This archive file of ECO 316 Week 4 Chapter 21 The Conduct of Monetary Policy comprises:

21.1 Multiple Choice Questions

1) By the end of the 1990s and 2000s,

2) Which of the following is NOT considered to be a goal of monetary policy?

3) Which of the following is considered to be a goal of monetary policy?

4) Inflation is an economic problem because it

5) Rates of inflation in the hundreds or thousands of percent per year are known as

6) Which of the following countries experienced hyperinflation during the 1920s?

7) The Employment Act of 1946 codified the federal government’s commitment to

8) Most economists believe that a zero rate of unemployment

9) John Smith leaves his job in York to go to California in hopes of finding a better one. If John Smith is unemployed while searching for a job in California, economists would consider him to be

10) When all workers who want jobs have them and the demand for and supply of labor are in equilibrium,

11) Which of the following statements about the natural rate of unemployment is correct?

12) The unemployment that is caused by changes in the economy, such as shifts in manufacturing techniques, increased use of computers and electronic machines, and increases in the production of services instead of goods, is called

13) Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel. Sally Jones is considered by economists to be

14) High employment spurs economic growth because high employment

15) When financial markets and institutions are not efficient in matching savers and borrowers,

16) The Fed was created

17) During the last two decades,

18) Federal deposit insurance

19) Interest rate fluctuations

20) Increases in interest rates are often blamed on

21) The Fed’s goal of interest rate stability

22) A rising dollar makes U.S. goods

23) A falling dollar makes U.S. goods

24) Which of the following best states the relationship among the Fed’s policy goals?

25) In 1995, then Senator Connie Mack of Florida introduced a bill that

26) Which chair of the Fed advocated that the Fed engage in inflation targeting?

27) An important problem facing the Fed is that

28) The Fed’s monetary policy tools

29) The information lag facing the Fed is

30) The Fed’s inability to instantaneously observe changes in inflation and economic growth result in

31) The impact lag facing the Fed is

32) A consequence of the impact lag is that the Fed

33) The Fed has attempted to solve the problems of being unable to directly control the variables that determine economic performance and the timing lags in observing and reacting to economic fluctuations by

34) Intermediate targets are

35) The Fed controls intermediate target variables only indirectly mainly because

36) Which of the following is an intermediate target?

37) Which of the following is an operating target?

38) The Fed uses operating targets as well as intermediate targets because

39) The quantity of M1 demanded varies inversely with market interest rates because

40) Using a monetary aggregate for an intermediate target

41) Using an interest rate for an intermediate target

42) Which of the following statements concerning the measurability of interest rates is true?

43) Which of the following statements is true concerning the Fed’s ability to measure potential intermediate targets over a short period of time?

44) The Fed has ignored advice to use a broad variable such as the stock of nonfinancial credit or nominal GDP as an intermediate target because

45) The main reason the Fed cannot control the real interest rate is that

46) Which of the following statements is correct?

47) Which of the following is considered a significant drawback of using interest rate targets?

48) If the Fed is targeting interest rates, during an economic downturn it will

49) If the Fed is targeting interest rates, then during an economic downturn it will take actions that will

50) If shifts in the money demand relationship occur frequently, targeting the money supply will lead to

51) If the relationship between consumer and business spending and investment decisions and the interest rate is stable,

52) If the financial side of the economy is stable,

53) Ordinarily, if the Fed chooses an interest rate as an intermediate target,

54) If the Fed chooses M1 as its intermediate target, it will likely choose as its operating target

55) During the postwar period, which of the following goals has been emphasized by the Fed?

56) The Fed’s interest in targets emerged

57) During World War II, the Fed pegged interest rates in order to

58) To peg the interest rate below its equilibrium level, the Fed must

59) The onset of the Korean War in 1950 made it more difficult for the Fed to peg the interest rate on Treasury securities because

60) As a result of the Korean War and the Fed’s pegging of the interest rate on Treasury securities,

61) Rising inflation in early 1951 is attributable, at least in part, to

62) Under the Federal Reserve-Treasury Accord of 1951,

63) Under William McChesney Martin, the Fed began to target free reserves, which are

64) During the time William McChesney Martin was chair of the Fed, free reserves were used

65) According to William McChesney Martin, an increase in free reserves indicated

66) During an economic expansion

67) As a result of targeting free reserves, the Fed will tend to

68) Why did Monetarist critics of the Fed welcome the appointment of Arthur Burns as chairman of the Board of Governors in 1970?

69) The Fed’s monetary policy during Arthur Burns’s tenure

70) Most critics believe that the Fed’s early attempt at monetary targeting under Arthur Burns failed because he used

71) During the term of Arthur Burns as chairman of the Fed, the FOMC gave top priority to

72) The Fed had particular difficulty during the 1970s in attempting to control both the federal funds rate and monetary aggregates because

73) Using the federal funds rate as an operating target

74) The Humphrey-Hawkins Act of 1978 resulted from political discontent over

75) Under Paul Volcker, the Fed

76) The fluctuations in the growth rate of M1 during 1979-1982 were

77) The Fed’s difficulties in producing greater monetary control after October 1979 were attributable to

78) When Paul Volcker became chair of the Fed in 1979, his primary commitment was to

79) In October 1982, the Fed

80) Since 1987, the Fed

81) Fed officials have argued that deregulation and financial innovation during the 1980s

82) In July 1993, Alan Greenspan informed the Congress that the Fed would

83) In the mid-1980s, the Fed attempted to

84) Shocks to the U.S. economy in the early 2000s included all of the following EXCEPT

85) In response to the shocks to the economy in the early 2000s, the Fed articulated what approach to monetary policy?

86) The Fed’s practices since World War II have

87) Critics of the Fed’s use of financial variables as targets have proposed that the Fed

88) All of the following arguments are presented in favor of inflation targeting EXCEPT

89) In 2006, the Bank of Japan adopted a policy framework focusing on

90) In practice, the ECB has committed to what type of strategy for monetary policy?

91) Which head of a central bank has emphasized the relevance of monetary aggregates for monetary policy?

92) As of 2006, which of the following central banks has formally adopted inflation targeting as its strategy for monetary policy?

21.2 Essay Questions

1) Suppose that households decrease their demand for checkable deposits. If the Fed is using an interest rate as an intermediate target, will it have to take any action to maintain the target?

2) According to the Taylor rule, what should the federal funds rate target be if inflation is 5%, the target rate of inflation is 2%, the equilibrium real federal funds rate is 2%, full-employment real GDP is $9 trillion, and current real GDP is $8.55 trillion?

3) What is meant by inflation targeting? Does the Fed engage in inflation targeting?

4) What has been the approach of the European Central Bank to monetary targeting?