Deck 5: Monetary Policy in the United States

Question 1

In the Keynesian view, the Fed's decision to reduce the fed funds rate, by increasing the banking system's excess reserves, should have consequences. Which of the below is NOT one of these consequences?

A) Banks, as the first economic units to be affected, will have more reserves and lower returns from lending in the fed funds market.
B) Banks will reduce the cost of loans to businesses and consumers and the return (if any) available to investors on short-term deposits.
C) Investors will be confronted with higher yields on short-term assets, such as Treasury bills and certificates of deposit.
D) Declines in the general cost of funding will encourage firms to expand and increase their output.

Answer 1

C

Question 2

The Fed cannot, with any of its monetary tools (open market operations, discount rates, etc.), directly influence such complex economic variables as ________.

A) the prices of goods and services
B) the unemployment rate
C) the growth in gross domestic product
D) All of these

Answer 2

D

Question 3

A tight monetary policy that curbs inflation by reducing the rate of growth in the money supply ________.

A) can also strengthen the financial health of the firms that borrowed from the financial institutions.
B) may actually weaken the financial health of the firms that borrowed from the financial institutions.
C) can avoid non-wanted goals.
D) All of these

Answer 3

B

Question 4

________ is helpful because it allows a constant reallocation of labor and leads to increased efficiency in the work force.

A) Zero inflation
B) Full employment
C) Frictional unemployment
D) Excess demand

Question 5

The Fed, like any monetary policy maker, has numerous goals but focuses, at any time, on the goal ________.

A) that is most often neglected.
B) that is unfortunately most often irrelevant.
C) that is most in danger of not being achieved.
D) that most often has political reasons for implementing.

Question 6

It is important to note that, when confronted with a supply shock, a central bank such as the Fed has two choices. Which of the below is ONE of these choices?

A) The banking authorities can shoot for zero unemployment.
B) The banking authorities can refuse to accommodate the higher price levels that follow the shock by matching them with an increase in the money supply.
C) The Fed can choose to shoot for a goal of low employment of the civilian labor force.
D) The Fed can choose shoot for a goal of high unemployment of the civilian labor force.

Question 7

The fed funds rate meets the requirement for an operating target. Which of the below is this requirement?

A) The rate is readily observable and continuously available because the market for fed funds is large and active.
B) The rate is readily observable and continuously available because the market for fed funds is small but active.
C) The rate is readily observable and continuously available because the market for fed funds is large but inactive.
D) The rate is often not observable or available because the market for fed funds is small and/or inactive.

Question 8

Which of the below statements is FALSE?

A) An important point about the operating target is that the Fed must choose either a short-term rate or the level of some reserves and cannot choose to target both kinds of variables.
B) As the Fed supplies more reserves and banks gain more ability to make more loans and buy other assets, the short-term rates fall; as the Fed withdraws reserves and reduces the banks' lending capacity, the short-term rates rise.
C) The Fed cannot know or predict the public's demand for money, which is the aggregate demand for holding some of its wealth in the form of liquid balances, such as bank deposits.
D) The least known of the intermediate targets is the money supply, measured by one of the more inclusive monetary aggregates.

Question 9

Inflation in advanced economies is ________ the result of excessive demand due to monetary or fiscal policy.

A) never
B) seldom (if ever)
C) frequently
D) always

Question 10

Which of the below statements is FALSE?

A) An important source of inflation is an economic shock in the supply of a crucial material, such as the oil shocks of the 1970s, which affected almost all countries.
B) It is important to realize that high employment is one of the Fed's goals because, in certain circumstances, the Fed's policy can indirectly influence the level of employment.
C) Given that zero unemployment is not a feasible aim, the appropriate goal of the Fed and other governmental policy makers is actually a high level of employment.
D) Stability in the price level is a secondary goal of the Fed.

Question 11

A requirement of a good operating target is that the Fed can exert substantial control over its level and changes. If the rate were to rise above the level that the Fed thought conducive to economic growth and high employment, the Fed would ________.

A) engage in open market purchases and not inject reserves into the banking system.
B) engage in open market purchases and inject reserves into the banking system.
C) not engage in open market purchases but would inject reserves into the banking system.
D) neither engage in open market purchases nor inject reserves into the banking system.

Question 12

Which of the below statements is FALSE?

A) The Fed can affect the rate of growth in the money supply by various means besides its control of reserves in the banking system.
B) A problem in the implementation of monetary policy is that the Fed has no direct control over the goals that are the final objectives of its policies.
C) The growth in the money supply depends to a substantial extent on the preferences, actions, and expectations of numerous banks, borrowers, and consumers.
D) The Fed uses one or more of its tools to affect what are called operating targets, which are monetary and financial variables whose changes tend to bring about changes in intermediate targets.

Question 13

Which of the below statements is TRUE?

A) The goal of stabilizing interest rates is indirectly related to the goal of growth and to the Fed's responsibility for the health of the nation's financial and banking system.
B) The Fed's goal is to stabilize and prevent changes in rates.
C) Because exchange rates are independent of the monetary policies of the major countries, the Fed has accepted the goal of stabilizing foreign exchange rates.
D) A chief disadvantage of unstable foreign currency exchange rates is that volatility in the prices of currencies inhibits the international trade that offers a host of benefits to all participating countries.

Question 14

Although economists have argued many years about the identity of appropriate operating and intermediate target variables, there is no dispute about the chief characteristics of a suitable operating or intermediate target. Which of the below is NOT a chief characteristic?

A) linkage (an expected connection with the intermediate target)
B) objectivity (decision-making eliminates personal experiences)
C) observability (targets must be readily and regularly observable economic variables)
D) responsiveness (respond quickly and in an expected way to the Fed's use of its tools)

Question 15

An easy money policy of expanding the money supply (that is, stimulating higher growth rates for one or more monetary aggregates) may appear to promote ________, but it may also raise the prospect of inflation, affect the exchange rate disadvantageously, and increase interest rates.

A) growth and low interest rates
B) growth and high interest rates
C) stagnation and low interest rates
D) stagnation and high interest rates

Question 16

________ is a condition of both inflation and recession.

A) Stagflation
B) Inflacession
C) Stagcession
D) Recessflation

Question 17

In some countries, a key foreign currency exchange rate may well function as an ________.

A) intermediary target.
B) supplementary target.
C) operating target.
D) operating procedure.

Question 18

Economic growth is ________.

A) not related to the goal of high employment.
B) helpful because it allows a constant reallocation of labor and leads to increased efficiency in the work force.
C) not a Fed goal because its operations cannot affect the level of growth.
D) the third goal of the Fed, which is the increase in an economy's output of goods and services.

Question 19

The standard way of measuring ________ is the change in a major price index.

A) inflation
B) consumer behavior
C) credit
D) investor preference

Question 20

The Fed, in interaction with banks and other units of the economy, create ________.

A) money and employment
B) employment and credit
C) money and credit
D) employment and debt

Question 21

Which of the below statements is FALSE?

A) Monetarists claim that policy that is based on known rules of growth in key monetary aggregates sustains stability in the price level, and that such stability fosters long-run economic growth and employment.
B) Monetarists believe that the money multiplier is basically steady, so that the link between reserves and the monetary aggregates can be identified.
C) The changes in interest rates that may result from changes in money demand should be allowed to affect the policy on reserves.
D) By 1982, the tight monetary policy had banished the worst of the inflation, which seemed to reach a bottom of about 3% to 4%.

Question 22

During 1997/1998, with strong economic growth and unemployment decreasing, Alan Greenspan and the Fed were faced with a dilemma. What was this dilemma?

A) They had to decide whether to tighten monetary policy to slow economic growth.
B) They had to decide whether or not to tighten monetary policy to rapidly increase economic growth.
C) They had to decide whether or not to loosen monetary policy to slow economic growth.
D) They had to decide whether or not to let the economy continue to grow at a sustainable rate equal to previous standards.

Question 23

A "weak" dollar contributes to inflation, as U.S. buyers pay more for the many goods they do import.

Question 24

The Fed's policy necessarily represents trade-offs among its various goals, which have different levels of relative importance at different times, depending on the state of the economy.

Question 25

The Fed's policy beginning in 1983 was to keep the growth in borrowed reserves within some specified range. As a result, the Fed ________.

A) supplied reserves through open market purchases when borrowed reserves fell.
B) refused reserves through open market purchases when borrowed reserves rose.
C) supplied reserves through open market sells when borrowed reserves rose.
D) supplied reserves through open market purchases when borrowed reserves rose.

Question 26

Interestingly, in recent years, many central banks have adopted inflation, despite certain problems in measurement, as a key intermediate variable.

Question 27

During the late 1990s and the 2000s, due to the moderately strong U.S. dollar, strong U.S. economic growth and weak or anemic economic growth in much of the rest of the world, the United States experienced a very large but decreasing trade deficit.

Question 28

The Fed can be certain how much impact any change in reserves will have on short-term rates.

Question 29

The Fed has numerous and complex goals related to conditions in the overall economy, which include price stability, high employment, economic growth, and stability in interest rates and the dollar's value in foreign currencies.

Question 30

In the mid 1980s, two developments of note occurred. The first was the need for the Fed, which it publicly acknowledged, to become concerned with the level and stability of the U.S. dollar's foreign currency exchange rate. What was the second development?

A) It was the shocking fall in equity prices around the world in October 1987.
B) It was the shocking increase in equity prices around the world after the fall in prices in October 1987.
C) It was the realization that nothing could be done to curb the instability in the financial markets.
D) It was the realization that nothing could be done to provide necessary liquidity.

Question 31

The goals are numerous, but the Fed's capabilities are limited to the simple menu of (1) trying to raise the rate of growth in the money supply by providing more reserves to banks, and (2) trying to reduce the rate of monetary expansion by reducing the reserves in the banking system.

Question 32

Policies expanding the money supply and stimulating growth are beneficial for all circumstances.

Question 33

Observability refers to the notion that an operating target must have an expected connection with the intermediate target, which itself must eventually affect the economy in a way that is consistent with the Fed's goals.

Question 34

Overall, according to the Keynesian view of the economy, a ________ in the fed funds rate should lead to a(n) ________ level of output and employment in the economy.

A) decline; lower
B) rise; higher
C) decline; unknown
D) None of these

Question 35

Which of the below has occurred during the 21st Century?

A) After the stock market reversed and the bubble began to burst, the Fed increased the Fed funds rate from 2% to 5% beginning in May 2000 to successfully avert a recession induced by the stock market.
B) During June 2004, the Fed began a series of 17 consecutive 0.25% decreases in the Fed funds rate, to decrease the Fed funds rate to 5.25% during June 2006.
C) Bernanke totally reversed Greenspan's policies being viewed as more open with respect to communication about the Fed's policy and open to promoting more open discussion.
D) The urgency about the economy and the financial system continued to intensify and the Fed increased its funds rate between regularly scheduled FOMC meetings in January 2008.

Question 36

During the early 1990s, what did the Fed succeed in doing?

A) The Fed successfully reduced rates across the maturity spectrum.
B) The fed funds rate rose to 13%, and the yield on 10-year government bonds was also high, touching 15.72% in December 1993.
C) It succeeded in aiding an economic expansion that unfortunately caused a rising civilian unemployment rate.
D) It spearheaded an economic recession with a falling real GDP.

Question 37

One historic consequence of the policy of supplying reserves according to movements in the fed funds rate was that the Fed did not concern itself ________.

A) with the behavior of the level of reserves, or of the monetary base and other monetary aggregates, which expanded in an erratic way.
B) with the behavior of discount rates, or of the discount window, and other interest rates, which changed in erratic ways.
C) with the behavior of exchange rates, or of the dollar and other foreign currencies, which moved in erratic fashions.
D) None of these

Question 38

The expansion in the monetary aggregates was particularly rapid from 1975 to 1978, and that expansion (along with the oil shocks) led to ________.

A) mild inflation and a decline in the dollar's value.
B) serious inflation and a decline in the dollar's value.
C) serious inflation and a rise in the dollar's value.
D) mild inflation and a moderate decline in the dollar's value.

Question 39

Overall during Greenspan's tenure there were two recessions, ________.

A) during 1981 and a very mild recession during the 1987 crash.
B) during 1991 and a very mild recession during 2001 after 9/11 terrorist attack.
C) during the 9/11 terrorist attack and during the Internet bubble.
D) None of these

Question 40

As of 1995, what did the Fed succeed in doing?

A) The Fed succeeded is helping the economy achieve inflationary growth.
B) The Fed succeeded is helping lead the country into a recession.
C) The Fed helped achieve a desirable strong growth and a low inflation that was referred to as the "new paradigm."
D) The Fed helped achieve an undesirable weak growth and a high inflation that was referred to as the "new paradigm."

Question 41

The Fed seeks to achieve its goals through a form of chain reaction. Describe the chronology and structure of this chain reaction explaining how operating and intermediate targets are used to achieve the Fed's ultimate goals?

Question 42

In the Keynesian view, the Fed's decision to reduce the fed funds rate, by increasing the banking system's excess reserves, should have certain consequences. Explain these consequences.

Question 43

During March 2008, there were surprisingly no concerns that a bankruptcy of Bear Stearns was imminent.

Question 44

During March 2008, the Fed introduced a new lending facility, called the Primary Dealer Credit Facility, for investment banks and securities dealers. Briefly explain the purpose of this new facility and how it contrasts with that used by commercial banks.

Question 45

The account of the widely accepted goals of monetary policy reveals a profound problem in the conduct of monetary policy. The goals are numerous, but the Fed's capabilities are limited. Describe the two limitations.

Question 46

Discuss two problems that the Fed has in implementing monetary policy.

Question 47

Bernanke became chairman during the final 25 basis point increases in the Fed funds rate to 5.25% on June 29, 2006, and maintained this rate through the remainder of 2006 and the first half of 2007.

Question 48

Intermediate targets may include monetary aggregates and interest rates, but never include foreign currency exchange rates.

Question 49

Identify and briefly describe three of the major goals of Fed policy.

Question 50

The targets of Fed policy have changed many times in the past 25 years.

Question 51

Keynesians adopt a monetary policy that largely calls for targeting long-term interest rates.