by

A)slow technological change in payment methods.
B)the increased use of electronic transfers.
C)the reduction in numbers of new financial instruments and markets.
D)All of the above are correct.

Question 26

Which of the following is considered to be the Fed's main policy tool?

A)the rediscount rate
B)the reserve ratio
C)raising taxes
D)open market operations

Question 27

In guiding policy in recent years, the Fed has

A)moved almost completely away from both aggregates and the interest rate as targets.
B)increased the use of both the aggregates and the interest rate as targets.
C)used the aggregates more than the interest rate as targets.
D)used interest-rate targeting more than monetary-aggregate targeting.

Question 28

When the Fed uses an interest rate as an intermediate target, upward pressure on the interest rate is countered by increasing the supply of reserves. This may lead to

A)higher fed funds rates.
B)steady economic growth.
C)a downward slide into recession.
D)higher inflation in the future.

Question 29

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?

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

Question 30

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

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

Question 31

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

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 32

-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?

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

Question 33

-Refer to Figure . Assume the Fed is targeting a particular level of money supply (M_t) as measured by one of the monetary aggregates. If money demand increases from D to D', what will happen if the Fed continues to leave the money supply unchanged?

A)The interest rate will rise.
B)The interest rate will fall.
C)The money demand curve will shift leftward.
D)The money supply curve will increase.

Question 34

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

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 35

Which of the following statements is true?

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 36

For which of the following does the Fed not establish economic projections?

A)nominal GDP
B)real GDP
C)unemployment
D)the exchange rate

Question 37

In the early 1980s, the Fed focused on the level of ________ as the ________ target.

A)nonborrowed reserves, operating
B)nonborrowed reserves, intermediate
C)borrowed reserves, operating
D)borrowed reserves, intermediate

Question 38

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.

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

Question 39

Which of the following choices correctly lists the three lags in the policy process in the order in which they are expected to occur?

A)the policy lag, the recognition lag, and the impact lag
B)the recognition lag, the policy lag, and the impact lag
C)the impact lag, the recognition lag, and the policy lag
D)the recognition lag, the impact lag, and the policy lag

Question 40

Which of the following best describes the impact lag?

A)the time it takes for policymakers to recognize that economic conditions have changed and that a policy change is necessary
B)the time that elapses from when the need for action is recognized to when the policy adjustment is enacted
C)the time from when the policy action is taken until there is a significant effect on the economy
D)None of the above is correct.

Question 41

Which of the following makes timely and appropriate monetary policy more difficult to determine?

A)the existence of uncertainty
B)the presence of lags in the policy process
C)increasing global integration
D)All of the above are correct.

Question 42

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

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 43

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

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 44

The time it takes for policymakers to determine that a change in the economy's performance has occurred is called

A)the policy lag.
B)uncertainty.
C)the impact lag.
D)the recognition lag.

Question 45

Examples of greater Fed openness include all of the following except

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 46

On the average, when monetary policymakers act, their actions will affect the economy

A)within 60 days
B)in 6 months or more.
C)instantaneously
D)only if there is a balanced budget

Question 47

The time that elapses between an action being taken by policymakers and its influence on the economy is called which of the following?

A)the timepiece dividend
B)the government dividend
C)the impact lag
D)a New York minute

Question 48

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?

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 49

Which of the following is false?

A)There is very little that policymakers can do today to materially affect the current performance of the economy.
B)The Fed's actions or its failure to take action today may aggravate inflation and cyclical fluctuations later.
C)Increasing interdependence among the economies of the world implies that U.S. policymakers have more control over the performance of the U.S economy than they had in the past.
D)The rationale behind intermediate targets is this: If the Fed hits the intermediate target, it will come reasonably close to achieving its economic objectives.

Question 50

As our country becomes more financially integrated with the rest of world, which of the following will occur?

A)Tokyo will be the dominant influence in our stock market.
B)The economies of the world will become more independent.
C)Fed policy making will become easier.
D)There will be increased interdependence and a greater need for global coordination of policy.

Question 51

Which of the following is true?

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 52

In using an interest rate target,

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 53

The Fed targets the interest rate by which of the following?

A)by targeting the federal funds rate
B)through the use of open market operations
C)by adjusting government spending and taxes
D)Both a and b are correct.

Question 54

The time that elapses from the point when the need for action is recognized and the point when a procedural change is decided upon is called which of the following?

A)the impact lag
B)the policy lag
C)the recognition lag
D)the forecasting lag

Question 55

If the demand for reserves is fixed, the larger the supply of reserves provided through open market operation, the

A)higher the fed funds rate.
B)greater the rediscount rate.
C)higher the interest rate.
D)lower the fed funds rate.

Question 56

If the demand for reserves is fixed, the smaller the supply of reserves provided through open market operation, the

A)higher the fed funds rate.
B)greater the rediscount rate.
C)higher the government deficit.
D)lower the fed funds rate.

Question 57

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

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 58

During the 1970s, the aggregate that was targeted most frequently was which of the following?

A)M1
B)M2
C)DNFD
D)Credit balances

Question 59

During the 1970s, the relationship between M1 and the level of economic activity was

A)stable and predictable.
B)erratic and unpredictable.
C)unknown.
D)None of the above is correct.

Question 60

Policy makers

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 61

Why has the relationship between some monetary aggregates and economic activity failed to survive over time?

A)technological changes in the payment system
B)deregulation
C)the creation of new financial instruments and markets
D)All of the above are correct.

Question 62

__________ occurs if revised data estimates suggest that some other course of action should have and would have been taken if the revised data were available.

A)Policy lag
B)Policy regret
C)Policy nullification
D)Political gain

Question 63

Because the Fed's ability to use DNFD in the implementation of monetary policy is _______, the Fed's control over DNFD is ______ precise than its control over the monetary aggregates.

A)severely limited, less
B)severely limited, more
C)extensive, less
D)extensive, more

Question 64

Which of the following is true?

A)The Fed sets growth target ranges for several aggregates in order to be absolutely certain they are correct.
B)The Fed currently 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 has become more open in recent years.

Question 65

Which of the following is true?

A)A side effect of the Fed's greater openness is that a larger volume of open market operations is needed to hit a given fed funds rate target.
B)The Fed believes that if it better communicates current and future policy moves, there will be less uncertainty.
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 has become more secretive in recent years.