Chapter 15
Central Banks in the World Today
Multiple-Choice Questions
1. The central bank in the United States is:
a. the Bank of America.
b. the Federal Reserve.
c. the U.S. Treasury.
d. the Bank of the United States.
2. The number of central banks that exist in the world today is:
a. less than 10.
b. about 250.
c. over 180.
d. over 50 but less than 100.
3. One monopoly that modern central banks have is in:
a. regulating other banks.
b. making loans to banks.
c. issuing U.S. Treasury securities.
d. issuing currency.
4. In the U.S. the authority to issue currency is held by:
a. the Federal Reserve.
b. the U.S. Treasury.
c. the Office of the Comptroller of the Currency.
d. the U.S. Mint.
5. Monetary policy in the United States is under the control of:
a. the U. S. Treasury.
b. the President.
c. the Federal Reserve.
d. the U.S. Senate.
6. The ability to create money means the central bank can control:
a. the availability of money and credit in a country‘s economy.
b. tax revenue.
c. the unemployment rate.
d. government expenditures.
7. Which of the following statements is true?
a. Printing currency can be a profitable venture for a government.
b. Printing currency, while necessary, is a losing venture for a
government.
c. Printing too much money usually leads to lower prices.
d. In the modern economy the amount of money created has no effect on prices.
8. Many governments give their central bank control over issuing currency because:
a. printing currency can be profitable for a government so government officials may have a
strong incentive to print too much.
b. having large amounts of currency can lead to lower rates of inflation.
c. central banks use the profits from issuing currency to finance their operations.
d. the only way to distribute currency to banks is through the central bank.
9. In its role as the bankers’ bank, a central bank performs each of the following, except:
a. providing loans during times of financial distress.
b. providing deposit insurance.
c. overseeing commercial banks and the financial system.
d. managing the payments system.
10. The central bank has the ability to create money; this means it:
a. can control the availability of money but not the availability of credit in the economy.
b. can make loans only when other institutions can.
c. can impact the rate of inflation.
d. has an objective to maximize its profit.
11. The stability of the financial system is enhanced by the ability of central banks to:
a. be a lender of last resort.
b. provide loans to insolvent banks.
c. provide deposit insurance.
d. convert poorly run banks into branches of the central bank.
12. In 2015, the average daily volume on the Federal Reserve’s Fedwire system was:
a. $33 billion.
b. $330 billion.
c. $3.3 trillion.
d. $330 million.
13. The Federal Reserve’s Fedwire system is used mainly to provide:
a. a means for foreign banks to transfer funds to U.S. banks.
b. an inexpensive and reliable way for financial institutions to transfer funds to one another.
c. an inexpensive way for individuals to pay their bills on-line.
d. a means for the Treasury to collect tax payments.
14. Which is a function of modern central banks?
a. To control securities markets
b. To control the government’s budget
c. To control the availability of money and credit
d. To manage fiscal policy
15. The rationale for the existence of central banks is mainly that:
a. financial markets lack transparency.
b. they are needed for the supervision of banks.
c. financial intermediation cannot occur without a central bank.
d. financial systems are prone to periods of extreme volatility.
16. The specific goals of central banks include all of the following except:
a. high stock prices.
b. low and stable inflation.
c. high and stable real growth.
d. a stable exchange rate.
17. The specific goals of central banks include each of the following, except:
a. high and stable real growth.
b. low and stable inflation.
c. high levels of exports.
d. low and stable unemployment.
18. A primary goal of central banks is to:
a. reduce the idiosyncratic risk that impacts specific investments.
b. reduce systematic risk.
c. keep stock and bond prices high.
d. keep inflation rates high.
19. Central banks often find:
a. they can efficiently pursue all of their goals simultaneously.
b. there are tradeoffs that make pursuing all of their goals simultaneously impossible.
c. the goal(s) they pursue will be determined by their profitability.
d. they must keep their goals secret or else they cannot be attained.
20. The primary objective of most central banks in industrialized economies is:
a. high securities prices.
b. low unemployment.
c. price stability.
d. a strong domestic currency.
21. If prices are not stable:
a. money becomes less useful as a store of value.
b. money performs better as a unit of account.
c. it may be an inconvenience, but resources are still allocated efficiently.
d. prices become highly useful for conveying information.
22. Which of the following is the best analogy? Inflation is like:
a. a pound having more ounces.
b. a day having more hours.
c. a minute having fewer seconds.
d. a mile having more feet.
23. The efficient allocation of resources requires:
a. that prices reflect the relative value of goods and services.
b. that inflation not exceed three percent a year.
c. deflation.
d. prices to remain constant.
24. Which of the following statements is most accurate?
a. As the inflation rate increases, inflation becomes less stable.
b. As the inflation rate decreases inflation becomes less stable.
c. As the inflation rate decreases inflation becomes more volatile.
d. As the inflation rate increases, inflation becomes more stable.
25. Stable inflation implies:
a. that the rate of inflation averaged over many years is zero.
b. that inflation is predictable.
c. that the rate of inflation conceals relative price changes.
d. low rates of unemployment.
26. The correlation between high rates of inflation and economic growth is:
a. direct; one brings about the other.
b. inverse; high inflation usually means low economic growth.
c. there is no correlation between these measures.
d. is direct at low rates of economic growth and inverse at high rates.
27. Most economists agree that the target rate of inflation for the central banks should be:
a. between 7 and 9 percent.
b. less than zero.
c. above zero for fears of deflation.
d. something over 3 but less than 6 percent.
28. The problem for a central bank setting a zero inflation policy would be:
a. the risk of high employment.
b. it is impossible to have zero inflation.
c. firms would have to cut the nominal wage to reduce the real wage.
d. economic growth would also have to be zero.
29. Higher than expected inflation will increase the:
a. real interest rate borrowers pay on fixed rate mortgages.
b. nominal amounts people need to save for retirement.
c. real interest rate savers earn on fixed rate CDs.
d. real interest rates both paid on mortgages and earned on CDs.
30. The main problem from inflation as seen by most economists is:
a. inflation raises prices more than wages.
b. inflation harms lenders more than it benefits borrowers.
c. during periods of inflation some prices fall.
d. inflation creates risk.
31. In terms of economic growth, the central bank would like to:
a. have the maximum growth rate possible.
b. keep the growth rate averaging zero.
c. keep the economy close to its potential or sustainable rate of growth.
d. balance every recession with a boom.
32. Potential output depends on all of the following except:
a. technology.
b. the number of firms in the economy.
c. the size of the capital stock.
d. the number of people who can work.
33. Over very long periods, U.S. real economic growth averaged around:
a. 3 percent per year.
b. 1 percent per year.
c. 5 percent per year.
d. 7 percent per year.
34. Everything else equal, if the growth rate of a country exceeds its sustainable rate, the
central bank:
a. will keep interest rates low to keep the momentum.
b. will now identify this new rate as the sustainable rate and try to maintain it.
c. is likely to raise interest rates to slow the rate of growth.
d. is likely to lower the interest rate thinking a slowdown is coming to offset this boom.
35. Which of the following statements is not true?
a. The potential growth rate in the U.S. economy may have fallen following the
financial crisis of 2007-2009.
b. Periods of growth below the potential level are periods of low unemployment.
c. Periods of growth above the potential level are periods of low employment.
d. Periods of growth below the potential level are periods of high unemployment.
36. All of the following are consequences of an economy operating above its potential level
except:
a. high rates of inflation.
b. high interest rates.
c. low unemployment.
d. stable prices.
37. Which of the following statements regarding growth was brought out from the material in
Chapter 15?
a. Stability results in higher output growth rates.
b. Inflation volatility results in higher output growth rates.
c. There is no correlation between the volatility in growth rates and annual output growth.
d. The more volatile the growth rate, the higher is the annual output growth.
38. At a growth rate of 6% an economy will double in size in:
a. 7 years.
b. 14 years.
c. 12 years.
d. 6 years.
39. Since the Federal Reserve was created, it has:
a. averted all financial panics that could have plagued the U.S. economy.
b. averted a few financial panics but not most.
c. improved its skill at securing financial stability.
d. proved to be much better at preventing international panics than domestic ones.
40. Keeping interest rates stable is:
a. the most important goal for a central bank.
b. a key goal, because stable interest rates will result in all other goals being achieved.
c. a secondary goal for central banks.
d. not a goal of the central bank.
41. Interest rate volatility is a problem because:
a. it adds to uncertainty, thereby diminishing the investment.
b. it decreases risk.
c. it can impact productivity in a positive way.
d. financial decisions become less difficult when interest rates are more volatile.
42. Central banks are in a position to control risk in the economy because they:
a. control the unemployment rate.
b. control the economy‘s real growth rate.
c. control short-term interest rates.
d. can change taxes.
43. Exchange-rate stability is likely to be a more important goal for the central banks of:
a. emerging market economies than the central bank of the U.S.
b. the U.S. and Japan than most small developing countries.
c. countries where exports and imports make up a small total of all economic activity.
d. large, closed economies.
44. Which of the following would give the most importance to the goal of exchange
rate stability?
a. Large, closed economies
b. The U.S. and Japan and other developed countries
c. Emerging market countries where exports and imports are central to the structure of
the economy
d. Europe
45. The 1990s saw inflation fall and real growth increase in the U.S. and in many other
countries. This is partially attributed to all of the following except:
a. technological innovation.
b. redesign of many central banks.
c. central banks became better at their jobs.
d. central banks focused more on exchange rates in a global environment.
46. Successful monetary policy relies most on:
a. having an ample supply of highly qualified people.
b. luck.
c. the institutional environment.
d. knowledgeable citizens who know how to react to the policy.
47. Most economists agree that a well-designed central bank would:
a. be independent of political pressure.
b. make its policy actions difficult to interpret.
c. be accountable only to other banks.
d. be run by one key policy maker.
48. There is a strong consensus among economists that monetary policy is more effective
when it is formed:
a. by an individual rather than a committee.
b. in secrecy without the reasoning behind it being revealed for many years.
c. to keep financial markets guessing.
d. independently of political pressure.
49. The idea that central banks should be independent of political pressure is an idea that:
a. has been around since there were central banks.
b. is relatively new.
c. every central bank was founded upon.
d. became quite popular in the early 1900s.
50. To be independent, a central bank must have:
a. its policies overturned only by the president.
b. control of its own budget.
c. the board members appointed for very short terms.
d. the chairperson serve as a member of the President’s cabinet.
51. The operational components required for truly independent central banks include:
a. a budget controlled by Congress.
b. the ability to have policies reversed.
c. monetary policies that cannot be reversed by anyone outside of the central bank.
d. the chairperson of the bank being answerable only to the President.
52. The interest rate decisions made by the Federal Open Market Committee:
a. can be overridden by the President.
b. can be overridden by the Secretary of the Treasury.
c. can be overridden by the U.S. Senate by a two-thirds
majorit
y.
d. cannot be overridden by anyone outside of the Federal Reserve.
53. One argument for an independent central bank is:
a. successful monetary policy requires a long time horizon usually well beyond the next
election of most public officials.
b. without independence competent people would not take a position in a central bank.
c. the central bank usually hires more competent individuals than the Treasury department
or other finance ministries.
d. central bankers have a short-run focus that usually corrects problems faster.
54. Compared to an independent central bank, elected officials are likely to:
a. favor long-run stability over short-term prosperity.
b. sacrifice short-term growth to keep future inflation low.
c. choose monetary policies that are overly accommodative.
d. prefer interest rates to vary more often.
55. Empirical research seems to verify that:
a. countries that have less independent central banks experience lower rates of inflation.
b. countries that have high rates of inflation seem to have central banks with low levels
of independence.
c. there is no relationship between the independence of central banks and rates of
inflati
on.
d. the rate of inflation seems to vary directly with the amount of central bank independence.
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56. In the United States, monetary policy is formed by:
a. an individual advised by a close group of people.
b. committee.
c. the President and approved by Congress.
d. the Chairman of the Federal Reserve and can only be overturned by the presidents of the
Regional Federal Reserve Banks.
57. Most central banks of industrialized countries have monetary policy formed by:
a. an individual, usually the minister of finance.
b. their version of Congress.
c. a committee made up of members of their central bank.
d. an individual, usually the person heading the central bank at the time.
58. In the United States, one problem with central bank independence is:
a. it is almost impossible to obtain because Congress controls the budget of the Federal
Reserve.
b. in a representative democracy, monetary policymakers must be held accountable to the
public.
c. central bank independence has not produced favorable results.
d. the central bank can control policy, but the U.S. Treasury issues currency.
59. Central bank accountability means:
a. politicians will establish goals and central bankers will report on their progress.
b. central bankers are not accountable to any elected officials.
c. central bankers are only accountable to the banks in their respective countries.
d. central bankers must hold press conferences to explain their monetary policy views.
60. During the financial crisis of 2007-2009 the U.S. Federal Reserve used its powers in all but
which of the following ways:
a. lending to nonbanks.
b. accepting very illiquid collateral against its loans.
c. lowered bank reserve requirements.
d. lowered its policy rate to zero.
61. In a survey of forecasters toward the end of the financial crisis of 2007-2009, forecast
inflation rates for the next decade in the United States were:
a. 0%.
b. 2%.
c. 4%.
d. 7%.
62. To say monetary policy is transparent implies:
a. that anyone could figure out what the correct policy should be.
b. monetary policy should not be so difficult that most people couldn’t understand it.
c. policymakers offer plausible explanations for their decisions along with supporting data.
d. that when faced with the same problem, policymakers will always react the same way.