Money, Banking, and Financial Markets Practice Test: Monetary Policy | Practice Test / Quiz / MCQs

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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. The Federal Reserve has been ________ preemptive because of the changing view that monetary policy has to be ________ looking.

less; backwardless; forwardmore; forwardmore; backward

2. When asset prices increase above their fundamental values it is called an ________.

asset-price bubbleasset-price spikeirrational spikeirrational bubble

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

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

4. The rate of inflation increases when

the unemployment rate is less than the NAIRU.the unemployment rate exceeds the NAIRU.the unemployment rate increases faster than the NAIRU increases.the unemployment rate equals the NAIRU.

5. The Fedʹs use of the ________ as an operating target in the 1970s resulted in ________ monetary policy.

federal funds rate; countercyclicalfederal funds rate; procyclicalM1 money supply; countercyclicalM1 money supply; procyclical

6. Which of the following is an advantage to money targeting?

It implies smaller output fluctuations.There is an immediate signal on the achievement of the target.It does not rely on a stable money-inflation relationship.It implies lack of transparency.

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

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

8. The monetary policy strategy that provides the least accountability is

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

9. Which of the following is NOT an element of inflation targeting?

Increased accountability of the central bank for attaining its inflation objectivesAn institutional commitment to price stability as the primary long-run goalA public announcement of medium-term numerical targets for inflationAn information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy

10. In its earliest years, the Federal Reserveʹs guiding principle for the conduct of monetary policy was known as the

real bills doctrine.liberal liquidity doctrine.quantity theory of money.free reserves doctrine.

11. High inflation can spiral out of control when

expected inflation decreases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation.expected inflation increases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation.expected inflation increases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation.expected inflation decreases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation.

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

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

13. If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because

of fluctuations in the consumption function.of fluctuations in the business cycle.bond values will tend to remain stable.of fluctuations in the demand for reserves.

14. Since the early 1990s, the Fed has conducted monetary policy by setting a target for the

level of borrowed reserves.monetary base.inflation rate.federal funds rate.

15. The Fed accidentally discovered open market operations when

it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system.it purchased securities for income following the 1920-1921 recession.it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system.it reinterpreted a key provision of the Federal Reserve Act.

16. Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets

a monetary aggregate.the monetary base.an interest rate.nominal GDP.

17. The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits

during World War I and World War II.during the Great Depression.only during World War I.throughout the entire existence of the Fed.

18. A borrowed reserves target is ________ because increases in income ________ interest rates and discount loans, causing the Fed to ________ the monetary base, everything else held constant.

procyclical; reduce; reducecountercyclical; increase; increaseprocyclical; increase; increasecountercyclical; reduce; reduce

19. Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble.

about the same amount ofmoreeither more, less, or the same amount ofless

20. Large fluctuations in money supply growth and smaller fluctuations in the federal funds rate between October 1982 and the early 1990s indicate that the Fed had shifted to ________ as an operating target.

excess reservesrequired reservesborrowed reservesnonborrowed reserves

21. 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 increased sharply.The unemployment rate remained constant.The unemployment rate has declined substantially after a sharp increase.

22. Estimates suggest that, in the United States economy, it takes just over ________ for monetary policy to affect output and just over ________ for monetary policy to affect the inflation rate.

1 year; 6 months6 months; 1 year2 years; 1 year1 year; 2 years

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

24. 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.

25. The real bills doctrine was the guiding principle for the conduct of monetary policy during the

1950s.1910s.1940s.1960s.

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