Deck 15: Monetary Policy

Question 1

A potential problem with adopting an inflation-control target i.is that the Reserve Bank will raise interest rates and push the economy into recession.
Ii)is that it provides an anchor for future expectations of inflation.
Iii)is that Reserve Bank policy actions are hidden from financial markets.

A)i and ii
B)iii only
C)i only
D)ii only
E)None of the above answers is correct.

Answer 1

C

Question 2

Which of the following are the tools used by the Reserve Bank to move the actual cash rate to the target cash rate?
I)Open market operations
Ii)The interest rate on exchange settlement balances
Iii)Selling foreign reserves

A)i only
B)ii only
C)iii only
D)i and ii
E)i,ii and iii

Answer 2

D

Question 3

The main objectives of monetary policy include all of the following EXCEPT

A)the stability of the currency in Australia.
B)keeping the long-term nominal interest rate equal to the real interest rate plus the inflation rate.
C)the maintenance of full unemployment in Australia.
D)the economic prosperity and welfare of the people of Australia.
E)keeping the inflation rate within the target of 2 to 3 per cent.

Answer 3

B

Question 4

The Reserve Bank can decide to control the quantity of the monetary base or its price.The monetary base has two prices:

A)the cash rate in the inter-bank overnight loans market and the exchange rate.
B)the real interest rate and the inflation rate.
C)the exchange rate and real interest rate.
D)the cash rate in the inter-bank overnight loans market and the discount rate.
E)the required reserves rate and the price level.

Question 5

The Taylor rule is an example of

A)an instrument rule based on M1.
B)a targeting rule focused on the monetary base.
C)an instrument rule focused on the monetary base.
D)a targeting rule focused on cash rate.
E)an instrument rule focused on the cash rate.

Question 6

The Reserve Bank pays interest on banks' reserve deposits,called exchange settlement accounts,equal to the cash rate less 0.25 per cent.This puts a ________ on the cash rate as it can't fall more than ________ below the cash rate.

A)floor;50 basis points
B)ceiling;50 basis points
C)ceiling;25 basis points
D)floor;100 basis points
E)floor;25 basis points

Question 7

The interest rate in the inter-bank loans market is called the

A)cash rate.
B)required reserve rate.
C)real interest rate.
D)coupon rate.
E)discount rate.

Question 8

Currently the Reserve Bank targets

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

Question 9

Which of the following statements are correct?
I)The Reserve Bank has responsibility for the conduct of monetary policy.
Ii)The Commonwealth government determines monetary policy.
Iii)The Reserve Bank Act requires regular consultation on monetary policy between the governor and the treasurer.

A)i only
B)ii only
C)i and iii
D)i and ii
E)iii only

Question 10

An instrument rule is based on ________ of the economy while a targeting rule is based on ________ of the economy.

A)a forecast;the previous state
B)the current state;the previous state
C)a forecast;the current state
D)the current state;a forecast
E)the previous state;the current state

Question 11

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

A)monetary base.
B)cash rate.
C)exchange rate.
D)discount rate.
E)flexible exchange rate.

Question 12

The benefit of adopting an inflation-control target i.is that the Reserve Bank's policy actions are clearly understood in financial markets.
Ii)is that it provides an anchor for future expectations of inflation.
Iii)is that Reserve Bank policy actions are hidden from financial markets.

A)i and ii
B)iii only
C)i only
D)ii only
E)None of the above answers is correct.

Question 13

A prerequisite for achieving the objectives of monetary policy is

A)guaranteeing bank loans.
B)maintaining an inflation rate of zero.
C)creating an inflation target.
D)creating financial stability in which financial markets function normally to allocate capital resources and risk.
E)avoiding financial crisis.

Question 14

Which of the following are policy instruments available to the Reserve Bank as it tries to achieve its macroeconomic goals?
I)Government expenditure on goods and services and taxes.
Ii)The government budget deficit or surplus.
Iii)Changes in the cash rate.

A)iii only
B)ii only
C)i and ii
D)i and iii
E)ii and iii

Question 15

An inflation-targeting monetary policy strategy is when

A)the central bank aims to control the money supply.
B)the central bank targets government debt.
C)the central bank commits to reducing unemployment below the natural rate.
D)the central bank commits to an explicit inflation target.
E)None of the above.

Question 16

The Reserve Bank monetary policy objective is

A)to keep unemployment below the natural unemployment rate.
B)to maintain a zero per cent consumer price inflation rate.
C)to keep frictional unemployment at zero per cent over the business cycle.
D)to keep consumer price inflation between 2 and 3 per cent over the business cycle.
E)to maintain a zero per cent inflation rate.

Question 17

Which of the following is a monetary policy goal?
I)Keeping the inflation rate in the target of 2 to 3 per cent.
Ii)Attaining minimum employment.
Iii)The stability of the currency in Australia.

A)i only
B)ii only
C)iii only
D)i and iii
E)i,ii and iii

Question 18

Which of the following is a potential monetary policy instrument for the Reserve Bank?

A)The real interest rate
B)Loanable funds
C)The inflation rate
D)Firms' profit rates
E)The cash rate

Question 19

Control of monetary policy rests with

A)the Federal Treasury.
B)the Reserve Bank.
C)the Senate.
D)the Parliament of Australia.
E)the Prime Minister.

Question 20

To determine whether the goal of stable prices is being achieved,the Reserve Bank monitors

A)the trimmed-mean CPI.
B)the GDP price deflator.
C)the trimmed-mean producer price index.
D)the core GDP deflator inflation rate.
E)the CPI.

Question 21

Equilibrium in the market for bank reserves determines the

A)30-year government bond rate.
B)inflation rate.
C)price level.
D)cash rate.
E)exchange rate.

Question 22

The Reserve Bank is concerned about inflation and has ________ the cash rate.Due to substitution effects,other ________ interest rates will ________ almost immediately.

A)decreased;long-term;decrease
B)increased;short-term;increase
C)decreased;short-term;decrease
D)increased;short-term;decrease
E)increased;long-term;increase

Question 23

If the Reserve Bank decreases the cash rate,other short-term interest rates ________ and the quantity of money and the supply of loanable funds ________.

A)fall;decrease
B)rise;increase
C)rise;do not change
D)rise;decrease
E)fall;increase

Question 24

Suppose the Reserve Bank lowers the cash rate.The short-term impact is that other short-term interest rates ________,the exchange rate ________ and the quantity of money and supply of loanable funds ________.

A)fall;rises;decrease
B)fall;rises;increase
C)fall;falls;increase
D)rise;falls;increase
E)rise;rises;decrease

Question 25

To change the cash rate,the Reserve Bank

A)changes the income tax rate on interest income.
B)uses open market operations to change the quantity of reserves.
C)tells banks how much to charge.
D)increases or removes money from the stock market.
E)coordinates with banks on establishing the new cash rate.

Question 26

If the Reserve Bank increases the cash rate,other short-term interest rates ________ and the quantity of money and the supply of loanable funds ________.

A)fall;increase
B)rise;decrease
C)rise;do not change
D)rise;increase
E)fall;decrease

Question 27

During the 2008 global financial crisis the Reserve Bank cut the cash rate from 7 per cent per year to 3 per cent per year.To achieve the target of 3 per cent per year the Reserve Bank

A)decreased the monetary base and shifted the supply of reserves to the left.
B)increased the monetary base and shifted the supply of reserves to the right.
C)decreased the monetary base and shifted the supply of reserves to the right.
D)decreased the monetary base and shifted the demand of reserves to the right.
E)increased the monetary base and shifted the supply of reserves to the left.

Question 28

The short-term impacts of a decrease in the cash rate are

A)other short-term interest rates increase and the exchange rate falls.
B)other short-term interest rates increase and the quantity of money and loanable funds increases.
C)other short-term interest rates decrease and the exchange rate falls.
D)other short-term interest rates decrease and the quantity of money and loanable funds falls.
E)other short-term interest rates increase and the quantity of money and loanable funds falls.

Question 29

Steps in the transmission of monetary policy are

A)the Commonwealth government increases the budget deficit,which increases the money supply,which increases aggregate supply.
B)the Reserve Bank increases government expenditures on goods and services,leading to an increase in aggregate demand.
C)the Commonwealth government increases government expenditures on goods and services,leading to an increase in aggregate demand.
D)the Commonwealth government increases the money supply,which lowers the interest rate,and leads to an increase in aggregate demand.
E)the Reserve Bank lowers the cash rate,which lowers the real interest rate,and leads to an increase in aggregate demand.

Question 30

If the Reserve Bank decreases the cash rate,in the months following the long-term interest rate ________ and,other things being equal,consumption expenditure and investment ________.

A)rises;increase
B)falls;decrease
C)falls;increase
D)rises;do not change
E)rises;decrease

Question 31

After a few months following a change in the cash rate,

A)the inflation rate rises.
B)banks' reserves increase.
C)the long-term interest rate changes.
D)other short-term interest rates change.
E)None of the above answers is correct.

Question 32

If the Reserve Bank increases the cash rate,in the months following the long-term interest rate ________ and,other things being equal,consumption expenditure and investment ________.

A)falls;decrease
B)falls;increase
C)rises;decrease
D)rises;do not change
E)rises;increase

Question 33

In the market for bank reserves,if the target rate is higher than the cash rate,the Reserve Bank will take action to ________ reserves.

A)increase the demand for
B)decrease the demand for
C)decrease the supply of
D)increase both the demand for and the supply of
E)increase the supply of

Question 34

Suppose the Reserve Bank raises the cash rate.The short-term impact is that other short-term interest rates ________,the exchange rate ________ and the quantity of money and supply of loanable funds ________.

A)rise;rises;decrease
B)fall;rises;increase
C)fall;falls;increase
D)fall;rises;decrease
E)rise;falls;increase

Question 35

Which of the following is NOT an effect from a change in the cash rate?

A)A change in government expenditures
B)A change in the real interest rate
C)A change in aggregate demand
D)A change in investment
E)A change in the exchange rate

Question 36

By using open market operations,the Reserve Bank

A)adjusts the demand for reserves to keep bank rates in line with the cash rate target.
B)adjusts the supply and demand of reserves to keep the cash rate equal to its target.
C)controls banks' demand for reserves,thereby keeping the cash rate equal to its target.
D)adjusts the supply of reserves to keep the cash rate equal to its target.
E)None of the above answers is correct.

Question 37

If the Reserve Bank wants to raise the cash rate,it

A)instructs large commercial banks to sell government securities in the open market.
B)sells government securities in the open market.
C)buys government securities in the open market.
D)tells large commercial banks to raise their interest rates.
E)sells government securities in the foreign exchange market.

Question 38

The higher the cash rate,the ________ the opportunity cost of holding reserves,which ________ the incentive for banks to hold reserves.

A)lower;does not change
B)higher;decreases
C)lower;increases
D)higher;increases
E)lower;decreases

Question 39

Refer to the figure above.If the Reserve Bank raises the cash rate,in the days following,other short-term interest rates ________ and the exchange rate ________.

A)rise;rises
B)do not change;rises
C)fall;falls
D)rise;falls
E)rise;does not change

Question 40

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

A)movement down the demand for reserves curve.
B)movement up the demand for reserves curve.
C)leftward shift of the demand for reserves curve.
D)rightward shift of the demand for reserves curve.
E)None of the above answers is correct.

Question 41

If the Reserve Bank is concerned about inflation,its actions ________ long-term interest rates so that investment ________ and net exports ________.

A)lower;increases;increase
B)raise;increases;increase
C)lower;decreases;decrease
D)raise;decreases;decrease
E)lower;increases;decrease

Question 42

Suppose the Reserve Bank lowers the cash rate.Put the following changes in the order in which they occur,starting with the changes that take place almost immediately and ending with the changes that may occur up to a year afterwards: i.Quantity of money increases.
Ii)Short-term interest rates fall.
Iii)Aggregate demand increases.
Iv)The long-term real interest rate falls.

A)i-ii-iv-iii
B)ii-i-iii-iv
C)iii-iv-i-ii
D)i-ii-iii-iv
E)ii-i-iv-iii

Question 43

Suppose monetary policy results in the exchange rate falling.As a result,

A)exports increase and imports increase.
B)exports decrease and imports decrease.
C)net exports increase.
D)exports do not change because they are autonomous and imports decrease.
E)net exports decrease.

Question 44

In the long run,the real interest rate is determined by

A)the expected inflation rate.
B)savings supply and investment demand.
C)the multiplier effect.
D)Reserve Bank actions.
E)the nominal interest rate.

Question 45

When the Reserve Bank increases the cash rate,bank loans ________,the supply of loanable funds ________,and the real interest rate ________.

A)increase;increases;falls
B)do not change;decreases;rises
C)decrease;decreases;rises
D)decrease;does not change;rises
E)increase;increases;rises

Question 46

If the Reserve Bank raises the target cash rate,which of the following happens?

A)Net exports increase.
B)Real GDP increases.
C)The real interest rate falls.
D)The price level rises.
E)Aggregate demand decreases.

Question 47

If the Reserve Bank decreases the cash rate,other short-term interest rates ________ and the exchange rate ________.

A)fall;rises
B)do not change;rises
C)fall;falls
D)do not change;falls
E)fall;does not change

Question 48

If the Reserve Bank lowers the cash rate,which of the following occurs?

A)Consumption expenditure decreases.
B)Net exports decreases.
C)Government expenditures on goods and services increase.
D)The price of the dollar on the foreign exchange market increases.
E)Investment increases.

Question 49

If the Reserve Bank lowers the cash rate,

A)other short-term interest rates rise.
B)other short-term interest rates fall.
C)net exports decrease.
D)the price level falls.
E)Both answers A and C are correct.

Question 50

If the Reserve Bank increases interest rates,other things remaining the same,foreigners demand ________ dollars,thereby ________ the exchange rate.

A)the same number of;not affecting
B)fewer;increasing
C)fewer;decreasing
D)more;increasing
E)more;decreasing

Question 51

The Reserve Bank raises the cash rate.Which of the following changes occurs most rapidly?

A)The inflation rate decreases.
B)The exchange rate rises.
C)Consumption expenditure decreases.
D)Real GDP growth decreases.
E)Aggregate demand decreases.

Question 52

The Reserve Bank is concerned about inflation and alters the target cash rate.Its policy will ________ short-term interest rates and,in the foreign exchange market,lead to the value of the Australian dollar ________.

A)raise;rising
B)raise;not changing
C)lower;not changing
D)lower;falling
E)lower;rising

Question 53

Suppose the Reserve Bank raises the cash rate.Put the following changes in the order in which they occur,starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards: i.Short-term interest rates rise.
Ii)Long-term interest rate rises.
Iii)Aggregate demand decreases.
Iv)Inflation rate decreases.

A)ii-i-iv-iii
B)i-ii-iii-iv
C)i-iii-ii-iv
D)i-ii-iv-iii
E)ii-i-iii-iv

Question 54

Suppose the Reserve Bank raises the cash rate.In the months that follow,the quantity of money and the supply of loanable funds ________,and the long-term real interest rate ________.

A)increase;falls
B)increase;rises
C)decrease;rises
D)does not change;rises
E)decrease;falls

Question 55

An increase in the cash rate ultimately results in ________ in the long-term real interest rate which leads to a ________ in investment.

A)a decrease;a decrease
B)an increase;a decrease
C)a decrease;an increase
D)an increase;an increase
E)a decrease;no change

Question 56

The Reserve Bank raises the cash rate.Which of the following changes takes the longest time before it occurs?

A)Aggregate demand decreases.
B)The supply of loanable funds decreases.
C)The exchange rate rises.
D)The quantity of money decreases.
E)Short-term interest rates rise.

Question 57

If the Reserve Bank buys government securities,other things the same,the exchange rate ________ and Australian exports ________.

A)rises;increase
B)falls;do not change because they are autonomous expenditure
C)rises;decrease
D)falls;decrease
E)falls;increase

Question 58

Suppose the Reserve Bank lowers the cash rate.In the months that follow,the quantity of money and the supply of loanable funds ________,and the long-term real interest rate ________.

A)decrease;rises
B)decrease;falls
C)increase;rises
D)increase;falls
E)do not change;rises

Question 59

A change in monetary policy affects

A)consumption expenditure,productivity and net exports.
B)government expenditures on goods and services because it affects the government's budget balance.
C)investment,government expenditures on goods and services,and net exports.
D)consumption expenditure,investment and net exports.
E)consumption expenditure,government expenditures on goods and services,and net exports.

Question 60

When the Reserve Bank raises the cash rate,almost immediately ________,and a few weeks later the ________.

A)long-term interest rates rise;quantity of money and supply of loanable funds increase
B)short-term interest rates rise;quantity of money and supply of loanable funds decrease
C)short-term interest rates fall;quantity of money and supply of loanable funds decrease
D)short-term interest rates fall;quantity of money and supply of loanable funds increase
E)long-term interest rates rise;quantity of money and supply of loanable funds decrease

Question 61

When the Reserve Bank wants to slow inflation,it

A)increases taxes on interest income.
B)lowers the cash rate.
C)cuts the cash rate target aggressively to almost zero.
D)increases aggregate income,output and employment.
E)raises the cash rate target.

Question 62

Because investment,consumption expenditure and net exports are interest-sensitive components of expenditure,a ________ in the cash rate brings ________ in ________.

A)fall;an increase;aggregate demand
B)fall;a decrease;aggregate supply
C)fall;a decrease;aggregate demand
D)rise;an increase;aggregate demand
E)rise;an increase;aggregate supply

Question 63

If the Reserve Bank is concerned about a possible recession,it ________ the target cash rate and ________ securities in open market operations.The supply of money ________ and the short-term interest rate ________.

A)lowers;sells;decreases;rises
B)raises;buys;increases;falls
C)lowers;buys;increases;falls
D)raises;sells;increases;rises
E)raises;buys;decreases;falls

Question 64

The Reserve Bank raises the target cash rate when it

A)fears inflation.
B)fears recession.
C)wants to encourage bank lending.
D)cannot change the quantity of money.
E)wants to increase the quantity of money.

Question 65

If the Reserve Bank lowers the cash rate,eventually the

A)AD curve shifts leftward,decreasing real GDP and lowering the price level.
B)AS curve shifts leftward,decreasing real GDP and raising the price level.
C)AD curve shifts leftward,decreasing real GDP and raising the price level.
D)AD curve shifts rightward,increasing real GDP and raising the price level.
E)AS curve shifts rightward,decreasing real GDP and raising the price level.

Question 66

When the Reserve Bank is worried about inflation,it ________ the target cash rate and,in the short term,________ the real interest rate.

A)lowers;raises
B)lowers;lowers
C)raises;raises
D)raises;lowers
E)does not change;raises

Question 67

If the Reserve Bank uses open market operations to offset a recession,it ________ government securities in order to ________ the cash rate.

A)sells;lower
B)buys;lower
C)buys;not change
D)sells;raise
E)buys;raise

Question 68

The Reserve Bank fears that the Australian economy is growing too slowly and in danger of experiencing a recession.To move the economy back to its potential GDP,the most likely policy action for the Reserve Bank is to ________ the target cash rate and thus ________.

A)raise;decrease aggregate demand
B)lower;decrease aggregate supply
C)raise;increase aggregate demand
D)lower;increase aggregate demand
E)lower;increase aggregate supply

Question 69

The Reserve Bank is concerned that inflation might occur.To help eliminate this possibility,it could ________ government securities to ________ the cash rate in the short run.

A)sell;lower
B)sell;raise
C)buy;raise
D)buy;lower
E)sell;not change

Question 70

To fight a recession,an appropriate monetary policy would be that the Reserve Bank conducts an open market operation that ________ government securities,________ the cash rate,and ________ aggregate demand.

A)sells;raises;increases
B)buys;lowers;increases
C)sells;lowers;increases
D)buys;lowers;decreases
E)sells;raises;decreases

Question 71

Using the data in the above table,if potential GDP for this economy is $25 billion,then in order to restore full employment,the cash rate can be

A)raised so that consumption expenditure,investment and net exports increase.
B)lowered so that consumption expenditure,investment and net exports increase.
C)lowered so that government expenditure on goods and services increases.
D)raised so that net exports increase.
E)lowered so that consumption expenditure and investment increase,though net exports decrease.

Question 72

In the short run,lowering the cash rate shifts the aggregate demand curve ________ so that real GDP ________ and the price level ________.

A)rightward;increases;rises
B)leftward;decreases;rises
C)leftward;decreases;falls
D)rightward;decreases;rises
E)rightward;increases;falls

Question 73

If the Reserve Bank lowers the interest rate,then

A)consumption expenditure decreases and investment increases.
B)both consumption expenditure and investment decrease.
C)only consumption expenditure decreases.
D)only investment decreases.
E)net exports will increase.

Question 74

If the Reserve Bank fears inflation,it ________ by ________ government securities to ________ the cash rate.

A)decreases aggregate demand;selling;raise
B)increases aggregate demand;selling;raise
C)decreases aggregate supply;selling;lower
D)increases aggregate supply;buying;lower
E)decreases aggregate supply;buying;raise

Question 75

When the economy is in a recession,the Reserve Bank can ________ the cash rate,which ________ aggregate demand and ________ real GDP.

A)lower;increases;decreases
B)lower;increases;increases
C)raise;decreases;increases
D)raise;increases;decreases
E)lower;decreases;decreases

Question 76

The economy is at the equilibrium shown as point a in the above figure.To restore the economy to potential GDP,the Reserve Bank should

A)sell government securities to lower the cash rate and thereby decrease aggregate demand.
B)buy government securities to raise the cash rate and thereby decrease aggregate demand.
C)buy government securities to raise the cash rate and thereby increase aggregate supply.
D)sell government securities to raise the cash rate and thereby increase aggregate demand.
E)buy government securities to lower the cash rate and thereby increase aggregate demand.

Question 77

Using the data in the above table,if potential GDP for this economy is $25 billion,then at the present moment real GDP is

A)at the full-employment level of output.
B)less than potential GDP.
C)greater than potential GDP.
D)not comparable to potential GDP.
E)equal to potential GDP.

Question 78

The economy is at the equilibrium shown at point a in the above figure.If the Reserve Bank

A)lowers the cash rate,the economy moves to an equilibrium at point b.
B)sells government securities,the economy moves to an equilibrium at point c.
C)raises the cash rate,the economy moves to an equilibrium at point c.
D)sells government securities,the economy moves to an equilibrium at point b.
E)None of the above is correct because the economy will remain at point a in any case.

Question 79

In a recession,the Reserve Bank's monetary policy aims to ________ the real interest rate,________ aggregate demand,and ________ aggregate supply.

A)decrease;increase;increase
B)decrease;increase;not change
C)increase;decrease;not change
D)increase;not change;increase
E)increase;increase;increase

Question 80

To fight a recession,the Reserve Bank can

A)lower the cash rate by selling securities and decrease the supply of reserves.
B)lower the cash rate by buying securities and increase the supply of reserves.
C)raise the cash rate by buying securities and decrease the supply of reserves.
D)raise the cash rate by selling securities and increase the supply of reserves.
E)lower income taxes on interest income.