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.
73) Which of the following statements is true regarding the Fed’s procedures for operating the
discount window?
A) The Fed’s operating procedures and paying interest on reserves contains the federal funds rate
between the interest rate paid on reserves and the discount rate.
B) The Fed’s operating procedures and paying interest on reserves creates more fluctuation in the
federal funds rate than if they simply didn’t pay interest on reserves.
C) The Fed’s operating procedures and paying interest on reserves has no impact on the
fluctuation of the federal funds rate.
D) None of the above is correct.
74) Which of the following statements is true?
A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the
deleveraging of credit markets reduces economic activity.
B) Bubbles driven soley by irrational exuberance lead to a failure of financial institutions.
C) Both A and B are correct.
D) Neither A nor B is correct.
75) If the Fed wants to “prick” an asset-pricing bubble driven by a credit boom, what is the
primary tool for accomplishing this?
A) Raising interest rates
B) Lowering interest rates
C) Increasing reserve requirements
D) Taking a short position in the overpriced asset
76) In response to an asset-price bubble, macroprudential regulation appears to be the right tool.
What is macroprudential regulation?
A) Increasing the federal funds rate across the macroeconomy
B) The use of tax incentives to capture some of the gains from bubbles
C) Regulatory policy to affect what is happening in credit markets in the aggregate
D) None of the above is correct.
77) As of June 2013, the consolidated balance sheet of the Federal Reserve System included
about ________ in assets.
A) $3.5 trillion
B) $2.0 trillion
C) $1.5 trillion
D) $500 billion
10.2 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) Inflation targeting makes the central bank less accountable.
9) 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.
10) 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.
11) The Fed’s operating procedures and paying interest on reserves contains the federal funds
rate between the interest rate paid on reserves and the discount rate.
12) An important lesson from the global financial crisis is that central banks and other regulators
should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction.
Intervention is always a mistake.
13) Quantitative easing and credit easing are essentially the same thing.
14) In the long run, the price stability goal is inconsistent with other goals, such as economics
growth, stability of financial markets, etc.
15) The natural rate of unemployment is not lowered by high inflation, so higher inflation cannot
produce lower unemployment or more employment in the long run.
16) In the short run, price stability often conflicts with the goals of high employment and
interest-rate stability.
10.3 Essay
1) Explain how the Fed’s use of its three tools 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.
11) Describe and discuss Chairman Bernanke’s views on inflation targeting and transparency in
central banking.
12) Distinguish between a hierarchical mandate and a dual mandate, with regard to central bank
goals.
13) Discuss some of the issues central banks will face maintaining price stability as a short-run
goal?
14) Discuss the role of the Fed as a lender of last resort during the 2007-2009 financial crisis.
15) What is the argument for the Fed paying interest to banks on required reserves? Are there
good arguments for not doing this?
16) Discuss how the monetary policy of the European Central Bank is similar to the U.S. How
are they different?
17) Describe an asset-price bubble.
18) What are the arguments for and against central bank intervention during asset-price bubbles?
19) Discuss the unconventional liquidity provisions implemented by the Fed in 2007.
20) Discuss the differences between quantitative easing and credit easing.
21) Discuss how altering the composition of the Fed’s balance sheet can stimulate the economy.
22) List and describe the various assets and liabilities making up the consolidated balance sheet
of the Federal Reserve System.