59) The policy that meant the Fed would make loans to member commercial banks whenever
they showed up at the discount window with “eligible paper” was known as
A) free reserves targeting.
B) the real bills doctrine.
C) nonborrowed reserves targeting.
D) leaning against the wind.
60) The real bills doctrine was the guiding principle for the conduct of monetary policy during
the
A) 1910s.
B) 1940s.
C) 1950s.
D) 1960s.
61) By the end of World War I, the Fed’s policies of rediscounting eligible paper and keeping
interest rates low led to
A) accelerating inflation.
B) stable prices and strong economic growth, as predicted by the real bills doctrine.
C) recession as reserves were steadily drained from the banking system.
D) none of the above.
62) The Fed’s operating strategy that led to double–digit inflation following the end of World
War I was known as
A) the free reserves policy.
B) the federal–funds targeting strategy.
C) the real bills doctrine.
D) pegging the money supply.
63) The Fed accidentally discovered open market operations in the early
A) 1920s.
B) 1910s.
C) 1900s.
D) 1890s.
64) The Fed accidentally discovered open market operations when
A) it came to the rescue of failing banks in the early 1930s and found that its purchases of
bank loans injected reserves into the banking system.
B) it purchased securities for income following the 1920–1921 recession.
C) it attempted to slow inflation in 1919 by selling securities and found that its sales
drained reserves from the banking system.
D) it reinterpreted a key provision of the Federal Reserve Act.
65) In the 1930s, the Fed
A) failed to perform its role as lender of last resort.
B) raised reserve requirements in three steps in 1936–37.
C) was given broad authority over reserve requirements.
D) all of the above.
E) only A and B of the above.
66) In the 1930s, the Fed
A) did not have enough power to perform the role of lender of last resort.
B) raised reserve requirements in three steps in 1936–37.
C) was given less authority over reserve requirements.
D) all of the above.
E) only A and B of the above.
67) During World War II, whenever interest rates would rise and the price of bonds would
begin to fall, the Fed would
A) lower reserve requirements.
B) raise reserve requirements.
C) make open market purchases of government securities.
D) make open market sales of government securities.
68) During World War II, the Fed in effect relinquished its control of monetary policy through
its policy of
A) continually lowering reserve requirements.
B) continually raising reserve requirements.
C) pegging interest rates.
D) targeting free reserves.
69) A procyclical monetary policy causes the money supply to _________ during recessions and
to _________ when the economy is growing.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
70) A policy of targeting free reserves is likely to be
A) procyclical.
B) stabilizing.
C) too difficult to implement practically.
D) none of the above.
71) In practice, the Fed’s policy of targeting _________ in the 1960s proved to be _________,
destabilizing the economy.
A) money market conditions; countercyclical
B) money market conditions; procyclical
C) monetary aggregates; countercyclical
D) monetary aggregates; procyclical
72) Although the Fed professed employment of a monetary aggregate targeting strategy during
the 1970s, its behavior suggests that it emphasized
A) free reserve targeting.
B) interest rate targeting.
C) a real bills doctrine.
D) price index targeting.
73) The Fed’s use of the federal funds rate as an operating target in the 1970s resulted in
A) countercyclical monetary policy.
B) too slow growth in M1 throughout the decade.
C) procyclical monetary policy.
D) too rapid growth in M1 throughout the decade.
E) none of the above.
74) The Fed’s operating procedures employed between 1979 and 1982 resulted in _________
swings in the federal funds rate and _________ swings in the M1 growth rate.
A) increased; increased
B) increased; decreased
C) decreased; decreased
D) decreased; increased
75) Explanations for the Fed’s poor monetary control during 1979–1982 include
A) the acceleration of financial deregulation.
B) the suspension of credit controls in mid–1979.
C) the Fed’s desire to fight inflation without taking all the criticism for the high interest
rate policy.
D) only A and B of the above.
E) only A and C of the above.
76) The fluctuations in both money supply growth and the federal funds rate during 1979–1982
suggest that the Fed
A) had shifted to borrowed reserves as an operating target.
B) had shifted to nonborrowed reserves as an operating target.
C) had shifted to the monetary base as an operating target.
D) never intended to target monetary aggregates.
77) The fluctuations in both money supply growth and the federal funds rate during 1979–1982
suggest that the Fed
A) never intended to target monetary aggregates.
B) used the announced strategy of targeting nonborrowed reserves as a smoke screen to
fight inflation.
C) had shifted to the monetary base as an operating target.
D) both A and B of the above.
78) Monetary policy since 1982 suggests that the Fed is
A) finally using a monetary aggregate as its intermediate target.
B) less concerned with fluctuations in the federal funds rate than in the 1979–1982 period.
C) more concerned with exchange rates than with interest rates.
D) none of the above.
79) Fed policy since 1982 suggests that
A) monetary aggregates continue to be rejected as its intermediate target.
B) it is pursuing a policy of interest rate smoothing.
C) it is now more concerned with exchange rates than with interest rates.
D) all of the above are true.
E) only A and B of the above are true.
80) By 1985, the strength of the dollar had caused a deterioration in American competitiveness
with foreign businesses. In response, the Fed _________ money growth to _________ the
value of the dollar.
A) increased; raise
B) increased; lower
C) decreased; raise
D) decreased; lower
81) During the period 1985–87, the actions of monetary policy authorities indicate that they were
most directly concerned with
A) stabilizing interest rates, even at the expense of losing control of monetary aggregates.
B) eliminating even moderate inflation.
C) lowering the value of the dollar.
D) none of the above.
82) Volatile fluctuations in money supply growth in the United Kingdom in the 1970s suggest
that the Bank of England
A) did not pursue its M3 monetary target seriously.
B) did not pursue its M1 monetary target seriously.
C) used the announced strategy of targeting the federal funds rate as a smoke screen to
fight inflation.
D) did both A and C of the above.
E) did both B and C of the above.
83) The Canadian experience with monetary policy during the 1970s and 1980s closely parallels
that of the United States in which respects?
A) The Canadian central bank announced a strategy of targeting a monetary aggregate in
the 1970s.
B) The Canadian central bank abandoned its monetary targeting strategy because of
exchange rate concerns.
C) The Canadian central bank’s announced strategy of targeting money was merely a
smoke screen to fight inflation.
D) All of the above.
E) Only A and B of the above.
84) The German Bundesbank’s experience with monetary policy during the 1970s and 1980s is
similar to that of Canada‘s central bank in which respects?
A) Both the German and Canadian central banks announced strategies to target monetary
aggregates in the 1970s.
B) Both the German and Canadian central banks were willing to abandon monetary
targeting due to exchange rate concerns.
C) Although the Canadian central bank abandoned its monetary targeting strategy
permanently, the Bundesbank has continued to target money.
D) All of the above.
E) Only A and B of the above.
85) The Bundesbank experience with monetary policy during the 1970s and 1980s is similar to
that of Canada’s central bank in which respects?
A) Both the German and Canadian central banks announced strategies to target monetary
aggregates in the 1970s.
B) Both the German and Canadian central banks were willing to abandon monetary
targeting due to exchange rate concerns.
C) Although the German central bank abandoned its monetary targeting strategy
permanently, the Canadian central bank has continued to target money.
D) Only A and B of the above.
86) Since 1978, the central bank of Japan has conducted monetary policy
A) using an interest rate as its operating target.
B) in a way that has produced relatively stable money growth.
C) to successfully lower Japan’s inflation rate.
D) to achieve all of the above.
E) to achieve only B and C of the above.
87) Since 1978, the central bank of Japan has conducted monetary policy
A) using the monetary base as its operating target.
B) in a way that has produced relatively stable money growth.
C) to help its exporters by lowering the value of the yen.
D) to achieve all of the above.
88) 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.
89) 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.
90) 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.
91) An open market _________ leads to a/an _________ of reserves and deposits in the banking
system and hence to a/an _________ of the monetary base and the money supply.
A) sale; expansion; contraction
B) purchase; expansion; contraction
C) sale; expansion; expansion
D) purchase; expansion; expansion
92) Regulations making it obligatory for depositroy 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.
93) 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
94) 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.
95) 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
96) Inflation targeting involves
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.
8.2 True/False
1) An objective of the Federal Reserve in its conduct of monetary policy is high employment.
2) When workers voluntarily leave work while they look for better jobs, the resulting
unemployment is called frictional unemployment.
3) The discount rate is an operating target.
4) The federal funds rate is an operating target.
5) Open market purchases by the Fed increase the supply of nonborrowed reserves.
6) Open market purchases by the Fed cause the federal funds rate to rise.
7) Flexibility is a requirement in selecting an intermediate target.
8) The real bills doctrine was the guiding principle for the conduct of monetary policy during
the 1910s.
9) The Fed accidentally discovered open market operations in the early 1890s.
10) During World War II, the Fed in effect relinquished its control of monetary policy through
its policy of pegging interest rates.
11) The Fed’s use of the federal funds rate as an operating target in the 1970s resulted in
countercyclical monetary policy.
12) The Fed policy since 1982 suggests that it is using a monetary aggregate as its intermediate
target.
13) Since 1978, the central bank of Japan has conducted monetary policy in a way that has
produced relatively stable money growth.
14) Financial innovation, deregulation, and the breakdown of a stable relationship between M1
and economic activity all contributed to the Fed abandoning M1 as an intermediate target.
15) Inflation targeting makes the central bank less accountable.
16) An open market sale leads to an expansion of reserves and deposits in the banking system
and hence to a decline in the monetary base and the money supply.
17) Decreased transparency of the monetary policy strategy through communication with the
public and the markets about the plans and objectives of monetary policymakers is an
element of inflation targeting.
8.3 Essay
1) Explain how the Fed’s use of its three tool of monetary policy affect supply and demand in
the market for reserves and the equilibrium federal funds interest rate.
2) Distinguish between the three types of Fed discount loans: primary credit, secondary credit,
and seasonal credit.
3) Why does the Fed use open market operations to a greater extent than reserve requirements
in its conduct of monetary policy?
4) Explain why the use of an interest rate targeting strategy may result in procyclical monetary
growth.
5) “The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to
procyclical money growth.” True, false, or uncertain? Why?
6) If inflation and unemployment are of direct concern to Fed officials, why do they make such
a big issue about money growth and interest rates? Why don’t they just target the
unemployment rate and the inflation rate directly? Explain.
7) Describe the goals of the Federal Reserve. What happens when these goals come into
conflict? How would one decide if lower inflation is more important than lower
unemployment? Explain.
8) Can the Fed control the money supply? Has it done so? What evidence can you provide to
support your answer to each question?
9) Compare the advantages and disadvantages of monetary targeting and inflation targeting.
10) Describe what criteria is applied when choosing a policy instrument.