TEST BANK Chapter 18 Conduct of Monetary Policy: Goals and Targets Tài chính tiền tệ

Chapter 18 Conduct of Monetary Policy: Goals and Targets T 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: D 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: E 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: B Question Status: New 624 4) Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 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 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: A 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: A 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: B 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: B 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: C Question Status: Previous Edition Chapter 18 9) Conduct of Monetary Policy: Goals and Targets 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: C 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: A 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: E 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: A 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: E Question Status: New 625 626 14) Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 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: A 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: A 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: D 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) all of the above (e) only (a) and (b) of the above Answer: D 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) all of the above (e) only (a) and (b) of the above Answer: E Question Status: Previous Edition Chapter 18 19) Conduct of Monetary Policy: Goals and Targets 627 Upward movements in interest rates 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: C 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: B 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: D 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: C 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: B Question Status: Previous Edition 628 24) Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 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: A 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: D 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: A 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: D Question Status: Previous Edition Chapter 18 28) Conduct of Monetary Policy: Goals and Targets A 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: E 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: C 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: A 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: A Question Status: Previous Edition 629 630 Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh 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: D 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: D 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: B Question Status: New Chapter 18 35) Conduct of Monetary Policy: Goals and Targets 631 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: B 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: C 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) (b) (c) (d) (e) increase the money supply to Ms′′ when money demand increases to Md′′ allow the interest rate to increase when money demand increases hold the money supply constant at Ms* when money demand falls to Md′ allow the interest rate to decrease when money demand decreases none of the above Answer: A Question Status: New 632 38) Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 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: D 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: B 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: B 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: B 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: E Question Status: Study Guide Chapter 18 72) Conduct of Monetary Policy: Goals and Targets 639 During World War II, whenever interest rates would rise and the price of bonds would begin to fall, the Fed would (a) lower reserve requirements (b) raise reserve requirements (c) make open market purchases of government securities (d) make open market sales of government securities Answer: C Question Status: Previous Edition 73) During World War II, the Fed in effect relinquished its control of monetary policy through its policy of (a) continually lowering reserve requirements (b) continually raising reserve requirements (c) pegging interest rates (d) targeting free reserves Answer: C Question Status: Previous Edition 74) The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits (a) only during World War I (b) during the 1980s (c) during the Great Depression (d) during World War I and World War II (e) throughout the entire existence of the Fed Answer: D Question Status: New 75) The Fed-treasury Accord of March 1951 provided the Fed greater freedom to (a) let interest rates increase (b) let unemployment increase (c) let inflation accelerate (d) let exchange rates fall (e) let exchange rates increase Answer: A Question Status: Study Guide 76) During the 1950s, the Fed targeted (a) M1 (b) M2 (c) the monetary base (d) money market conditions (e) discounting of eligible paper Answer: D Question Status: New 640 77) Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition During the 1950s, Fed monetary policy targeted (a) the monetary base (b) nonborrowed reserves (c) discount loans (d) interest rates (e) the exchange rate Answer: D Question Status: New 78) Targeting interest rates can be procyclical because (a) 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 (b) 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 (c) 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 (d) an increase in income increases the monetary base and money supply, causing the Fed to buy bonds to increase interest rates and income (e) none of the above Answer: A Question Status: New 79) Targeting interest rates can be procyclical because (a) a decrease in income decreases interest rates, causing the Fed to sell bonds, decreasing the monetary base and money supply, leading to further decreases in income (b) a decrease in interest rates decreases income, causing the Fed to sell bonds, decreasing the monetary base and money supply, leading to further decreases in income (c) a decrease in the monetary base decreases the money supply, causing the Fed to sell bonds, decreasing the monetary base and money supply, leading to further decreases in income (d) a decrease in income decreases the monetary base and money supply, causing the Fed to sell bonds to decrease interest rates and income (e) none of the above Answer: A Question Status: New 80) High inflation can spiral out of control when (a) expected inflation increases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation (b) expected inflation decreases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation (c) expected inflation increases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation (d) expected inflation decreases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation (e) none of the above Answer: A Question Status: New Chapter 18 81) Conduct of Monetary Policy: Goals and Targets 641 In practice, the Fed’s policy of targeting money market conditions in the 1960s proved to be (a) countercyclical, helping to stabilize the economy (b) procyclical, destabilizing the economy (c) procyclical, helping to stabilize the economy (d) countercyclical, destabilizing the economy Answer: B Question Status: Previous Edition 82) In practice, the Fed’s policy of targeting _ in the 1960s proved to be , destabilizing the economy (a) money market conditions; countercyclical (b) money market conditions; procyclical (c) monetary aggregates; countercyclical (d) monetary aggregates; procyclical Answer: B Question Status: Revised 83) Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasized (a) free-reserve targeting (b) interest-rate targeting (c) a real-bills doctrine (d) price-index targeting Answer: B Question Status: Previous Edition 84) Although the Fed professed employment of _ targeting during the 1970s, its behavior suggests that it emphasized _ targeting (a) free reserve; interest rate (b) interest rate; monetary aggregate (c) monetary aggregate; interest rate (d) free reserve; monetary aggregate Answer: C Question Status: Previous Edition 85) The Fed’s use of the federal funds rate as an operating target in the 1970s (a) resulted in countercyclical monetary policy (b) resulted in too slow growth in M1 throughout the decade (c) resulted in procyclical monetary policy (d) resulted in too rapid growth in M1 throughout the decade (e) resulted in none of the above Answer: C Question Status: Previous Edition 642 86) Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition The Fed’s use of the _ as an operating target in the 1970s resulted in _ monetary policy (a) federal funds rate; countercyclical (b) federal funds rate; procyclical (c) M1 money supply; countercyclical (d) M1 money supply; procyclical Answer: B Question Status: Revised 87) In the 1970s, the Fed selected an interest rate as an operating target rather than a reserve aggregate primarily because it (a) had no interest in targeting a monetary aggregate, as evidenced by its unwillingness to target a reserve aggregate (b) was still very concerned with achieving interest rate stability (c) was committed to targeting free reserves (d) was committed to the real bills doctrine Answer: B Question Status: Previous Edition 88) The Fed operating procedures employed between 1979 and 1982 resulted in _ swings in the federal funds rate and _ swings in the M1 growth rate (a) increased; increased (b) increased; decreased (c) decreased; decreased (d) decreased; increased Answer: A Question Status: Previous Edition 89) Explanations for the Fed’s poor monetary control during 1979–1982 include (a) the acceleration of financial deregulation (b) the back to back recessions in 1980 and 1981–1982 (c) the Fed’s desire to fight inflation without taking all the criticism for the high interest rate policy (d) all of the above reasons (e) only (a) and (b) of the above Answer: D Question Status: Previous Edition 90) Explanations for the Fed’s poor monetary control during 1979–1982 include (a) the slow down in financial innovation after passage of the Monetary Control Act of 1980 (b) the suspension of credit controls in mid-1979 (c) the Fed’s desire to fight inflation without taking all the criticism for the high interest rate policy (d) only (a) and (b) of the above Answer: C Question Status: Previous Edition Chapter 18 91) Conduct of Monetary Policy: Goals and Targets 643 Explanations for the Fed’s poor monetary control during 1979–1982 include (a) the acceleration of financial deregulation (b) the suspension of credit controls in mid-1979 (c) the Fed’s desire to fight inflation without taking all the criticism for the high interest rate policy (d) only (a) and (b) of the above (e) only (a) and (c) of the above Answer: E Question Status: Previous Edition 92) Explanations for the Fed’s poor monetary control during 1979–1982 include (a) the suspension of credit controls in mid-1979 (b) the slow down in financial innovation after passage of the Monetary Control Act of 1980 (c) the imposition of credit controls in 1980 (d) only (a) and (b) of the above Answer: C Question Status: Previous Edition 93) The fluctuations in both money supply growth and the federal funds rate during 1979–1982 suggest that the Fed (a) had shifted to borrowed reserves as an operating target (b) had shifted to total reserves as an operating target (c) had shifted to the monetary base as an operating target (d) never intended to target monetary aggregates Answer: D Question Status: Revised 94) The fluctuations in both money supply growth and the federal funds rate during 1979–1982 suggest that the Fed (a) never intended to target monetary aggregates (b) used the announced strategy of targeting the federal funds rate as a smokescreen to fight the back to back recessions in 1980 and 1981–1982 (c) had shifted to borrowed reserves as an operating target (d) had shifted to the monetary base as an operating target Answer: A Question Status: Revised 95) The fluctuations in both money supply growth and the federal funds rate during 1979–1982 suggest that the Fed (a) never intended to target monetary aggregates (b) used the announced strategy of targeting the federal funds rate as a smokescreen to fight the back to back recessions in 1980 and 1981–1982 (c) had shifted to the monetary base as an operating target (d) all of the above (e) both (a) and (b) of the above Answer: A Question Status: Revised 644 96) Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition The fluctuations in both money supply growth and the federal funds rate during 1979–1982 suggest that the Fed (a) never intended to target monetary aggregates (b) used the announced strategy of targeting monetary aggregates as a smokescreen to fight inflation (c) had shifted to borrowed reserves as an operating target (d) both (a) and (b) of the above Answer: D Question Status: Revised 97) The Fed’s failure to exercise effective control over the money supply during the 1979–1982 period (a) proves that such control is not possible (b) resulted because forces outside of its control removed the link between open market operations and the money supply (c) occurred despite evidence of a strong link between open market operations and the money supply (d) stems from the Treasury-Federal Reserve Accord Answer: C Question Status: Previous Edition 98) The fluctuations in both money supply growth and the federal funds rate between October 1982 and the early 1990s indicates that the Fed had shifted to _ as an operating target (a) borrowed reserves (b) nonborrowed reserves (c) excess reserves (d) required reserves Answer: A Question Status: Previous Edition 99) The fluctuations in both money supply growth and the federal funds rate between October 1982 and the early 1990s suggested that the Fed had shifted to targeting (a) nonborrowed reserves (b) interest rates (c) monetary aggregates (d) the price of gold Answer: B Question Status: Previous Edition 100) Fed policy between October 1982 and the early 1990s suggests (a) that it used a monetary aggregate as its intermediate target (b) that it was less concerned with fluctuations in the federal funds rate than in the 1979–1982 period (c) that it was more concerned with exchange rates than with interest rates (d) none of the above Answer: D Question Status: Previous Edition Chapter 18 Conduct of Monetary Policy: Goals and Targets 645 101) Fed policy between October 1982 and the early 1990s indicates that (a) interest rate targeting finally gave way to a strategy of targeting the monetary base (b) it was pursuing a policy of interest rate targeting (c) it was less concerned with inflation when compared to the 1970s (d) only (a) and (b) of the above are true Answer: B Question Status: Previous Edition 102) 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 (a) increase; neutral (b) increase; expansionary (c) increase; contractionary (d) decrease; expansionary (e) decrease; contractionary Answer: D Question Status: Study Guide 103) A borrowed reserves target is (a) procyclical because increases in income increase interest rates and discount loans, causing the Fed to increase the monetary base (b) countercyclical because increases in income increase interest rates and discount loans, causing the Fed to increase the monetary base (c) procyclical because increases in income reduce interest rates and discount loans, causing the Fed to reduce the monetary base (d) countercyclical because increases ion income reduce interest rates and discount loans, causing the fed to reduce the monetary base (e) neutral because economic activity has no effect on incentives to borrow from the Fed Answer: A Question Status: New 104) Fed policy since the early 1990s indicates that (a) monetary aggregates continue to be rejected as intermediate target (b) it is pursuing a policy of targeting the federal funds rate (c) it is pursuing a policy of targeting the exchange rate (d) only (a) and (b) of the above are true (e) only (a) and (c) of the above are true Answer: D Question Status: Previous Edition 105) Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the (a) monetary base (b) money supply (c) federal funds interest rate (d) exchange rate Answer: C Question Status: Previous Edition 646 Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 106) Since the early 1990s, the Fed has conducted monetary policy by setting a target for the (a) level of borrowed reserves (b) growth in nominal GDP (c) federal funds rate (d) inflation rate (e) monetary base Answer: C Question Status: Revised 107) 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 (a) raising; lowering (b) raising; raising (c) lowering; lowering (d) lowering; raising Answer: A Question Status: Previous Edition 108) From late 1992 until February 1994, the Fed kept the federal funds interest rate (a) targeted at a constant percent (b) targeted at a constant percent (c) targeted at a constant percent (d) within a narrow band between and percent (e) within a narrow band between and percent Answer: C Question Status: Previous Edition 109) The Federal reserve from late 1992 until February 1994 (a) kept the federal funds interest rate targeted at a constant percent (b) kept the federal funds interest rate low because of its concern that a credit crunch was putting a drag on the economy (c) abandoned its policy of keeping the federal funds interest rate target a secret (d) did all of the above (e) did only (a) and (b) of the above Answer: E Question Status: Previous Edition 110) The Federal reserve from late 1992 until February 1994 (a) kept the federal funds interest rate targeted at a constant percent (b) kept the federal funds interest rate low because of its concern that a credit crunch was putting a drag on the economy (c) abandoned its policy of keeping the federal funds interest rate target a secret (d) did all of the above (e) did only (a) and (b) of the above Answer: B Question Status: Previous Edition Chapter 18 Conduct of Monetary Policy: Goals and Targets 647 111) In February 1994, the Fed (a) raised its federal funds interest rate target (b) abandoned its policy of keeping the federal funds interest rate target a secret (c) lowered its federal funds interest rate target by 3/4s of a percentage point following the collapse of Long-Term Capital Management (d) did both (a) and (b) of the above (e) did both (b) and (c) of the above Answer: D Question Status: Previous Edition 112) In February 1994, the Fed (a) lowered its federal funds interest rate target (b) abandoned its policy of keeping the federal funds interest rate target a secret (c) raised its federal funds interest rate target by 3/4s of a percentage point following the collapse of Long-Term Capital Management (d) did both (a) and (b) of the above (e) did both (b) and (c) of the above Answer: B Question Status: Previous Edition 113) Starting in February 1994, the Fed (a) abandoned its policy of keeping the federal funds interest rate target a secret (b) lowered the federal funds interest rate target to deal with a possible slowing in the economy (c) began a preemptive strike against inflation by raising the federal funds interest rate in steps to percent by early 1995 (d) did both (a) and (b) of the above (e) did both (a) and (c) of the above Answer: E Question Status: Previous Edition 114) In early 1996, the Fed (a) lowered the federal funds interest rate target to deal with a possible slowing in the economy (b) abandoned its policy of keeping the federal funds interest rate target a secret (c) raised its federal funds interest rate target by 3/4s of a percentage point following the collapse of Long-Term Capital Management (d) did both (a) and (b) of the above (e) did both (b) and (c) of the above Answer: A Question Status: Previous Edition 648 Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 115) In early 1996, the Fed (a) lowered the federal funds interest rate to deal with a possible slowing in the economy (b) began a preemptive strike against inflation by raising the federal funds interest rate in steps to percent by early 1995 (c) abandoned its policy of keeping the federal funds interest rate target a secret (d) did both (a) and (b) of the above (e) did both (b) and (c) of the above Answer: A Question Status: Previous Edition 116) In early 1996, the Fed (a) began a preemptive strike against inflation by raising the federal funds interest rate in steps to percent by early 1995 (b) lowered the federal funds interest rate to deal with a possible slowing in the economy (c) decided to keep the federal funds interest rate target at a constant percent (d) did none of the above Answer: B Question Status: Previous Edition 117) Between early 1996 and late 1998, the Fed (a) lowered the federal funds interest rate to deal with a possible slowing in the economy (b) took the dramatic step lowering the federal funds interest rate by 3/4s of a percentage point following the collapse of Long-Term Capital Management in the fall of 1998 (c) kept the federal funds interest rate targeted at a constant percent (d) did both (a) and (b) of the above (e) did none of the above Answer: D Question Status: Previous Edition 118) In the fall of 1998, the Fed (a) raised the federal funds interest rate to deal with a strengthening economy, discounting concerns about the financial crises in other countries (b) took the dramatic step lowering the federal funds interest rate by 3/4s of a percentage point following the collapse of Long-Term Capital Management in the fall of 1998 (c) took the dramatic step lowering the federal funds interest rate by 3/4s of a percentage point because of the financial crises in East Asia and Russia (d) both (b) and (c) of the above (e) did none of the above Answer: D Question Status: Revised Chapter 18 Conduct of Monetary Policy: Goals and Targets 649 119) In 1999, the Fed (a) raised the federal funds interest rate to deal with a strengthening economy (b) took the dramatic step lowering the federal funds interest rate by 3/4s of a percentage point following the collapse of Long-Term Capital Management in the fall of 1998 (c) lowered the federal funds interest rate because of concerns about the potential for a world-wide financial crisis in the wake of financial problems in both Asia and Russia (d) did none of the above Answer: A Question Status: Previous Edition 120) Federal Reserve monetary policy from 1990 to the present has been characterized by (a) a return to a federal funds operating target (b) a policy of preemptive strikes to head off future inflationary pressure (c) a return to monetary aggregate operating targets (d) both (a) and (b) of the above (e) both (b) and (c) of the above Answer: D Question Status: Study Guide 121) International policy coordination refers to (a) central banks in major nations acting without regard to the global consequences of their policies (b) central banks in major nations pursuing only domestic objectives (c) central banks adopting policies in pursuit of joint objectives (d) central banks all adopting identical policies (e) all central banks holding domestic interest rates constant Answer: C Question Status: New 122) International policy coordination exists when (a) all central banks adopt identical unemployment rate goals (b) all central banks adopt identical growth rate goals (c) central banks hold exchange rates constant (d) central banks adopt policies in pursuit of common goals (e) all of the above Answer: D Question Status: New 123) According to the Taylor rule, the Fed should raise the federal funds interest rate when (a) inflation rises above the Fed’s inflation target (b) real GDP rises above the Fed’s output target (c) real GDP drops below the Fed’s output target (d) both (a) and (b) occur (e) both (a) and (c) occur Answer: D Question Status: Revised 650 Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 124) According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation _ the Fed’s inflation target or when real GDP _ the Fed’s output target (a) rises above; drops below (b) drops below; drops below (c) rises above; rises above (d) drops below; rises above Answer: C Question Status: Revised 125) Using Taylor’s rule, when the equilibrium real federal funds rate is percent, the positive output gap is percent, the target inflation rate is percent, and the actual inflation rate is percent, the nominal federal funds rate should be (a) percent (b) 5.5 percent (c) percent (d) 6.5 percent (e) percent Answer: D Question Status: New 126) Using Taylor’s rule, when the equilibrium real federal funds rate is percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is percent, the nominal federal funds rate should be (a) percent (b) percent (c) percent (d) percent (e) percent Answer: B Question Status: New 127) Using Taylor’s rule, when the equilibrium real federal funds rate is percent, the output gap is negative percent, the actual inflation rate is 1.5 percent, and the target inflation rate is percent, the nominal federal funds rate should be (a) 1.25 percent (b) 1.5 percent (c) 1.75 percent (d) 2.00 percent (e) 2.25 percent Answer: C Question Status: New Chapter 18 Conduct of Monetary Policy: Goals and Targets 651 128) Using Taylor’s rule, when the equilibrium real federal funds rate is percent, the positive output gap is percent, the target inflation rate is percent, and the actual inflation rate is percent, the nominal federal funds rate should be (a) percent (b) 5.5 percent (c) percent (d) 6.5 percent (e) percent Answer: B Question Status: New 129) The rate of inflation tends to remain constant when (a) the unemployment rate is above the NAIRU (b) the unemployment rate equals the NAIRU (c) the unemployment rate is below the NAIRU (d) the unemployment rate increases faster than the NAIRU increases (e) the unemployment rate falls faster than the NAIRU falls Answer: B Question Status: New 130) The rate of inflation increases when (a) the unemployment rate equals the NAIRU (b) the unemployment rate exceeds the NAIRU (c) the unemployment rate is less than the NAIRU (d) the unemployment rate increases faster than the NAIRU (e) the unemployment and the NAIRU increase by equal amounts Answer: C Question Status: New 652 Frederic S Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition T Essay Questions 1) Explain and demonstrate graphically how targeting a monetary aggregate can result in interest rate instability Answer: In the figure below, when the money supply is held constant, increases in money demand result in increased interest rates, and decreases in money demand result in fall interest rates The target money supply is the vertical money supply line Since fluctuations in demand not cause monetary policy actions, the result is the interest rate fluctuations shown in the graph 2) Explain and demonstrate graphically how targeting interest rates can result in fluctuations in monetary aggregates Answer: With an interest rate target, fluctuations in money demand require offsetting changes in the monetary base, and thus monetary aggregates, to keep the interest rate constant, as shown in the graph below In the graph, the interest rate target is shown Increases in money demand are matched by increases in money supply to keep the interest rate at the target Decreases in money demand are matched by decreases in money supply to keep the interest rate at target Chapter 18 Conduct of Monetary Policy: Goals and Targets 653 3) Explain how targeting interest rates can result in inflation spiraling out of control Answer: If a central bank has an interest rate target, and increasing inflation causes increases in inflationary expectations, and through the Fisher effect, increases in nominal interest rates, the central bank will respond with increases in the money supply in an attempt to lower interest rates However, the monetary expansion will increase inflation, starting the cycle again As long as the central bank pursues the interest rate target, inflation will continue to spiral upward 4) Explain the Taylor rule, including the formula for setting the federal funds rate, and the components of the formula If the Fed were to use this rule, how many goals would it use to set monetary policy? Answer: The Taylor rule specifies that the target federal funds rates should be set to equal the equilibrium rate, plus the rate of inflation for the Fisher effect, plus one-half times the output gap, plus one-half times the inflation gap The formula is Federal funds rate = equilibrium federal funds rate + inflation rate + ½ (output gap) + ½ (inflation gap) The output gap is the percentage deviation of real GDP from potential full-employment real GDP The inflation gap is the difference between actual inflation and the central bank’s target rate of inflation The equilibrium real federal funds rate is the real rate consistent with full employment in the long run The inflation rate is the actual rate of inflation The Taylor rule sets the federal funds rate recognizing the goals of low inflation and full employment (or equilibrium long-run growth)