41) The oldest central bank, founded in 1694, is the
A) Bank of England.
B) Deutsche Bundesbank.
C) Bank of Japan.
D) Federal Reserve System.
42) The newest central bank, which began operations in January 1999, is the
A) European Central Bank.
B) Bank of Argentina.
C) Bank of Korea.
D) Bank of New Zealand.
43) Which of the following central banks has the greatest degree of independence?
A) Bank of England
B) European Central Bank
C) Bank of Japan
D) Federal Reserve System
44) A 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 mandated that their central banks give up multiple policy goals to focus strictly on
inflation.
D) have required their central banks to coordinate policies with their ministers of finance.
45) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to
maximize
A) the public’s welfare.
B) its own welfare.
C) profits.
D) conflict between the executive and legislative branches of government.
46) The theory of bureaucratic behavior suggests that the Federal Reserve will
A) try to avoid a conflict with the president and Congress over increases in interest rates.
B) try to gain regulatory power over more banks.
C) devise clever strategies in an effort to avoid blame for poor economic performance.
D) do all of the above.
47) According to the theory of bureaucratic behavior, the objective of bureaucracy is
A) to maximize its own welfare, meaning that it seeks additional power and prestige.
B) to maximize consumers’ surplus, meaning that it seeks additional regulatory powers.
C) to protect the industry it regulates, meaning that it seeks additional regulatory powers.
D) none of the above.
48) According to the theory of bureaucratic behavior,
A) the objective of a bureaucracy is to maximize its own welfare, meaning that it seeks
additional power and prestige.
B) the bureaucracy will fight vigorously to preserve its autonomy; thus, it will attempt to avoid
conflict with the president and Congress.
C) the bureaucracy will support legislation that gives it additional regulatory power.
D) all of the above describe bureaucratic behavior.
49) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
A) resists so vigorously congressional attempts to limit the central bank’s autonomy.
B) is secretive about the conduct of future monetary policy.
C) sought less control over banks in the 1980s.
D) all of the above.
E) only A and B of the above.
50) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
A) is supportive of congressional attempts to limit the central bank’s autonomy.
B) is secretive about the conduct of future monetary policy.
C) sought less control over banks in the 1980s.
D) is willing to take on powerful groups that may threaten its autonomy.
51) The strongest argument for an independent Federal Reserve rests on the view that subjecting
the Fed to more political pressures would impart
A) an inflationary bias to monetary policy.
B) a deflationary bias to monetary policy.
C) a disinflationary bias to monetary policy.
D) a countercyclical bias to monetary policy.
52) Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process can
A) impart an inflationary bias to monetary policy.
B) impart a deflationary bias to monetary policy.
C) generate a political business cycle in which, just before an election, expansionary policies are
pursued to lower unemployment and interest rates.
D) cause both A and C of the above to occur.
53) The case for Federal Reserve independence includes the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) 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.
C) a Federal Reserve under the control of Congress or the president might make the so-called
political business cycle more pronounced.
D) all of the above.
54) The case for Federal Reserve independence includes the idea that
A) 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.
B) a Federal Reserve under the control of Congress or the president might make the so-called
political business cycle more pronounced.
C) the principal-agent problem is perhaps worse for the Fed than for congressmen since the
former does not answer to the voters on election day.
D) only A and B of the above.
55) The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) 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.
C) policy is always performed better by an elite group such as the Fed.
D) a Federal Reserve under the control of Congress or the president might make the so-called
political business cycle more pronounced.
56) The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) the principal-agent problem is perhaps worse for the Fed than for congressmen since the
former does not answer to the voters on election day.
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.
57) Advocates of Fed independence fear that subjecting the Fed to direct presidential or
congressional control would
A) impart an inflationary bias to monetary policy.
B) force monetary authorities to sacrifice the long-run objective of price stability.
C) make the so-called political business cycle even more pronounced.
D) do all of the above.
E) do only A and B of the above.
58) Advocates of Fed independence fear that subjecting the Fed to direct presidential or
congressional control would
A) impart an inflationary bias to monetary policy.
B) force monetary authorities to sacrifice the long-run objective of price stability.
C) make the so-called political business cycle less pronounced.
D) do all of the above.
E) do only A and B of the above.
59) Supporters of the current system of Fed independence believe that a less autonomous Fed
would
A) adopt a long-run bias toward policymaking.
B) pursue overly expansionary monetary policies.
C) be more likely to create a political business cycle.
D) do only B and C of the above.
60) Critics of the current system of Fed independence contend that
A) the current system is undemocratic.
B) voters have too much say about monetary policy.
C) the president has too much control over monetary policy on a day–to–day basis.
D) all of the above are true.
61) Critics of Fed independence argue
A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no
one.
B) that an independent Fed conducts monetary policy with a consistent inflationary bias.
C) that the Fed, since it does not face a binding budget constraint, spends too much of its
earnings.
D) only A and B of the above.
62) Critics of Fed independence argue
A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no
one.
B) that independence seemingly does little to guarantee good monetary policy.
C) that its independence may encourage the Fed to pursue a course of narrow self-interest rather
than the public interest.
D) all of the above.
63) Instrument independence means the central bank is free from
A) political pressure regarding how it uses the tools of monetary policy.
B) political pressure regarding the goals it pursues.
C) both A and B of the above.
D) neither A nor B of the above.
64) Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and 2.5% per
year is passed by Congress. This law restricts the Fed’s
A) instrument independence.
B) goal independence.
C) both A and B of the above.
D) neither A nor B of the above.
65) Cross-country evidence suggests that an increase in central bank independence results in a
________ inflation rate and ________ unemployment.
A) lower; higher
B) lower; no worse
C) higher; lower
D) higher; higher