Chapter 18 Conduct of Monetary Policy: Goals and Targets 1
Chapter 18
Conduct of Monetary Policy: Goals and Targets
Multiple Choice
1)The objectives of the Federal Reserve in its conduct of monetary policy include
(a)economic growth.
(b)price stability.
(c)high employment.
(d)all of the above.
Answer:
Question Status: Previous Edition
2)The goals of monetary policy include
(a)output stability.
(b)price stability.
(c)stability of the financial markets.
(d)all of the above.
(e)both (b) and (c) of the above.
Answer:
Question Status: New
3)The goals of monetary policy include
(a)output stability.
(b)stability in the foreign exchange markets.
(c)maintenance of the gold standard.
(d)all of the above.
(e)both (a) and (b) of the above.
Answer:
Question Status: New
4)Even if the Fed could completely control the money supply, monetary policy would have critics because
(a)the Fed is asked to achieve many goals, some of which are incompatible with others.
(b)the Fed’s goals do not include high employment, making labor unions a critic of the Fed.
(c)the Fed’s primary goal is exchange rate stability, causing it to ignore domestic economic conditions.
(d)it is required to keep Treasury security prices high.
(e)all of the above.
Answer:
Question Status: Study Guide
5)High unemployment is undesirable because it
(a)results in a loss of output.
(b)always increases inflation.
(c)always increases interest rates.
(d)reduces the federal budget deficit.
(e)reduces idle resources.
Answer:
Question Status: New
6)When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called
(a)structural unemployment.
(b)frictional unemployment.
(c)cyclical unemployment.
(d)underemployment.
Answer:
Question Status: Previous Edition
7)Unemployment resulting from a mismatch of workers’ skills and job requirements is called
(a)frictional unemployment.
(b)structural unemployment.
(c)seasonal unemployment.
(d)cyclical unemployment.
(e)the natural rate of unemployment.
Answer:
Question Status: New
8)The goal for high employment should seek a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the
(a)frictional level of unemployment.
(b)structural level of unemployment.
(c)natural rate level of unemployment.
(d)Keynesian rate level of unemployment.
Answer:
Question Status: Previous Edition
9)Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by
(a)encouraging firms to invest.
(b)encouraging people to save.
(c)doing both (a) and (b) of the above.
(d)doing neither (a) nor (b) of the above.
Answer:
Question Status: Previous Edition
10)Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by
(a)encouraging firms to invest and people to save.
(b)encouraging firms to limit their price increases.
(c)doing both (a) and (b) of the above.
(d)doing neither (a) nor (b) of the above.
Answer:
Question Status: Previous Edition
11)Supply-side economic policies seek to
(a)increase taxes to encourage saving.
(b)raise interest rates through contractionary monetary policy.
(c)increase federal government expenditures.
(d)increase consumption expenditures by increasing taxes.
(e)increase saving and investment using tax incentives.
Answer:
Question Status: New
12)Price stability is desirable because
(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.
Answer:
Question Status: Previous Edition
13)Inflation results in
(a)ease of planning for the future.
(b)ease of comparing prices over time.
(c)social harmony.
(d)lower nominal interest rates.
(e)difficulty interpreting relative price movements.
Answer:
Question Status: New
14)Economists feel that countries recently suffering hyperinflations have experienced
(a)reduced growth.
(b)increased growth.
(c)reduced prices.
(d)lower interest rates.
(e)none of the above.
Answer:
Question Status: New
15)The primary goal of the European Central Bank is
(a)price stability.
(b)exchange rate stability.
(c)interest rate stability.
(d)high employment.
(e)all of the above.
Answer:
Question Status: New
16)The Federal Reserve desires interest rate stability because
(a)it allows for less uncertainty about future planning.
(b)interest-rate volatility often leads to demands to curtail the Fed’s power.
(c)it guarantees full employment.
(d)of both (a) and (b) of the above.
Answer:
Question Status: Previous Edition
17)Upward movements in interest rates
(a)create great hostility toward the central bank and lead to demands that the central bank’s power be curtailed.
(b)make it more difficult for construction firms to plan how many houses they should build.
(c)reduce consumers’ willingness to purchase houses.
(d)do all of the above.
(e)do only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
18)Upward movements in interest rates
(a)create great hostility toward the central bank and lead to demands that the central bank’s power be curtailed.
(b)make it more difficult for construction firms to plan how many houses they should build.
(c)increase consumers’ willingness to purchase houses.
(d)do all of the above.
(e)do only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
19)Upward movements in interest rates do all of the following except
(a)create great hostility toward the central bank and lead to demands that the central bank’s power be curtailed.
(b)make it more difficult for construction firms to plan how many houses they should build.
(c)increase consumers’ willingness to purchase houses.
(d)both (a) and (b) of the above.
Answer:
Question Status: Revised
20)The Federal Reserve System was created to
(a)make it easier to finance budget deficits.
(b)promote financial market stability.
(c)lower the unemployment rate.
(d)promote rapid economic growth.
(e)all of the above.
Answer:
Question Status: New
21)Which economic goals of monetary policy make planning for the future easier?
(a)Price level stability
(b)Interest rate stability
(c)Exchange rate stability
(d)All of the above
(e)None of the above
Answer:
Question Status: New
22)Which set of goals can, at times, conflict in the short run?
(a)High employment and economic growth
(b)Interest rate stability and financial market stability
(c)High employment and price level stability
(d)Exchange rate stability and financial market stability
(e)All of the above sets of goals can be in conflict
Answer:
Question Status: New
23)The central bank’s game plan can be described as follows:
(a)The central bank uses its policy tools to adjust intermediate targets that directly impact its operating targets in a way that allows the central bank to achieve its goals.
(b)The central bank uses its policy tools to adjust operating targets that directly impact its intermediate targets in a way that allows the central bank to achieve its goals.
(c)The central bank uses its operating targets to adjust its intermediate targets that directly impact its policy tools in a way that allows the central bank to achieve its goals.
(d)None of the above.
Answer:
Question Status: Previous Edition
24)If the central bank’s strategy for conducting monetary policy is thought of as a game plan that proceeds in stages, then the game plan can be summarized as follows:
(a)The central bank selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets; finally, it adjusts its policy tools to affect the desired targets and goals.
(b)The central bank selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets; finally, it adjusts its policy tools to affect the desired targets and goals.
(c)The central bank selects its policy tools, then its intermediate targets consistent with its policy tools, then the operating targets consistent with the intermediate targets; finally, it adjusts its policy goals to affect the desired targets and tools.
(d)The central bank selects its policy tools, then the operating targets consistent with achieving its policy tools, then the intermediate targets consistent with its operating targets; finally, it adjusts its policy goals to affect the desired targets and tools.
(e)None of the above.
Answer:
Question Status: Revised
25)Which of the following is not an operating target?
(a)Nonborrowed reserves
(b)Monetary base
(c)Federal funds interest rate
(d)Discount rate
(e)All are operating targets
Answer:
Question Status: Previous Edition
26)Which of the following is a potential operating target for the central bank?
(a)The monetary base
(b)The M1 money supply
(c)Nominal GNP
(d)The discount rate
Answer:
Question Status: Previous Edition
27)Which of the following is a potential operating target for the central bank?
(a)Nonborrowed reserves
(b)The federal funds rate
(c)The monetary base
(d)Each of the above
Answer:
Question Status: Previous Edition
28) potential operating target for the Fed is
(a)the monetary base.
(b)borrowed reserves.
(c)the federal funds rate.
(d)the nonborrowed monetary base.
(e)all of the above.
Answer:
Question Status: Study Guide
29)Due to the lack of timely data for the price level and economic growth, the Fed’s strategy
(a)targets the exchange rate, since the Fed can control this variable.
(b)targets the price of gold, since it is closely related to economic activity.
(c)uses an intermediate target, such as an interest rate.
(d)stabilizes the consumer price index, since the Fed can control the CPI.
(e)has been to abandon policy goals.
Answer:
Question Status: Study Guide
30)An advantage of an intermediate targeting strategy is that it provides the central bank with
(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)each of the above.
(e)only (a) and (b) of the above.
Answer:
Question Status: Previous Edition
31)If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because
(a)of fluctuations in the money demand function.
(b)of fluctuations in the consumption function.
(c)bond values will tend to remain stable.
(d)of fluctuations in the business cycle.
Answer:
Question Status: Previous Edition
Figure 18-1
32)Referring to Figure 18-1, fluctuations in money demand between Md and Md cause
(a)fluctuations of the money supply.
(b)the interest rate to remain stable at i*.
(c)interest rate fluctuations between i* and i.
(d)interest rate fluctuations between i and i.
(e)none of the above.
Answer:
Question Status: New
33)Figure 18-1 depicts a situation of
(a)interest rate stability.
(b)stability of money demand.
(c)instability of money supply.
(d)interest rate instability.
(e)none of the above.
Answer:
Question Status: New
34)In Figure 18-1, the central bank is targeting
(a)the interest rate.
(b)the money supply.
(c)money demand.
(d)all of the above.
(e)none of the above.
Answer:
Question Status: New
35)If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent,
(a)fluctuations in the money supply will be small.
(b)fluctuations in the money supply will be large.
(c)the Fed will probably quickly abandon this policy, as it did in the 1960s.
(d)the Fed will probably quickly abandon this policy, as it did in the 1950s.
Answer:
Question Status: Previous Edition
36)Money demand fluctuations cause the Fed to lose control over a monetary aggregate if the Fed targets
(a)a monetary aggregate.
(b)the monetary base.
(c)an interest rate.
(d)nominal GDP.
(e)all of the above.
Answer:
Question Status: Study Guide
Figure 18-2
37)Referring to Figure 18-2, if the central bank wishes to keep the interest rate at the target value i*, it must
(a)increase the money supply to Ms when money demand increases to Md.
(b)allow the interest rate to increase when money demand increases.
(c)hold the money supply constant at Ms* when money demand falls to Md.
(d)allow the interest rate to decrease when money demand decreases.
(e)none of the above.
Answer:
Question Status: New
38)Referring to Figure 18-2, an interest rate target requires that the central bank
(a)increase the money supply when money demand falls.
(b)increase the money supply when interest rates fall.
(c)reduce the money supply when money demand increases.
(d)reduce the money supply when interest rates fall.
(e)hold the money supply constant when money demand changes.
Answer:
Question Status: New
39)Referring to Figure 18-2, when money demand fluctuates between Md and Md, a policy of interest rate targeting results in
(a)interest rate fluctuations between i and i.
(b)money supply fluctuations between Ms and Ms.
(c)interest rate fluctuations between i* and i.
(d)money supply fluctuations between M* and Ms.
(e)no fluctuations in either the interest rate or money supply.
Answer:
Question Status: New
40)Referring to Figure 18-2, the target interest rate i* is attained when
(a)money demand is Md* and the money supply is Ms.
(b)money demand is Md and the money supply is Ms.
(c)money demand is Md and the money supply is Ms*.
(d)money demand is Md* and the money supply is Ms.
(e)money demand is Md and the money supply is Ms*.
Answer:
Question Status: New
41)Interest rates are difficult to measure because
(a)data on them are not timely available.
(b)real interest rates depend on the hard-to-determine expected inflation rate.
(c)they fluctuate too often to be accurate.
(d)they cannot be controlled by the Fed.
Answer:
Question Status: Previous Edition
42)Economists question the desirability of a real interest rate target because
(a)the Fed does not have direct control over real interest rates.
(b)changes in real interest rates have little effect on economic activity.
(c)real interest rates are extremely difficult to measure.
(d)all of the above are correct.
(e)only (a) and (c) of the above.
Answer:
Question Status: Study Guide
43)Which of the following criteria need not be satisfied for choosing an intermediate target?
(a)The variable must be measurable.
(b)The variable must be controllable.
(c)The variable must be predictable.
(d)The variable must be transportable.
Answer:
Question Status: Previous Edition
44)Which of the following criteria must be satisfied when selecting an intermediate target?
(a)The variable must be measurable and frequently available.
(b)The variable must be controllable with the use of the central bank’s policy tools.
(c)The variable must have a predictable impact on the policy goal.
(d)Each of the above.
Answer:
Question Status: Previous Edition
45)Which of the following is not a requirement in selecting an intermediate target?
(a)Measurability
(b)Controllability
(c)Flexibility
(d)Predictability
Answer:
Question Status: Previous Edition
46)A problem with using nominal GDP as an intermediate target is that
(a)data for nominal GDP are available quarterly.
(b)data for nominal GDP are highly accurate.
(c)data for nominal GDP are not related to inflation and economic growth.
(d)all of the above.
(e)both (b) and (c) of the above.
Answer:
Question Status: New
47)Which of the following best explains why the Federal Reserve does not use nominal GDP as an intermediate target?
(a)Nominal GDP has little connection with Fed policy goals.
(b)Nominal GDP is unaffected by open market operations.
(c)The Fed has little direct control over nominal GDP.
(d)None of the above.
Answer:
Question Status: Previous Edition
48)When it comes to choosing an operating target, both the _____ rate and _____ aggregates are measured accurately and are available daily with almost no delay.
(a)three-month T-bill; monetary
(b)three-month T-bill; reserve
(c)federal funds; monetary
(d)federal funds; reserve
Answer:
Question Status: Previous Edition
49)When it comes to choosing an operating target, both the _____ rate and _____ aggregates are easily controllable using the Fed’s policy tools.
(a)federal funds; monetary
(b)federal funds; reserve
(c)three-month T-bill; monetary
(d)thirty-year T-bond; reserve
Answer:
Question Status: Previous Edition
50)If the desired intermediate target is an interest rate, then the preferred operating target will be a(n) _____ variable like the _____.
(a)interest rate; three-month T-bill rate
(b)interest rate; federal funds rate
(c)monetary aggregate; monetary base
(d)monetary aggregate; nonborrowed base
Answer:
Question Status: Previous Edition
51)If the desired intermediate target is a monetary aggregate, then the preferred operating target will be a(n) _____ variable like the _____.
(a)interest rate; three-month T-bill rate
(b)interest rate; federal funds rate
(c)reserve aggregate; monetary base
(d)reserve aggregate; narrow money supply M1
Answer:
Question Status: Previous Edition
52)If the desired intermediate target is a monetary aggregate, which of the following would be the most preferred operating target?
(a)The federal funds interest rate
(b)The 90-day T-bill rate
(c)The 180-day T-bill rate
(d)The monetary base
Answer:
Question Status: Previous Edition
53)If the desired intermediate target is an interest rate, the preferred operating target would be
(a)the federal funds interest rate.
(b)the monetary base.
(c)nonborrowed reserves.
(d)borrowed reserves.
(e)the discount rate.
Answer:
Question Status: New
54)In its earliest years, the Federal Reserve’s guiding principle for the conduct of monetary policy was known as the
(a)real bills doctrine.
(b)liberal liquidity doctrine.
(c)free reserves doctrine.
(d)conservative liquidity doctrine.
(e)the quantity theory of money.
Answer:
Question Status: Revised
55)The guiding principle for the conduct of monetary policy that held that as long as loans were being made for “productive” purposes, then providing reserves to the banking system to make sure these loans would not be inflationary became known as the