Name:________________________ Econ 333 Homework #11 Mutilple Choice Questions: Please choose the best answer of the choices presented in the multiple choice questions. 1. The specific goals of central banks include all of the following except: A. High stock prices B. Low and stable inflation C. High and stable real growth D. A stable exchange rate 2. The goals of central banks are to: A. Reduce the idiosyncratic risk that impacts specific investments B. Reduce systematic risk C. Keep stock and bond prices high D. Keep inflation rates high 3. Central banks often find: A. They can efficiently pursue all of their goals simultaneously B. There are tradeoffs that make pursuing all of their goals simultaneously impossible C. The goal(s) they pursue will be determined by stock market behavior D. They must keep their goals secret or else they cannot be attained 4. If prices are not stable: A. Money becomes less useful as a store of value B. Money performs better as a unit of account C. It may be an inconvenience, but resources are still allocated efficiently D. Prices become highly useful for conveying information 5. The primary objective of most central banks in industrialized economies is: A. High securities prices B. Low unemployment C. Price stability D. A strong domestic currency 6. The correlation between high rates of inflation and economic growth is: A. Direct; one brings about the other B. Inverse; high inflation usually means low economic growth C. There is no correlation between these measures D. Is direct at low rates of economic growth and inverse at high rates 7. The problem for a central bank setting a zero inflation policy would be: A. The risk of high employment B. It is impossible to have zero inflation C. Firms would have to cut nominal wages to reduce labor cost D. Economic growth would also have to be zero 8. In terms of economic growth, the central bank would like to: A. Have the maximum growth rate possible B. Keep the growth rate averaging zero C. Keep the economy close to its potential or sustainable rate of growth D. Balance every recession with a boom 9. In the U.S., real growth usually averages around: A. 3 percent per year B. 1 percent per year C. 5 percent per year D. 7 percent per year 10. At a growth rate of 6% an economy will double in size in: A. 7 years B. 14 years C. 12 years D. 6 years 11. Since the Federal Reserve was created, it has: A. Averted all financial panics that could have plagued the U.S. economy B. Averted a few financial panics but not most C. Improved its skill at providing financial market stability D. Proved to be much better at preventing international panics than domestic ones 12. Central banks are in a position to control risk in the economy because they: A. Control the unemployment rate B. Control the economy's real growth rate C. Control short?term interest rates D. Can change taxes 13. Exchange?rate stability is likely to be a more important goal for the central banks of: A. Emerging market economies than the central bank of the U.S. B. The U.S. and Japan than most small developing countries C. Countries where exports and imports make up a small total of all economic activity D. Europe 14. The focus for most central banks today is: A. The quantity of M1 B. Interest rates C. The quantity of M2 D. Controlling the size of the money multiplier 15. Most central banks, including the Fed and the ECB, provide discount loans at a rate: A. Equal to the target interest rate B. Below the target interest rate C. Above the target interest rate D. That is equal to the overnight interbank lending rate 16. Which of the following statements is most correct? A. The Fed can control the amount of reserves, but cannot control the monetary base B. The Fed can control the make up of the monetary base, but cannot affect the market interest rate C. The Fed can control the size of the monetary base but not the price of its components D. The Fed can control either the size of the monetary base or the price of its components 17. The tools of monetary policy available to the Fed include each of the following, except the: A. Currency?to?deposit ratio B. Discount rate C. Target federal funds rate D. Reserve requirement 18. The fact that there is a market for federal funds enables banks to: A. Make fewer loans than they would otherwise B. Borrow more from the Fed C. Hold a lower level of excess reserves than they would otherwise hold D. Hold less in required reserves 19. Federal funds loans are: A. Secured loans between banks and the Fed B. Unsecured loans C. Collateralized loans between banks D. Guaranteed by the FDIC 20. The Fed could make the market federal funds rate equal the target rate by: A. Mandating that all loans be transacted at the target rate B. Setting the discount rate below the federal funds rate C. Entering the federal funds market as a borrower or a lender D. Paying higher interest on reserves 21. The tool the Fed uses to keep the federal funds rate close to the target is: A. The required reserve rate B. Discount lending C. Open market operations D. They can set the rate by law 22. If the market federal funds rate were above the target rate, the response from the Fed would likely be to: A. Purchase U.S. Treasury securities B. Sell U.S. Treasury securities C. Lower the required reserve rate D. Lower the discount rate 23. If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would: A. Increase the supply of reserves B. Decrease the supply of reserves C. Do nothing; the Fed will let the market work D. Alter the demand for reserves 24. Which of the following statements is most correct? A. The market federal funds rate equals the target federal funds rate B. Over the last 10 years the deviations between the target and market federal funds rate have decreased C. Over the last 10 years the deviations between the target and market federal funds rate have increased D. There doesn't appear to be any relationship at all between the target and market federal fund rates 25. The Fed's temporary operations involve the use of: A. Discount loans B. Repurchase agreements C. An outright purchase of U.S. Treasury Securities D. An outright sale of U.S. Treasury Securities 26. The Fed would use a reverse repo when: they A. Want to temporarily increase the monetary base B. Forecast a permanent decrease in the demand for monetary base C. Forecast a permanent increase in the demand for monetary base D. Want to temporarily decrease the monetary base 27. Variables that can influence the Fed's forecast for reserves each day include forecasting the: A. Day's demand for mortgage loans B. Level of float in the banking system, but not the balance in the U.S. Treasury's account C. Balance of the U.S. Treasury's account, but not the float D. Level of float in the banking system and the balance of the U.S. Treasury's account 28. In 2002, the Federal Reserve changed its discount lending procedures. Which of the following statements is correct? A. For most of its history the Federal Reserve has lent reserve to banks at a rate equal to the target federal funds rate; after 2002 the rate would be below the target federal funds rate B. The changes made in 2002 have made it more difficult for the Fed to meet its interest?rate stability objective C. Before 2002 the Fed discouraged banks from borrowing and actually destabilized the interbank market for reserves D. The Fed now controls the quantity of credit extended as well as its price 29. The Fed will make a discount loan to a bank during a crisis: A. No matter what condition the bank is in B. Only if the bank is sound financially and can provide collateral for the loan C. But if the bank doesn't have collateral the interest rate is higher D. Only if the bank would fail without the loan 30. The types of loans the Fed makes consist of each of the following, except: A. Primary credit B. Conditional credit C. Seasonal credit D. Secondary credit 31. Which of the following features would characterize a good monetary policy instrument? A. Observable only to monetary policy officials B. Tightly linked to monetary policy objectives C. Controllable and rigid D. Difficult to change 32. The reserve requirement does not meet all of the criteria of a good monetary policy tool, because it: A. Is not controllable B. Is not observable C. Cannot be quickly changed D. The impact of changing it is unpredictable 33. Which of the following statements is not correct? A. The current target of the FOMC is the federal funds rate B. If the Fed were to target the quantity of reserves, a decrease in reserve demand would result in a lower federal funds rate C. The Fed currently sets both an interest rate and a quantity target for monetary policy D. If the Fed were to target the quantity of reserves, an increase in reserve demand would raise the federal funds rate 34. Inflation targeting does all of the following except: A. Increase policymakers' credibility B. Increase policymakers' accountability C. Communicate policymakers' objectives clearly and openly D. Hinder economic growth 35. The components of the formula for the Taylor rule includes each of the following, except: A. The target federal funds rate B. The current inflation rate C. The 30?year U.S. Treasury bond rate D. The inflation gap 36. The Taylor rule assumes the real long?term interest rate would be: A. Approximately 2.5% B. Zero C. Five percent less the inflation rate D. One percent 37. A practical limitation of using the Taylor rule for setting the target federal funds rate would be that it: A. Makes monetary policy less transparent B. Makes monetary policymakers less accountable C. Requires better real?time data than is available D. Is difficult to calculate the target from the formula user HW 1518
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