Econ Final Part 2
Econ test 2
Questions and Answers
- 1.
Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant?
- A.
Liquidity
- B.
Risk
- C.
Wealth
- D.
Expected Returns
Correct Answer
C. WealthExplanation
When wealth increases, individuals have more money to invest in assets, leading to an increase in demand for all assets. This is because people with higher wealth are more likely to invest in various assets as a means of preserving and growing their wealth. Therefore, an increase in wealth will cause the demand for all assets to increase, assuming all other factors such as liquidity, risk, and expected returns remain constant.Rate this question:
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- 2.
When the price of a bond is above the equilibrium price, there is an excess bonds, price will , and interest rate will .
- A.
Supply of; rise; fall
- B.
Supply of; fall; rise
- C.
Demand for; rise; fall
- D.
Damn for: fall, rise
Correct Answer
B. Supply of; fall; riseExplanation
When the price of a bond is above the equilibrium price, there is an excess supply of bonds. This means that there are more bonds available in the market than there is demand for them. As a result, the price of the bonds will fall as sellers try to attract buyers. Additionally, the interest rate will rise as a higher interest rate is needed to incentivize buyers to purchase the bonds at the lower price.Rate this question:
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- 3.
When the inflation rate is expected to increase, the for bonds falls, while the curve shifts to the right, everything else held constant.
- A.
Demand , demand
- B.
Demand, supply
- C.
Supply, demand
- D.
Supply, supply
Correct Answer
B. Demand, supplyExplanation
When the inflation rate is expected to increase, the demand for bonds falls. This is because as inflation rises, the purchasing power of the fixed interest payments from bonds decreases. Investors are less willing to hold bonds at the same interest rate when they expect inflation to erode the value of those payments. On the other hand, the supply curve shifts to the right. This is because as inflation increases, issuers of bonds may be more willing to sell them at higher interest rates to compensate for the expected loss in purchasing power.Rate this question:
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- 4.
The bond supply and demand framework is easier to use when analyzing the effects of changes in , while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level and the supply of .
- A.
Government budget deficits, bonds
- B.
Government budget deficits, money
- C.
Expected inflation, bonds
- D.
Expected inflation, money
Correct Answer
D. Expected inflation, moneyExplanation
The bond supply and demand framework is easier to use when analyzing the effects of changes in expected inflation because inflation has a direct impact on bond prices and yields. When expected inflation increases, bond prices decrease and yields increase, leading to a decrease in bond demand. On the other hand, the liquidity preference framework provides a simpler analysis of the effects from changes in money supply, income, and the price level. Changes in these factors affect the demand for money and can influence interest rates and overall economic activity.Rate this question:
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- 5.
Milton Friedman contends that it is entirely possible that when the money supply rises, interest rates may if the effect is more than offset by changes in income, the price level, and expected inflation.
- A.
Rise, liquidity
- B.
Fall, liquidity
- C.
Fall, risk
- D.
Rise, risk
Correct Answer
A. Rise, liquidityExplanation
According to Milton Friedman, when the money supply increases, interest rates may rise if the liquidity effect is more than offset by changes in income, the price level, and expected inflation. This means that even though an increase in the money supply would typically lead to a decrease in interest rates (fall, liquidity), other factors such as changes in income, the price level, and expected inflation can counteract this effect and cause interest rates to rise instead (rise, liquidity).Rate this question:
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- 6.
Municipal bonds have default risk, yet their interest rates are lower than the rates on default-free treasury bonds. This suggest that ......
- A.
The benefit from the tax-exempt status of municipal bonds is less than their default risk
- B.
The benefit from the tax-exempt status of municipal bonds exceeds their default risk
- C.
Treasury bonds are not default-free
- D.
The benefit from the tax-exempt status of municipal bonds equals their default risk
Correct Answer
B. The benefit from the tax-exempt status of municipal bonds exceeds their default riskExplanation
This suggests that the benefit from the tax-exempt status of municipal bonds is greater than their default risk. Despite the possibility of default, investors are willing to accept a lower interest rate on municipal bonds because they can avoid paying taxes on the interest income. This tax advantage offsets the default risk and makes municipal bonds more attractive compared to default-free treasury bonds.Rate this question:
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- 7.
According to the liquidity premium theory of the term structure.....
- A.
Because of the positive term premium, the yield curve will not be observed to be downward sloping
- B.
The interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium
- C.
The interest rate for each maturity bond is determined by supply and demand for that maturity bond
- D.
Because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time
Correct Answer
B. The interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premiumExplanation
According to the liquidity premium theory of the term structure, the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. This means that the yield curve will not be observed to be downward sloping due to the positive term premium. The theory suggests that the interest rate for each maturity bond is determined by supply and demand for that maturity bond, and because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time.Rate this question:
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- 8.
Which of the following is NOT and entity of the Federal Reserve Systems?
- A.
The Comptroller of the Currency
- B.
The Federal Open Market Committee
- C.
Federal Reserve Banks
- D.
The Board of Governors
Correct Answer
A. The Comptroller of the CurrencyExplanation
The Comptroller of the Currency is not an entity of the Federal Reserve Systems because it is actually an independent bureau within the U.S. Department of the Treasury. The Comptroller of the Currency is responsible for regulating and supervising national banks and federal savings associations. While it collaborates with the Federal Reserve on certain matters, it is not directly a part of the Federal Reserve System.Rate this question:
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- 9.
The federal Reserve Bank of plays a special role in the Federal Reserve Systems because it houses the open market desk.
- A.
San Francisco
- B.
Boston
- C.
New York
- D.
Chicago
Correct Answer
C. New YorkExplanation
The Federal Reserve Bank of New York plays a special role in the Federal Reserve System because it houses the open market desk. This means that it is responsible for implementing monetary policy by buying and selling government securities in the open market. The open market desk helps to control the money supply and interest rates in order to achieve the Federal Reserve's goals of price stability and maximum employment. The Federal Reserve Bank of New York's location in the financial hub of the United States also gives it close proximity to major financial institutions and allows for effective communication and coordination with market participants.Rate this question:
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- 10.
Banks Subject to reserve requirements set by the Federal Reserve System include
- A.
All banks whether or not they are members of the Federal reserve system
- B.
Only Nationally chartered banks
- C.
Only banks with assets less than $500 Million
- D.
Only banks with assets less than $100 million
Correct Answer
A. All banks whether or not they are members of the Federal reserve systemExplanation
All banks, regardless of whether or not they are members of the Federal Reserve System, are subject to reserve requirements set by the Federal Reserve System. This means that all banks are required to hold a certain percentage of their deposits as reserves, which cannot be lent out or invested. These reserve requirements are set by the Federal Reserve to ensure the stability and liquidity of the banking system. Therefore, the correct answer is that all banks are subject to reserve requirements set by the Federal Reserve System.Rate this question:
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- 11.
Members of the Board of Governors are .....
- A.
Chosen by the Federal Reserve Bank presidents
- B.
Never allowed to serve more than 7 year terms
- C.
Appointed by the president of United States and confirmed by the Senate as members resign
- D.
Appointed by the newly elected president of the united states, as are cabinet positions
Correct Answer
C. Appointed by the president of United States and confirmed by the Senate as members resignExplanation
The members of the Board of Governors are appointed by the president of the United States and confirmed by the Senate as members resign. This means that when a vacancy arises in the Board of Governors, the president appoints a new member, and the Senate must confirm the appointment. This process ensures that the president has a say in selecting the members of the Board of Governors, while also providing a system of checks and balances through the confirmation process by the Senate.Rate this question:
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- 12.
The Federal Open Market Committee consists of the .....
- A.
Seven members of the Board of Governors and seven presidents of the regional Fed banks
- B.
Seven Members of the board of Governors and five presidents of the regional Fed Banks
- C.
Five senior members of the seven- member board of governors
- D.
Twelve regional Fed bank presidents and the chairman of the Board of Governors
Correct Answer
B. Seven Members of the board of Governors and five presidents of the regional Fed BanksExplanation
The correct answer is seven members of the Board of Governors and five presidents of the regional Fed banks. The Federal Open Market Committee (FOMC) is responsible for making decisions about monetary policy in the United States. It consists of twelve voting members, which include the seven members of the Board of Governors and five of the twelve regional Federal Reserve Bank presidents. These individuals come together to discuss and analyze economic conditions and determine the appropriate course of action regarding interest rates and other monetary policy tools.Rate this question:
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- 13.
Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to ...
- A.
Propose legislation that would force the fed to submit budget requests to Congress, as must other government agencies.
- B.
Instruct the General Accounting Office to audit the foreign exchange market functions of the Federal Reserve
- C.
Withhold appropriations from the Board of Governors.
- D.
Withhold appropriations from the Federal Open Market Committee
Correct Answer
A. Propose legislation that would force the fed to submit budget requests to Congress, as must other government agencies.Explanation
Members of Congress are able to influence monetary policy indirectly by proposing legislation that would require the Federal Reserve to submit budget requests to Congress, similar to other government agencies. This would give Congress more oversight and control over the Fed's monetary decisions. By having the power to review and approve the Fed's budget, Congress can exert influence on the Fed's actions and potentially shape monetary policy according to their preferences. This demonstrates how members of Congress can impact monetary policy through their legislative authority.Rate this question:
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- 14.
The trend in recent years is that more and more governments ....
- A.
Have been granting greater independence to their central banks.
- B.
Have been reducing the independence of their central banks to make them more accountable for poor economic performance
- C.
Have required their central banks to cooperate more with their Ministers of Finance
- D.
Have mandated that their central banks focus on controlling inflation
Correct Answer
A. Have been granting greater independence to their central banks.Explanation
In recent years, there has been a growing trend among governments to grant greater independence to their central banks. This means that central banks are given more autonomy and freedom to make decisions regarding monetary policy without interference from the government. This trend is likely driven by the recognition that central banks need to have independence in order to effectively carry out their role of maintaining price stability and promoting economic growth. By granting greater independence, governments are acknowledging the importance of allowing central banks to operate independently and make decisions based on economic considerations rather than political pressures.Rate this question:
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- 15.
The Federal Reserve independence does not include the idea that ....
- A.
A policy is always performed better by an elite group such as the Fed.
- B.
Political pressure would impart an inflationary bias to monetary policy
- C.
A politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level
- D.
A Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced
Correct Answer
A. A policy is always performed better by an elite group such as the Fed.Explanation
The correct answer is that the Federal Reserve independence does not include the idea that a policy is always performed better by an elite group such as the Fed. This means that the independence of the Federal Reserve does not imply that a small group of experts will always make better policy decisions compared to other groups or individuals. The concept of independence is more focused on insulating the Federal Reserve from political pressure and interference, allowing it to make decisions based on long-term objectives and the overall health of the economy.Rate this question:
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- 16.
Recent research indicates that inflation performance (low inflation) has been found to be best in countries with .....
- A.
The most independent central banks.
- B.
Political control of monetary policy
- C.
A policy of always keeping interest rates low
- D.
Money financing of budget deficits
Correct Answer
A. The most independent central banks.Explanation
Recent research suggests that countries with the most independent central banks have the best inflation performance. This means that when central banks have a higher level of independence from political influence, they are better able to make decisions based on economic factors rather than political considerations. This allows them to implement effective monetary policies that can help control inflation and maintain price stability in the economy. In contrast, countries with political control of monetary policy may be more prone to making decisions based on short-term political goals, which can lead to less effective inflation management. Similarly, a policy of always keeping interest rates low or money financing of budget deficits may not necessarily result in optimal inflation performance.Rate this question:
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- 17.
The four players in the money supply process include .....
- A.
Banks, depositors, the central bank, and borrowers
- B.
Banks, depositors, the central bank, and the U.S Treasury
- C.
Banks, borrowers, the central bank, and the U.S Treasury
- D.
Banks, depositors, borrowers, and the U.S Treasuries
Correct Answer
A. Banks, depositors, the central bank, and borrowersExplanation
The correct answer is banks, depositors, the central bank, and borrowers. In the money supply process, banks play a crucial role as they create and control the money supply through lending and accepting deposits. Depositors contribute to the money supply by depositing funds into banks. The central bank, such as the Federal Reserve in the United States, regulates and oversees the money supply and banking system. Borrowers are an essential part of the process as they borrow money from banks, increasing the money supply in circulation.Rate this question:
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- 18.
The sum of the Fed's monetary liabilities and the U.S Treasury's monetary liabilities is called ...
- A.
The money supply
- B.
Bank reserves
- C.
Currency in circulation
- D.
The money base
Correct Answer
D. The money baseExplanation
The sum of the Fed's monetary liabilities and the U.S Treasury's monetary liabilities is called the money base. The money base refers to the total amount of money in an economy that is held by the central bank and the government. It includes both physical currency in circulation and bank reserves, which are deposits held by commercial banks at the central bank. The money base is an important measure of the overall money supply in an economy and is used by policymakers to manage monetary policy.Rate this question:
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- 19.
the Federal Reserve earn income while the Federal Reserve cost nothing.
- A.
Assets of; liabilities of
- B.
Reserves of; assets of
- C.
Liabilities of; assets of
- D.
Currency in circulation by; assets of
Correct Answer
A. Assets of; liabilities ofExplanation
The correct answer is "Assets of; liabilities of". This is because the Federal Reserve earns income through its assets, such as government securities and loans to banks, while its liabilities, such as currency in circulation and reserves held by banks, do not cost anything. The Federal Reserve's assets are used to generate income, while its liabilities represent the obligations it has to the public and financial institutions.Rate this question:
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- 20.
The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in , the open market purchase has no effect on reserves; if the proceeds are kept as , reserves increase by the amount of the open market purchase.
- A.
Currency; currency
- B.
Deposits ; deposits
- C.
Currency; deposits
- D.
Deposits; currency
Correct Answer
C. Currency; depositsExplanation
When an open market purchase is made, it involves the central bank buying bonds from a seller. The effect on reserves depends on how the seller keeps the proceeds. If the proceeds are kept in currency, it means the seller is holding physical cash, and in this case, the open market purchase has no effect on reserves. However, if the proceeds are kept as deposits, it means the seller has deposited the money in a bank account, and in this case, reserves increase by the amount of the open market purchase. Therefore, the correct answer is currency; deposits.Rate this question:
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- 21.
There are two ways in which the Fed can provide additional reserves to the banking system; it can government bonds or it can discount loans to commercial banks.
- A.
Sell; call in
- B.
Purchase ; extend
- C.
Purchase; call in
- D.
Sell; extend
Correct Answer
B. Purchase ; extendExplanation
The correct answer is "purchase; extend". The Federal Reserve can provide additional reserves to the banking system by purchasing government bonds from commercial banks, which increases the reserves held by the banks. Additionally, the Fed can extend discount loans to commercial banks, which also increases their reserves.Rate this question:
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- 22.
In the simple deposit expansion model, if the requiredreserve ration is 20 percent and the Fed increase reservesby $100, checkable deposits can potentially expand by ...
- A.
$500
- B.
$100
- C.
$1,000
- D.
$250
Correct Answer
A. $500Explanation
If the required reserve ratio is 20 percent and the Fed increases reserves by $100, it means that the banks are required to hold 20 percent of the reserves and can potentially lend out the remaining 80 percent. Since $100 is 80 percent of the potential lending amount, the checkable deposits can potentially expand by $500.Rate this question:
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- 23.
Decisions by depositors to increase their holdings of , or of banks to hold will result in a smaller expansion of deposits than the simple model predicts.
- A.
Currency , required reserves
- B.
Deposits, required reserves
- C.
Currency, excess reserves
- D.
Deposits, excess reserves
Correct Answer
C. Currency, excess reservesExplanation
When depositors decide to increase their holdings of currency or when banks decide to hold excess reserves, it means that these funds are not being deposited into the banking system. As a result, the expansion of deposits will be smaller than what the simple model predicts, because the money is not being multiplied through the lending process. Therefore, the correct answer is currency, excess reserves.Rate this question:
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- 24.
If the required reserve ration is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is..
- A.
$8400
- B.
$8000
- C.
$1200.8
- D.
$1200
Correct Answer
D. $1200Explanation
The money supply can be calculated using the money multiplier formula, which is the reciprocal of the reserve ratio. In this case, the reserve ratio is 10%, so the money multiplier is 1/0.1 = 10. The money supply is then calculated by multiplying the currency in circulation ($400 billion) and checkable deposits ($800 billion) by the money multiplier. This gives us a money supply of $12,000 billion, which is equivalent to $1200. Therefore, the correct answer is $1200.Rate this question:
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- 25.
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is...
- A.
0.601
- B.
1.67
- C.
2.5
- D.
2.0
Correct Answer
C. 2.5Explanation
The money supply can be calculated using the formula: Money Supply = Currency in Circulation + Checkable Deposits. In this case, the currency in circulation is given as $400 billion and the checkable deposits are given as $800 billion. Therefore, the money supply is $400 billion + $800 billion = $1.2 trillion.Rate this question:
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- 26.
The Fed does not tightly control the monetary base because it does not completely control
- A.
The discount rate
- B.
Open market purchases
- C.
Open market sales
- D.
Borrowed reserves
Correct Answer
D. Borrowed reservesExplanation
The Fed does not tightly control the monetary base because it does not completely control borrowed reserves. This means that the Fed cannot fully dictate the amount of reserves that banks borrow from it. Borrowed reserves are the funds that banks borrow from the Federal Reserve to meet their reserve requirements. The Fed can influence the level of borrowed reserves through its monetary policy tools, such as adjusting the discount rate, but it does not have complete control over it. Therefore, the Fed's ability to tightly control the monetary base is limited.Rate this question:
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- 27.
The amount of borrowed reserves is related to the discount rate, and is related to the market interest rate.
- A.
Negatively, negatively
- B.
Positively, negatively
- C.
Positively, positively
- D.
Negatively, positively
Correct Answer
D. Negatively, positivelyExplanation
The amount of borrowed reserves is negatively related to the discount rate, meaning that as the discount rate increases, the amount of borrowed reserves decreases. On the other hand, the amount of borrowed reserves is positively related to the market interest rate, meaning that as the market interest rate increases, the amount of borrowed reserves also increases.Rate this question:
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- 28.
In the early 1930s, the currency ratio rose, as did the level of excess reserves. Money supply analysis predicts that, everything else held constant, the money supply should have ...
- A.
Risen
- B.
Remain unchanged
- C.
Either risen, fallen, or remain unchanged
- D.
Fallen
Correct Answer
D. FallenExplanation
In the early 1930s, the currency ratio rose and the level of excess reserves also increased. According to money supply analysis, if everything else remains constant, the money supply should have fallen. This is because an increase in the currency ratio and excess reserves indicates a decrease in the amount of money being circulated in the economy. Therefore, the correct answer is "fallen".Rate this question:
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- 29.
The opportunity cost of holding excess reserves is ....
- A.
The prime rate
- B.
The federal funds rate
- C.
The treasury bill rate
- D.
The discount rate
Correct Answer
B. The federal funds rateExplanation
The opportunity cost of holding excess reserves is the federal funds rate. This is because when banks hold excess reserves, they are essentially keeping money idle instead of lending it out to earn interest. The federal funds rate is the interest rate at which banks lend their excess reserves to other banks overnight. Therefore, by holding excess reserves, banks are foregoing the opportunity to earn interest at the federal funds rate.Rate this question:
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- 30.
In the market for reserves, an open market purchase the of reserves which causes the federal funds rate to fall, everything else held constant.
- A.
Increase, supply
- B.
Decreases, supply
- C.
Decreases, demand
- D.
Increases, demand
Correct Answer
A. Increase, supplyExplanation
An open market purchase refers to the buying of reserves by the central bank from commercial banks. When the central bank purchases reserves, it injects money into the banking system, increasing the supply of reserves. This increase in the supply of reserves leads to a surplus of reserves in the market, causing the federal funds rate to fall. Therefore, the correct answer is "increase, supply."Rate this question:
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- 31.
Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate. If the Federal Reserves wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a open market , everything else held constant
- A.
Defensive, purchase
- B.
Dynamic, sale
- C.
Defensive, sale
- D.
Dynamic, purchase
Correct Answer
A. Defensive, purchaseExplanation
If the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate, it means that the market interest rates are higher than the desired level set by the Federal Reserve. In order to bring the federal funds rate back to their target level, the Federal Reserve needs to decrease the market interest rates. This can be achieved by conducting an open market operation of purchasing government securities, which increases the money supply in the market and lowers interest rates. This action is considered defensive because it aims to defend the desired target rate.Rate this question:
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- 32.
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%.
- A.
Has no effect on the federal funds rate
- B.
Has an indeterminate effect on the federal funds rate
- C.
Raises the federal funds rate
- D.
Lowers the federal funds rate
Correct Answer
A. Has no effect on the federal funds rateExplanation
Lowering the discount rate from 5% to 4% in the market for reserves does not have any effect on the federal funds rate. The federal funds rate is the interest rate at which banks lend their reserves to each other overnight. The discount rate is the interest rate at which banks can borrow reserves directly from the Federal Reserve. When the discount rate is lowered, banks are more inclined to borrow from the Federal Reserve, increasing the supply of reserves in the market. However, this does not directly impact the federal funds rate because it depends on the supply and demand of reserves in the market, which is influenced by various factors other than the discount rate.Rate this question:
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- 33.
In the market for reserves, an increase in the reserves requirement the demand for reserves, the federal funds rate, everything else held constant.
- A.
Increase, lowering
- B.
Decreases, raising
- C.
Deacreases, lowering
- D.
Increases, raising
Correct Answer
D. Increases, raisingExplanation
An increase in the reserves requirement would increase the demand for reserves. When the demand for reserves increases, banks have to borrow more reserves from each other in the federal funds market. This increased demand for reserves puts upward pressure on the federal funds rate, which is the interest rate at which banks lend reserves to each other. Therefore, an increase in the reserves requirement raises the federal funds rate.Rate this question:
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- 34.
When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be ...
- A.
Offensive
- B.
Defensive
- C.
Reactionary
- D.
Dynamic
Correct Answer
B. DefensiveExplanation
When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be defensive. This means that the Federal Reserve is taking action to defend its balance sheet and liquidity position by replacing the withdrawn funds with other assets. Defensive open market operations are typically used to maintain stability in the financial system and ensure that the Federal Reserve has enough reserves to meet its obligations.Rate this question:
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- 35.
The fed's discount lending is of three types: is the most common category; isgiven to a limited number of baks in vacationand agricultural areas; is given to banks that haveexperienced severe liquidity problems.
- A.
Seasonal credit, secondary credit, primary credit
- B.
Secondary credit, seasonal credit, primary credit
- C.
Primary credit, seasonal credit, secondary credit
- D.
Seasonal credit, primary credit, secondary credit
Correct Answer
C. Primary credit, seasonal credit, secondary creditExplanation
The correct answer is primary credit, seasonal credit, secondary credit. This is because primary credit is the most common type of discount lending offered by the Federal Reserve. Seasonal credit is provided to a limited number of banks in vacation and agricultural areas. Secondary credit is given to banks that have experienced severe liquidity problems.Rate this question:
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- 36.
The discount rate is kept the federal funds rate.
- A.
Typically; above
- B.
Typically , equal to
- C.
Typically ; below
- D.
Always; below
Correct Answer
A. Typically; aboveExplanation
The correct answer is "typically; above". The discount rate is typically set above the federal funds rate. The federal funds rate is the interest rate at which banks lend funds to each other overnight, while the discount rate is the interest rate at which banks can borrow directly from the Federal Reserve. The discount rate is usually higher than the federal funds rate to encourage banks to borrow from each other first before resorting to borrowing from the Federal Reserve.Rate this question:
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- 37.
The most important advantage of discount policy is that the Fed can use it to ....
- A.
Punish banks that have deficient reserves
- B.
Control the money supply
- C.
Perform its role as lender of last resort
- D.
Precisely control the monetary base
Correct Answer
C. Perform its role as lender of last resortExplanation
The discount policy allows the Federal Reserve to act as the lender of last resort. This means that in times of financial crisis or when banks are facing liquidity issues, the Fed can provide loans to banks to ensure their stability and prevent a systemic collapse. By performing this role, the Fed helps maintain confidence in the banking system and supports overall economic stability.Rate this question:
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- 38.
An increase in reduces the money supply since it causes the to fall.
- A.
Margin requirements, money multiplier
- B.
Reserve requirements, money multiplier
- C.
Margin requirements, monetary base
- D.
Reserver requirements, monetary base
Correct Answer
B. Reserve requirements, money multiplierExplanation
An increase in reserve requirements reduces the money supply since it causes the money multiplier to fall. Reserve requirements refer to the amount of funds that banks are required to hold in reserve against their deposits. When reserve requirements are increased, banks are required to hold a larger portion of their deposits, which reduces the amount of money that can be lent out and therefore decreases the money supply. The money multiplier refers to the amount of money that can be created through the lending process, and when reserve requirements increase, the money multiplier decreases, further reducing the money supply.Rate this question:
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- 39.
The Federal reserves pay interest on reserves held on deposit. The European System of Central Banks pay interest on reserves held on deposit.
- A.
Does not, does
- B.
Does, does not
- C.
Does not, does not
- D.
Does, does
Correct Answer
A. Does not, doesExplanation
The correct answer is "does not, does". This means that the Federal reserves do not pay interest on reserves held on deposit, while the European System of Central Banks does pay interest on reserves held on deposit.Rate this question:
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- 40.
The most common definition that central bankers use for price stability is ...
- A.
Low and stable deflation
- B.
An inflation rate of zero percent.
- C.
High and stable inflation
- D.
Low and stable inflation
Correct Answer
D. Low and stable inflationExplanation
Central bankers commonly define price stability as low and stable inflation. This means that the inflation rate remains consistently low over time, without significant fluctuations. This definition is preferred because it promotes economic stability and allows for long-term planning and investment. It also helps to prevent the negative effects of both deflation and high inflation on the economy. Therefore, central bankers aim to maintain a low and stable inflation rate to achieve price stability.Rate this question:
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- 41.
Monetary policey is considered time-inconsistent because
- A.
Of the lag times associated with the implementation of monetary policy and its effect on the economy
- B.
Policy makers are tempted to pursue discretionary policy that is more expansionary in the short run
- C.
Policy makers are tempted to pursue discretionary policy that is more contractionary in the short run.
- D.
Of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.
Correct Answer
B. Policy makers are tempted to pursue discretionary policy that is more expansionary in the short runExplanation
Monetary policy is considered time-inconsistent because policy makers are tempted to pursue discretionary policy that is more expansionary in the short run. This is because there is a lag time between the implementation of monetary policy and its effect on the economy. In the short run, policy makers may be tempted to take actions that stimulate economic growth and provide immediate benefits, even if it may not be the most optimal long-term strategy. This inconsistency arises due to the challenges of balancing short-term goals with long-term stability and sustainability.Rate this question:
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- 42.
Which set of goals can, at times, conflict in the short run?
- A.
Exchange rate stability and financial market stability
- B.
High employment and economic growth
- C.
Interest rate stability and financial market stability
- D.
High employment and price level stability
Correct Answer
D. High employment and price level stabilityExplanation
High employment and price level stability can conflict in the short run because policies aimed at increasing employment may result in higher wages and increased demand for goods and services. This increased demand can lead to higher prices, causing price level instability. Conversely, policies aimed at maintaining price level stability may require reducing aggregate demand, which can lead to lower employment levels. Therefore, striking a balance between high employment and price level stability can be challenging in the short run.Rate this question:
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- 43.
Either dual or hierarchial mandate is acceptable as long as is the primary goal in the .
- A.
Reducing business-cycle fluctuations; long run
- B.
Reducing business cycle fluctuations; short run
- C.
Price stability; long run
- D.
Price stability; short run
Correct Answer
C. Price stability; long runExplanation
Either a dual or hierarchical mandate is acceptable as long as price stability is the primary goal in the long run. This means that the central bank's main objective should be to maintain a stable price level over an extended period of time. While reducing business cycle fluctuations and ensuring price stability in the short run are also important, the emphasis should be on achieving price stability in the long run. This ensures that inflation remains low and predictable, which is crucial for fostering sustainable economic growth and maintaining the purchasing power of the currency.Rate this question:
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- 44.
If the relationship between the monetary aggregate and the goal variable is weak, then ...
- A.
Inflation targeting is superior to exchange-rate targeting.
- B.
Monetary aggregate targeting will not work.
- C.
Monetary aggregate targeting is superior to inflation targeting
- D.
Monetary aggregate targeting is superior to exchange - rate tageting
Correct Answer
B. Monetary aggregate targeting will not work.Explanation
If the relationship between the monetary aggregate and the goal variable is weak, it suggests that changes in the monetary aggregate will not have a significant impact on the goal variable. Therefore, monetary aggregate targeting, which focuses on controlling the money supply to achieve economic goals, will not be effective in this situation.Rate this question:
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- 45.
The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is ..
- A.
Inflation targeting
- B.
Monetary targeting
- C.
Targeting with an implicit nominal anchor.
- D.
Interest-rate targeting.
Correct Answer
A. Inflation targetingExplanation
The correct answer is inflation targeting. Inflation targeting is a monetary policy strategy where central banks set a specific inflation target and use various tools to achieve it. In countries like Canada, New Zealand, and the United Kingdom, the central banks use inflation targeting as their primary approach to monetary policy. They focus on controlling inflation rates within a certain range by adjusting interest rates and other policy measures. This approach helps to promote price stability and anchor inflation expectations in the economy.Rate this question:
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- 46.
Which of the following is not a disadvantage to inflation targeting?
- A.
There is a lack of transparency.
- B.
Inflation targets could impose a rigid rule on policy makers
- C.
There is potential for larger output fluctuations.
- D.
There is a delayed signal about achievement of the target.
Correct Answer
A. There is a lack of transparency.Explanation
Inflation targeting generally promotes transparency as it requires central banks to communicate their inflation targets and the strategies they will use to achieve them. This helps to anchor inflation expectations and build credibility. Therefore, a lack of transparency would not be a disadvantage to inflation targeting.Rate this question:
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- 47.
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.
- A.
1 year, 2 years
- B.
1 year, 6 months
- C.
2 years, 1 year
- D.
6 months, 1 year
Correct Answer
A. 1 year, 2 yearsExplanation
Monetary policy refers to the actions taken by the central bank to control the supply of money and interest rates in an economy. The given answer suggests that it takes just over 1 year for monetary policy to affect output, meaning that the impact of changes in monetary policy on the level of economic output can be observed after approximately one year. Additionally, it takes just over 2 years for monetary policy to affect the inflation rate, indicating that changes in monetary policy take longer to influence the overall price level in the economy, with the effects becoming noticeable after around two years.Rate this question:
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- 48.
Which of the following is not a disadvantage of using an implicit nominal anchor for monetary policy?
- A.
It relies on a stable money-inflation relationship
- B.
There is low accountability for central bankers.
- C.
This type of policy relies on the policy-makers in charge.
- D.
There is low transparency of policy.
Correct Answer
A. It relies on a stable money-inflation relationshipExplanation
Using an implicit nominal anchor for monetary policy does not have a disadvantage of relying on a stable money-inflation relationship. This means that this type of policy does not require a stable relationship between money supply and inflation in order to be effective. Other disadvantages mentioned in the options include low accountability for central bankers, reliance on the policymakers in charge, and low transparency of policy.Rate this question:
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- 49.
If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because ....
- A.
Of fluctuations in the business cycle
- B.
Of fluctuations in the consumption function
- C.
Bond values will tend to remain stable
- D.
Of fluctuations in the demand for reserves
Correct Answer
D. Of fluctuations in the demand for reservesExplanation
When a central bank targets a monetary aggregate, it means that it aims to control the supply of money in the economy. However, if there are fluctuations in the demand for reserves, it can affect the central bank's ability to control the interest rate. Fluctuations in the demand for reserves can lead to changes in the amount of money in circulation, which in turn can impact the interest rate. Therefore, targeting a monetary aggregate can result in the central bank losing control over the interest rate due to fluctuations in the demand for reserves.Rate this question:
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- 50.
Which of the following is not a requirement in selecting an intermediate target?
- A.
Measurability
- B.
Predictability
- C.
Flexibility
- D.
Controllability
Correct Answer
C. FlexibilityExplanation
In selecting an intermediate target, flexibility is not a requirement. The other three options - measurability, predictability, and controllability - are important factors to consider when choosing an intermediate target. Measurability ensures that progress towards the target can be quantified and evaluated. Predictability allows for the estimation of future outcomes and helps in planning. Controllability ensures that the target can be influenced and controlled. On the other hand, flexibility refers to the ability to adapt or change plans, which is not a requirement when selecting an intermediate target.Rate this question:
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