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Money, Banking, and Financial Markets Practice Test: Monetary Policy
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Monetary policy in the United States is the actions and communications of the Federal Reserve (Fed) to promote stable prices, maximum employment, and moderate long-term interest rates. The Fed is the central bank of the US, and Congress has instructed it to pursue these goals. The Fed's monetary policy influences the cost of consumer debt, such as mortgages, credit cards, and automobile loans.  The Fed's monetary policy is implemented primarily by targeting the federal funds rate, which is the interest rate that banks charge each other for lending or borrowing reserve balances overnight. The... Show more
Money, Banking, and Financial Markets Practice Test: Monetary Policy
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25 Questions

1. Which of the following is an advantage of the Fedʹs ʺjust do itʺ approach to monetary policy?
2. The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is
3. The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed
4. The Fedʹs failure to exercise effective control over the money supply during the 1979 -1982 period
5. A central bank has ________ chance to identify a credit -driven bubble compared to an irrational exuberance bubble.
6. If the desired intermediate target is an interest rate, the preferred policy instrument would be
7. The rate of inflation tends to remain constant when
8. The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity.
9. Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasized
10. The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness, putting pressure on the Fed to pursue a more ________ monetary policy.
11. If the desired intermediate target is a monetary aggregate, which of the following would be the most preferred policy instrument?
12. According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase.
13. The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits
14. The Fed accidentally discovered open market operations when
15. ________ bubble is driven entirely by unrealistic optimistic expectations.
16. In practice, the Fedʹs policy of targeting money market conditions in the 1960s proved to be
17. When compared to the Fedʹs ________ anchor approach, ________ targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles.
18. Suppose interest rates are kept very low for a long time such that there is a spike in the amount of lending. Everything else held constant, this could cause ________ bubble.
19. The Fedʹs mistakes of the early 1930s were compounded by its decision to
20. In its earliest years, the Federal Reserveʹs guiding principle for the conduct of monetary policy was known as the
21. The monetary policy strategy that provides an immediate signal on target achievement is
22. The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as
23. The Fed can engage in preemptive strikes against a rise in inflation by ________ the federal funds interest rate; it can act preemptively against negative demand shocks by ________ the federal funds interest rate.
24. Using Taylorʹs rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be
25. During World War II, whenever interest rates would rise and the price of bonds would begin to fall, the Fed would

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