63. The means for assuring accountability and transparency:
a. may differ across the central banks of different countries.
b. are the same for all successful central banks.
c. involve setting specific numerical targets so there is no confusion as to what the goal is.
d. are opposite to each other; increasing one means decreasing the other.
64. In the United Kingdom accountability and transparency for its central bank is achieved by
setting:
a. a numerical target for unemployment each year.
b. a numerical target for economic growth.
c. numerical targets for economic growth and the exchange rate.
d. an explicit numerical target for inflation.
65. The central bank for the euro area tries to achieve accountability and transparency through
a:
a. standard numerical objective for inflation over the medium term.
b. specific target for unemployment and economic growth.
c. following the monetary policy guidance of the European Parliament.
d. specific target for the dollar euro exchange rate.
66. Setting an explicit numerical inflation target is most associated with the goal(s) of:
a. transparency.
b. accountability.
c. both transparency and accountability.
d. neither transparency nor accountability; it‘s about moral hazard.
67. In the United States, the Federal Reserve is asked to:
a. deliver on a specific inflation target set by Congress.
b. meet an explicit target for economic growth.
c. meet a specific target for unemployment each year.
d. deliver price stability as one of a number of objectives.
68. Today, most central banks announce their policy actions:
a. one year after the policy is put in place.
b. almost immediately.
c. within a 3 to 5 year “window”.
d. usually six months after the policy is put in place.
69. The Federal Reserve’s policy regarding announcing its policy decisions has:
a. always been to announce it immediately; that was part of the original Federal Reserve Act of 1913.
b. only recently gone to immediate announcement; until 1994 these policy decisions were secret.
c. been to release the decisions immediately since its early failure at preventing the Great Depression.
d. changed so that now the Fed does not release its decisions publicly.
70. One reason given for more central bankers releasing its decisions publicly is:
a. for monetary policy to work, people must be taken by surprise.
b. most people do not understand monetary policy so it really doesn’t do any harm to release
the decisions publicly.
c. so that central banks across the world can coordinate their policies.
d. monetary policy is more effective when households and businesses can understand
and anticipate it.
71. Which of the following statements is most accurate?
a. Central bank statements in developed countries are similar both in length and in the speed
with which policy changes are announced.
b. Central bank statements in developed countries differ both in length and in the speed
with which policy changes are announced.
c. Central bank statements in developed countries are similar in length but differ in the
speed with which policy changes are announced.
d. Central bank statements in developed countries differ in length but are similar in the
speed with which policy changes are announced.
72. The monetary policy framework is:
a. the law that created the Federal Reserve System.
b. the idea that central banks should be interconnected across countries.
c. a way to prioritize and implement the central bank’s objectives when they are in
conflict.
d. a growing belief that there should be one central bank headquartered at the World Bank.
73. One reason for having a monetary policy framework is:
a. it makes clear what specific goals the central bankers are pursuing.
b. it provides leeway for central bankers to change their goals without communicating
the change and disrupting financial markets.
c. it provides central bankers the secrecy needed to perform their jobs effectively.
d. it can make goal setting vague enough so that the central bankers can always claim success.
74. One use of a monetary policy framework is to clarify all of the following except:
a. the likely response when policy goals are in conflict with one another.
b. the goal that is currently receiving the most attention.
c. how goals will be measured.
d. why zero inflation is not desirable.
75. One problem for the Federal Reserve regarding setting policy stems from the fact that:
a. there are multiple goals that may be inconsistent with each other.
b. there are more policy instruments than goals.
c. Congress sets very tight goal ranges that the central bankers must hit.
d. the membership of its governing board changes so often.
23
76. Whenever central bankers face more than one goal, the policy framework requires:
a. the central bank to always focus on inflation first.
b. central bankers to focus on all goals, no matter what.
c. economic growth to be the top priority.
d. central bankers to make their priorities clear.
77. The ability to control inflation expectations is most closely related to a central bank’s:
a. transparency.
b. credibility.
c. accountability.
d. willingness to communicate.
78. One thing that is true about economic policy in the U.S. is:
a. fiscal and monetary policy never conflict.
b. monetary and fiscal policy need not, but may conflict.
c. monetary policy ultimately controls fiscal policy since the Fed controls the money supply.
d. fiscal policy ultimately controls monetary policy since Congress can control the Fed’s budget.
79. Which of the following statements is most true concerning economic policy in the U.S.?
a. Monetary policymakers tend to have a long view while fiscal policymakers tend to ignore the
long-run inflationary ramifications of their actions.
b. Fiscal policymakers tend to focus on inflation and unemployment while monetary
policymakers focus most of their attention on the money supply and the exchange rate.
c. Fiscal policymakers tend to focus more on pleasing their constituents and so are willing to
sacrifice the short run for the long run.
d. Monetary policy independence is enshrined in the U.S. Constitution.
80. For fiscal policymakers, one of the results of an independent central bank is:
a. to finance government spending the Treasury has to order more currency from the central
bank.
b. fiscal policymakers always have to borrow to increase spending.
c. fiscal policymakers cannot borrow unless the Federal Reserve prints more money.
d. increased government spending has to be financed with either higher taxes or increased
government borrowing.
81. Fiscal policymakers may actually welcome some inflation for all of the following reasons
except:
a. it potentially raises tax revenues.
b. it reduces the real value of the national debt allowing governments to “default” on a portion of
their debt.
c. interest payments tend to be fixed so the real interest payments are reduced.
d. it weakens the independence of the central bank.
82. If a government were to find that it cannot raise taxes any further, and that it cannot borrow
any further from financial markets, the government:
a. cannot increase its spending any further.
b. can increase spending by having the central banks purchase its bonds.
c. is in default.
d. can decrease the amount of money in circulation.
83. The autonomy of modern central banks means that governments cannot increase their
spending by:
a. raising taxes.
b. issuing bonds.
c. printing money.
d. either issuing bonds or printing money; both represent debt.
84. All of the following are true about central bank independence except that it:
a. is usually given at the pleasure of governments.
b. can be eliminated by governments in a time of crisis.
c. is usually guaranteed by a country’s constitution.
d. can be subverted by the actions of fiscal policymakers.
Short Answer Questions
85. If we look back in history, why has the role of creating money fallen to central banks?
86. If governments operated like businesses, meaning their goal was to maximize profits, why
would they likely never give up the power to print money to any other institution?
87. If we think back to Chapter 11 when we discussed moral hazard, discuss how a government
ceding the right to control the amount of currency to a central bank is a way to treat a potential
moral hazard problem.
88. What are the three main functions a central bank performs in its role as a banker’s bank?
89. Explain why it is correct to say the Federal Reserve functions as the government’s bank but it
is incorrect to say it controls the government’s budget.
90. What do modern central bankers not do?
91. What are the specific objectives of most central bankers?
92. Discuss how the goals of central bankers can be linked to risk and the ability or inability of
individuals to eliminate this risk.
93. Imagine you own a retail mail order business. You produce your catalog, where items and
prices are listed, in January and you use the same catalog all year. The central bank in your
country increases the money supply by an amount to cause inflation to average one percent each
month. Ignoring any seasonality in sales (like the holiday season), what should happen to your
sales as the year progresses and why?
94. What may be the reasons that explain the observation that during periods of hyperinflation
economic growth actually slows or even contracts?
95. Explain why inflation degrades the information content of prices.
96. If one of the specific goals that central bankers focus on is economic growth, should they
aim for the highest short-term growth rate the economy can achieve? Explain.
97. We have a country, Fantasyland, where the current per capita real income is 20,000 units of
output, and the current average growth rate is 2.0 percent. What will be the difference in the
standard of living twenty years from now if Fantasyland grows at a rate of 3.5 percent and we
assume population is constant?
98. One of the specific goals for central bankers is financial system stability. Considering the
U.S., for example, would this imply that the Federal Reserve would always take action to prevent
any single bank from failing? Explain.
99. How do the specific goals of interest rate and exchange rate stability differ in importance
from the other specific goals mentioned for central bankers?
100. What are the potential problems that can result if central bankers set a target of a zero rate
of inflation?
101. Why might the central bankers in emerging market economies focus more attention on a
stable exchange rate than say the Federal Reserve or the European Central Bank?
102. Today there is a clear consensus about the best way to design a central bank. What are the
criteria for a successful central bank?
103. The chairman of the Fed gives a speech and hints that, at the next meeting of the Open
Market Committee, the issues of a rapidly growing economy and preliminary indications of
rising prices will have to be addressed. You are in the market for a new house and your mortgage
broker calls to tell you that the interest rate on the $100,000, 30-year mortgage you applied for
ha
s just increased by a quarter of a percent. Why did the rate increase even though the Fed has
not announced any rate change?
104. What do you think is meant by the statement that “successful monetary policy requires
competent people and the right institutional environment“?
32
105. What are the operational components of central bank independence?
106. The apparent result of central bank independence has been better performing economies.
Why do you think it took so long for many countries to create independent central banks?
107. The Federal Reserve didn’t always communicate its actions to the public like it does today.
As recently as the mid-1990s, secrecy ruled. Why do you think the Fed and most central banks
now are more public about their actions and the reasons for them?
108. Provide an example where monetary policymakers in the United States would be put in a
position of conflicting goals and as a result forced to make a tradeoff.
109. Imagine a central banker who takes office believing that, ultimately, the best way to
stimulate an economy is to keep people guessing. This means the policymaker will often, but not
always, announce one change but then actually do something else. What do you think of the
central bank’s chances for achieving its objectives and why?
110. Using the U.S. as an example, explain why rising budget deficits on the part of a federal
government creates a potential point of conflict between fiscal and monetary policymakers.
111. Why might Congress actually prefer the higher rate of inflation that might result from
deficit spending to higher taxes and/or a cut in government spending?
112. Explain why inflation is a way for governments to default on a portion of the debts they
owe.
113. Predict how monetary policymaking would change, if at all, if members of the Board of
Governors of the Federal Reserve were popularly elected to two-year terms and could run for re-
election.
