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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

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 Federal Open Market Committee (FOMC) is the Fed's monetary policymaking body, and it sets the target range for the federal funds rate. The FOMC also issues forward guidance to shape market expectations about interest rates and financial conditions.

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Money, Banking, and Financial Markets Practice Test: Monetary Policy

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1. Targeting interest rates can be procyclical because

an increase in income increases interest rates, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income.an increase in income increases the monetary base and money supply, causing the Fed to buy bonds to increase interest rates and income.an increase in the monetary base increases the money supply, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income.an increase in interest rates increases income, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income.

2. The monetary policy strategy that relies on a stable money-income relationship is

the implicit nominal anchor.inflation targeting.exchange-rate targeting.monetary targeting.

3. International policy coordination refers to

central banks in major nations acting without regard to the global consequences of their policies.central banks all adopting identical policies.central banks in major nations pursuing only domestic objectives.central banks adopting policies in pursuit of joint objectives.

4. If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent,

fluctuations of nonborrowed reserves will be small.fluctuations of nonborrowed reserves will be large.the Fed will probably quickly abandon this policy, as it did in the 1960s.the Fed will probably quickly abandon this policy, as it did in the 1950s.

5. 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.

raising; raisingraising; loweringlowering; raisinglowering; lowering

6. The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed

had shifted to the monetary base as an operating target.had shifted to total reserves as an operating target.had shifted to borrowed reserves as an operating target.never intended to target monetary aggregates.

7. Which of the following is NOT a disadvantage to inflation targeting?

There is potential for larger output fluctuations.There is a lack of transparency.Inflation targets could impose a rigid rule on policymakers.There is a delayed signal about achievement of the target.

8. If the desired intermediate target is an interest rate, the preferred policy instrument would be

the federal funds rate.the monetary base.nonborrowed reserves.borrowed reserves. E) the discount rate.

9. Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the

federal funds interest rate.money supply.monetary base.exchange rate.

10. When compared to the Fedʹs ________ anchor approach, ________ targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles.

implicit; monetarynominal; monetarynominal; inflationimplicit; inflation

11. The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is

interest-rate targeting.inflation targeting.monetary targeting.targeting with an implicit nominal anchor.

12. The Fed-Treasury Accord of March 1951 provided the Fed greater freedom to

let inflation accelerate.let exchange rates increase.let interest rates increase.let unemployment increase.

13. Although the Fed professed employment of ________ targeting during the 1970s, its behavior suggests that it emphasized ________ targeting.

interest-rate; monetary aggregatefree-reserve; interest-ratefree reserve; monetary aggregatemonetary aggregate; interest-rate

14. During the years 1979 to 1982, the Federal Reserveʹs announced policy was monetary targeting.During this time period the Federal Reserve

hit about half of their monetary targets.did not hit any of their monetary targets because it is believed that controlling the money supply was not the intent of the Federal Reserve.hit all of their monetary targets.did not hit any of their monetary targets because they were unrealistic.

15. During the 1950s, Fed monetary policy targeted

interest rates.the exchange rate.the monetary base.discount loans.

16. If the desired intermediate target is an interest rate, then the preferred policy instrument will be a(n) ________ variable like the ________.

interest rate; three-month T-bill ratemonetary aggregate; nonborrowed baseinterest rate; federal funds ratemonetary aggregate; monetary base

17. The Fedʹs mistakes of the early 1930s were compounded by its decision to

lower the monetary base in 1936-1937.lower reserve requirements in 1936-1937.raise reserve requirements in 1936-1937.raise the monetary base in 1936-1937.

18. One of the factors that contributed to the success German policymakers had using a monetary targeting type policy was that

they rarely communicated the intentions of policy to the public in order to keep the public from panicking.the money target was flexible to allow the Bundesbank to concentrate on other goals as needed.they implemented policy so their inflation rate goal was met in the short run.they used a rigid target for the money growth rate.

19. During World War II, whenever interest rates would ________ and the price of bonds would begin to ________, the Fed would make open market purchases.

rise; fallfall; riserise; risefall; fall

20. Compared to the United States, Japanʹs experience with monetary targeting performed

worse with regard to the inflation rate, but better with regard to output fluctuations.better with regard to the inflation rate, but worse with regard to output fluctuations.better with regard to the inflation rate and output fluctuations.worse with regard to the inflation rate and output fluctuations.

21. The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as

policy with an implicit nominal anchor.monetary targeting.exchange-rate targeting.inflation targeting.

22. A central bank has ________ chance to identify a credit -driven bubble compared to an irrational exuberance bubble.

less of aa greater, less or about the same level of aa greaterabout the same level of a

23. In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?

The unemployment rate declined sharply immediately after the inflation targets were adopted.The unemployment rate remained constant.The unemployment rate increased sharply.The unemployment rate has declined substantially after a sharp increase.

24. The monetary policy strategy that provides an immediate signal on target achievement is

the implicit nominal anchor.monetary targeting.exchange-rate targeting.inflation targeting.

25. The Fed operating procedures employed between 1979 and 1982 resulted in ________ swings in the federal funds rate and ________ swings in the M1 growth rate.

decreased; decreasedincreased; increaseddecreased; increasedincreased; decreased

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