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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. When asset prices increase above their fundamental values it is called an ________.
2. If the desired intermediate target is an interest rate, then the preferred policy instrument will be a(n) ________ variable like the ________.
3. Inflation targets can increase the central bankʹs flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations.
4. The monetary policy strategy that provides an immediate signal on target achievement is
5. Although the Fed professed employment of ________ targeting during the 1970s, its behavior suggests that it emphasized ________ targeting.
6. A central bank has ________ chance to identify a credit -driven bubble compared to an irrational exuberance bubble.
7. In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?
8. Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the
9. Which of the following is NOT a disadvantage of of the Fedʹs ʺjust do itʺ approach to monetary policy?
10. Interest rates are difficult to measure because
11. Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets
12. Compared to the United States, Japanʹs experience with monetary targeting performed
13. 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.
14. International policy coordination refers to
15. One of the factors that contributed to the success German policymakers had using a monetary targeting type policy was that
16. A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending.
17. The Fedʹs mistakes of the early 1930s were compounded by its decision to
18. Which of the following is not an operating instrument?
19. According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase.
20. According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation________ the Fedʹs inflation target or when real GDP ________ the Fedʹs output target.
21. The Federal Reserve has been ________ preemptive because of the changing view that monetary policy has to be ________ looking.
22. The first country to adopt inflation targeting was
23. In practice, the Fedʹs policy of targeting money market conditions in the 1960s proved to be
24. During World War II, whenever interest rates would rise and the price of bonds would begin to fall, the Fed would
25. The guiding principle for the conduct of monetary policy that held that as long as loans were being made for ʺproductiveʺ purposes, then providing reserves to the banking system to make these loans would not be inflationary became known as the

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