Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
61. The central banks of Australia, Canada and New Zealand have eliminated reserve
requirements and conduct monetary policy through a “channel” or “corridor” system that
involves setting a:
A. Target interest rate only
62. The central banks of Australia, Canada and New Zealand have eliminated reserve
requirements and conduct monetary policy through a “channel” or “corridor” system. The
“channel” or “corridor” refers to the spread between the central bank’s:
A. Target interest rate and its deposit rate
63. One key difference between the Fed and the European Central Bank (ECB) in their
reserve requirements is that the:
A. Reserve requirements of the ECB are at a much higher rate than the Fed’s
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
64. The European equivalent of the U.S.’s market federal funds rate is called the:
D. Overnight repurchase rate
65. Which of the following statements is most correct?
A. The FOMC is more successful at keeping the market rate closer to the target rate than the
ECB
66. Over the years most monetary policy experts would agree with each of the following
statements, except:
A. The reserve requirement is not useful as an operational instrument
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
67. Which of the following features would characterize a good monetary policy instrument?
D. Difficult to change
68. The reserve requirement does not meet all of the criteria of a good monetary policy tool,
because it:
A. Is not controllable
69. Which of the following statement is most true regarding monetary policy tools?
D. The Fed currently uses a quantity tool for monetary policy
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
70. From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side
effect of this strategy was:
A. The inflation rate increased to over 18 percent in 1983
71. In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to the
actual market interest rates that occurred, the:
D. Inflation rate would have risen further
72. Which of the following statements is not correct?
A. The current target of the FOMC is the federal funds rate
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
73. Which of the following statements is not correct?
A. The current target of the FOMC is the federal funds rate
74. If reserve demand is volatile, in order for the central bank to keep interest rates from being
volatile, it must:
A. Target the quantity of reserves
D. The real goals of monetary policy
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
76. Which of the following would be classified as intermediate targets for U.S. monetary
policy?
77. Over the last few decades, central bankers have:
D. Developed more intermediate targets
78. During the 1990s many countries developed a monetary policy framework that focused on
inflation targeting. This is an example of policymakers:
D. Developing a new intermediate target
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
79. Central banks that have a hierarchical mandate with inflation targeting basically are
saying:
A. Hitting the inflation target is the first priority after all other stated objectives are reached
80. Inflation targeting does all of the following except:
A. Increase policymakers’ credibility
81. The Taylor rule is:
D. A rule adopted by Congress to make the Fed’s monetary policy more accountable to the
public
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
82. The components of the formula for the Taylor rule includes each of the following, except:
A. The target federal funds rate
83. The Taylor rule assumes the real long-term interest rate would be:
D. One percent
84. If each of the coefficients in front of the inflation gap and the output gap in the formula
for the Taylor rule is 0.5, this implies:
A. That the Fed assumes that inflation and output are right on target
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
85. Given the following formula for the Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If the current rate of inflation is 5% and the target rate of inflation is 2%, and output is 3%
above its potential, the target federal funds rate would be:
A. 6.5%
86. Given the following formula for the Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3%
above its potential, the target federal funds rate would be:
D. 4.5%
87. Given the following formula for the Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If output in the economy were to fall by an additional one percent below potential, the target
federal funds rate would:
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
88. Given the following formula for the Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If the inflation rate in the economy were to fall by 2% below the target inflation rate, the
target federal funds rate would:
D. Increase by 1.0%
89. Given the following formula for the Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
Every one percent decrease in the rate of inflation will:
A. Raise the target federal funds rate by 1.5%
90. Given the following formula for the Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
Every one percent increase in the rate of inflation will:
A. Increase the real federal funds rate by 1.5%
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
91. The constant term in the Taylor rule is usually equal to:
A. The long-term risky real interest rate
D. Producer Price Index
93. A practical limitation of using the Taylor rule for setting the target federal funds rate
would be that it:
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
18–32
94. Of the following, which would not be considered an unconventional monetary policy
approach?
D. Credit easing
95. Unconventional monetary policy tools include all but:
A. quantitative easing
Short Answer Questions
Chapter 18 – Monetary Policy: Stabilizing the Domestic Economy
96. In 2001, the FOMC lowered the target federal funds rate eleven times, cutting the rate
from 6½ percent to 1¾ percent. Why didn’t the Fed just cut the rate by larger amounts early
on?
97. State and briefly define the tools of monetary policy available to the Federal Reserve.
98. Why is it necessary to distinguish between the target federal funds rate and the market
federal funds rate?
99. Could the Fed impact the amount of borrowing in the federal funds market without
changing their target for the federal funds rate? Explain.
100. Why does the Federal Funds rate face a zero bound?
101. Describe the supply curve in the market for bank reserves.
102. Is discount lending used to keep banks from failing? Explain.