45) If the Fed’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 Fed 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 effect the desired targets and goals.
B) The Fed 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 effect the desired targets and goals.
C) The Fed selects its policy goals, then the intermediate targets consistent with achieving its
policy goals, then the policy tools consistent with its intermediate targets. Finally, it adjusts its
operating targets to effect the desired targets and tools.
D) The Fed 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 effect the desired targets and tools.
E) None of the above.
46) An advantage of an intermediate targeting strategy is that it provides the Fed 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) all of the above.
E) only A and B of the above.
47) Which of the following is not a requirement in selecting an intermediate target?
A) Measurability
B) Controllability
C) Flexibility
D) Predictability
48) Which of the following is a potential operating target for the Fed?
A) The monetary base
B) The M1 money supply
C) Nominal GDP
D) The discount rate
49) Which of the following is a potential operating target for the Fed?
A) Nonborrowed reserves
B) The federal funds rate
C) The monetary base
D) All of the above
50) 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
51) When it comes to choosing an operating target, both the ________ rate and ________
aggregates are easily controllable using the Fed’s policy tools.
A) federal funds; monetary
B) federal funds; reserve
C) three-month Treasury bill; monetary
D) ten-year Treasury bond; reserve
52) If the desired intermediate target is an interest rate, then the preferred operating target will be
a(n) ________ variable like the ________.
A) interest rate; three-month Treasury bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed base
53) If the desired intermediate target is a monetary aggregate, then the preferred operating target
will be a(n) ________ variable like the ________.
A) interest rate; three-month Treasury bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed reserves
54) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, fluctuations in the
reserves demand curve will cause ________ to fluctuate.
A) nonborrowed reserves
B) the federal funds interest rate
C) monetary aggregates
D) the inflation rate
55) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, an increase in the
demand for reserves will result in a(n) ________ in ________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate
56) If the Fed uses the federal funds rate as an interest rate target, fluctuations in the reserves
demand curve will cause ________ to fluctuate.
A) nonborrowed reserves
B) the federal funds interest rate
C) Treasury bill interest rates
D) the inflation rate
57) If the Fed uses the federal funds rate as an interest rate target, an increase in the demand for
reserves will result in a(n) ________ in ________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate
58) Under inflation targeting, a central bank must pursue policies that
A) keep the inflation rate at a target value of zero.
B) keep the inflation rate at some specific target value.
C) keep the inflation rate within a specific target range.
D) lower the inflation rate, provided this can be done without raising the unemployment rate
above a specified target value.
59) The first country to mandate that its central bank adopt inflation targeting was
A) the United States.
B) the United Kingdom.
C) Canada.
D) New Zealand.
60) Banks’ holding of deposits in accounts with the Fed, plus currency that is physically held in
banks are called
A) the monetary base.
B) government securities.
C) open market operations.
D) reserves.
61) An open market ________ leads to a(n) ________ of reserves and deposits in the banking
system and hence to a(n) ________ of the monetary base and the money supply.
A) sale; expansion; contraction
B) purchase; expansion; contraction
C) sale; expansion; expansion
D) purchase; expansion; expansion
62) Regulations making it obligatory for depository institutions to keep a certain fraction of their
deposits in accounts with the Fed are
A) open market operations.
B) federal funds rate.
C) required reserve ratio.
D) reserve requirements.
63) Which type of open market operation is intended to change the level of reserves?
A) Defensive open market operations
B) Reserve requirements
C) Dynamic open market operations
D) Market equilibrium
64) The type of open market operation intended to offset movements in other factors that affect
reserves and the monetary base is
A) the dynamic open market operations.
B) the defensive open market operations.
C) the reserve requirements.
D) market equilibrium.
65) What goals are continually mentioned by central bank officials when discussing the
objectives of monetary policy?
A) High unemployment
B) Instability in foreign exchange markets
C) Interest-rate stability
D) All of the above
66) Which of the following statements is correct, concerning price stability as a monetary goal?
A) In the long run, no inconsistency exists between the price stability goal and the
other goals, such as high unemployment.
B) In the short run price stability often conflicts with the goals of high employment and interest–
rate stability.
C) Neither A nor B is true.
D) Both A and B are correct.
67) Which of the following statements is correct, concerning price stability as a monetary goal?
A) In the long run, inconsistencies exists between the price stability goal and the
other goals, such as high unemployment.
B) In the short run price stability does not conflict with the goals of high employment and
interest-rate stability.
C) Neither A nor B is true.
D) Both A and B are correct.
68) The Bank of England, as well as the ECB, put price stability first among all goals. This is
known as a ________.
A) hierarchical mandate
B) dual mandate
C) singular mandate
D) ubiquitous mandate
69) The Fed puts price stability along with maximum employment as its primary goals. This is
known as a ________.
A) hierarchical mandate
B) dual mandate
C) singular mandate
D) ubiquitous mandate
70) Hierarchical mandates can cause a problem that Mervyn King, Governor of the Bank of
England, refers to as an “inflation nutter,” that can lead to large ________.
A) inflation spikes
B) output fluctuations
C) unemployment rates
D) economic growth
71) Inflation targeting involves
A) a public announcement of medium-term numerical targets for inflation.
B) increased accountability of the central bank for attaining its inflation objectives.
C) an information-inclusive approach in which many variables are used in making decisions
about monetary policy.
D) all of the above.
72) During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the
crisis?
A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25.
B) The Fed set up the Term Auction Facility to provide further liquidity to banks.
C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P.
Morgan.
D) all of the above.