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Unformatted text preview: Please choose the best answer of the choices presented in the multiple choice questions. 1. The specific goals of central banks include each of the following, except: A. High levels of exports B. Low and stable inflation C. High and stable real growth D. Low and stable unemployment 2. The primary objective of most central banks in industrialized economies is: A. Price stability B. A strong domestic currency C. High securities prices D. Low unemployment 3. The efficient allocation of resources requires: A. That inflation not exceed three percent a year B. Prices to remain constant C. Deflation D. That prices reflect the relative value of goods and services 4. In terms of economic growth, the central bank would like to: A. Have the maximum growth rate possible B. Balance every recession with a boom C. Keep the growth rate averaging zero D. Keep the economy close to its potential or sustainable rate of growth 5. Potential output depends on all of the following except: A. Technology B. The number of people who can work C. The size of the capital stock D. The number of firms in the economy 6. Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank: A. Is likely to lower the interest rate thinking a slowdown is coming to offset this boom 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. Will keep interest rates low to keep the momentum 7. Interest rate volatility is a problem because: A. Expenditure in the economy tends to vary inversely with the interest rate 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 1 8. The ways the Fed can inject reserves into the banking system include: A. An increase in the size of the Fed's balance sheet through selling securities B. Increasing the discount rate C. An increase in the size of the Fed's balance sheet through purchasing securities D. Making loans to nonbank corporations 9. Which of the following statements is most correct? A. The Fed can control the amount of reserves, but cannot control the monetary base B. The Fed can control the make up of the monetary base, but cannot affect the market interest rate C. The Fed can control the size of the monetary base but not the price of its components D. The Fed can control either the size of the monetary base or the price of its components 10. The tools of monetary policy include: A. The target federal funds rate B. The excess reserve rate C. The currencytodeposit ratio D. Both the excess reserve rate and the target federal funds rate 11. The Fed could make the market federal funds rate equal the target rate by: A. Setting the discount rate below the federal funds rate B. Paying higher interest on reserves C. Entering the federal funds market as a borrower or a lender D. Mandating that all loans be transacted at the target rate 12. If the Fed entered the federal funds market as a borrower or a lender to make sure the market rate always equals the target rate, they would be doing all of the following except: A. In essence paying interest on excess reserves B. Making unsecured loans C. Following the directives issued by Congress D. Eliminating a lot of valuable information coming from the market 13. The tool the Fed uses to keep the federal funds rate close to the target is: A. The required reserve rate B. Discount lending C. Open market operations D. They can set the rate by law 14. If the market federal funds rate were below the target rate, the response from the Fed would likely be to: A. Raise the discount rate B. Purchase U.S. Treasury securities C. Raise the required reserve rate D. Sell U.S. Treasury securities 2 15. If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would: A. Decrease the supply of reserves B. Do nothing; the Fed will let the market work C. Alter the demand for reserves D. Increase the supply of reserves 16. The daily reserve supply curve is: A. Vertical until the federal funds rate equals the discount rate; at that point it becomes horizontal B. Upward sloping C. Horizontal until the federal funds rate equals the discount rate; at that point it becomes vertical D. Downward sloping 17. Which of the following statements is most correct? A. The market federal funds rate equals the target federal funds rate B. Over the last 10 years the deviations between the target and market federal funds rate have decreased C. There doesn't appear to be any relationship at all between the target and market federal fund rates D. Over the last 10 years the deviations between the target and market federal funds rate have increased 18. Discount lending today is primarily used for: A. Controlling reserves B. Preventing bank panics C. Providing shortterm financial stability D. Providing shortterm financial stability and preventing bank panics 19. On a particular day, the actual federal funds rate can deviate from the target federal funds rate. This might be due to all of the following except: A. The forecasts of the Fed's staff were in error B. There may have been more float in the banking system than anticipated C. Unexpected changes in the demand for reserves D. Daily changes in the target rate 20. In 2002, the Federal Reserve changed its discount lending procedures. Which of the following statements is correct? A. For most of its history the Federal Reserve has lent reserve to banks at a rate equal to the target federal funds rate; after 2002 the rate would be below the target federal funds rate B. Before 2002 the Fed discouraged banks from borrowing and actually destabilized the interbank market for reserves C. The Fed now controls the quantity of credit extended as well as its price D. The changes made in 2002 have made it more difficult for the Fed to meet its interestrate stability objective 3 21. The Fed will make a discount loan to a bank during a crisis: A. No matter what condition the bank is in B. Only if the bank would fail without the loan C. Only if the bank is sound financially and can provide collateral for the loan D. But if the bank doesn't have collateral the interest rate is higher 22. Secondary credit provided by the Fed is designed for: A. Banks who qualify for a lower interest than what is available under primary credit B. Banks that are in trouble and cannot obtain a loan from anyone else C. Banks that want to borrow without putting up collateral D. Foreign banks 23. Seasonal credit provided by the Fed is not as common as it used to be because: A. Other sources for longterm loans have developed for banks in seasonal areas B. Seasonal credit has been replaced by secondary credit C. Seasonal credit is being replaced by primary credit D. There are fewer banks in seasonal areas 24. Which of the following statement is most true regarding monetary policy tools? A. The central banks cannot set a quantity and a price tool simultaneously B. The Fed currently uses a quantity tool for monetary policy C. The federal funds rate is not the best tool because it fails the controllable test of a good monetary policy tool D. The required reserve rate is the most easily observable tool 25. The Taylor rule is: A. The monetary policy setting formula followed explicitly by the FOMC B. An approximation that seeks to explain how the FOMC sets their target C. A rule adopted by Congress to make the Fed's monetary policy more accountable to the public D. An explicit tool used by the ECB but not the Fed 26. Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + (inflation gap) +(output gap) if the current rate of inflation is 5% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: A. 10.5% B. 3.5% C. 6.5% D. 2.5% 27. The measure for the actual rate of inflation used in the Taylor rule is the: A. GDP deflator B. Producer Price Index C. Personal Consumption Expenditure Index D. Consumer Price Index 4 28. If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in what change in loans? A. A decrease of $1 million B. An increase of $10 million C. An increase of $1 million D. No change 29. History proves that: A. Money growth rates equal inflation rates B. Countries with low rates of money growth have high rates of inflation C. Money growth and inflation are not related D. Countries with high rates of money growth have high rates of inflation 30. For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing: A. Extremely high rates of inflation B. Severe deflation C. Rapid economic growth D. Rapid development of financial intermediaries 31. The velocity of money equals: A. Nominal GDP times the price level B. Nominal GDP divided by the price level C. Nominal GDP times the money supply D. Nominal GDP divided by the money supply 32. The velocity of money increases if: A. Each unit of money is used more frequently B. Each unit of money is used less frequently C. More purchases are made D. None of the above answers is correct; the velocity of money is constant 33. Which of the following expresses the equation of exchange? A. MY = PV B. MV = PY C. MP = VY D. MV = Y 34. Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the growth rate of money is 5.0%, the change in the velocity of money is: A. Zero; velocity is constant B. 0.5% C. +0.5% D. +4.5% 5 35. If the Fed were to tie the rate of money growth to the Consumer Price Index (CPI), the rate of money growth might be excessive because: A. Most economists maintain the CPI overstates inflation by 1 percent annually B. Studies suggest that money growth is not related to the CPI C. The CPI does not measure inflation at the household level D. Most economists maintain the CPI overstates inflation by 2 to 4 percent annually 36. Based on the analysis of the equation of exchange, Irving Fisher, derived the quantity theory of money which states that: A. Velocity changes always offset changes in the supply of money B. Changes in the aggregate price level are caused solely by changes in velocity C. Changes in the aggregate price level are caused solely by changes in the quantity of money D. None of the answers given are correct 37. If we let Md reflect money demand, then we can write the equation for money demand as: A. Md = V(Y/P) B. Md = (1/V) PY C. Md =VY D. Md = PY 38. Equilibrium in the money market would be expressed by which of the following? A. Ms = (1/V)Y B. Ms = (1/V)P C. Md = (1/V)P D. Ms =Md 39. The quantity theory of money along with the assumption of a constant velocity can explain which of the following? A. At a given level of money growth, the higher the level of real growth the higher the level of inflation will be B. If real growth is higher than money growth the price level must be rising C. At a given level of money growth, the higher the level of real growth the lower the level of inflation will be D. If real growth equals money growth, the price level is falling 40. Which of the following statements is most correct? A. The velocity of M2 is relatively stable across all time periods B. The velocity of M2 is more volatile in the short run than the long run C. The velocity of M2 is less stable than the velocity of M1 D. Fisher's assumption about money velocity being stable in the long run was incorrect 41. During economic slowdowns (recessions) the velocity of money tends to: A. Increase slightly B. Remain relatively stable C. Increase dramatically D. Decrease 6 42. If the nominal interest rate increases: A. The cost of holding money decreases B. The velocity of money should decrease C. The cost of holding money increases and the velocity of money should decrease D. The cost of holding money increases 43. If real GDP stays the same but the price level increases: A. Nominal money demand should remain the same B. Nominal money demand should decrease C. Real money demand should decrease D. Nominal money demand should increase 44. The fact that people can write drafts (checks) from many stock and money market accounts has: A. Increased the cost of converting nonmoney assets to a means of payment B. Decreased the transactions demand for money C. Not affected the transactions demand for money D. Increased the transactions demand for money 45. The interest rate earned on money holdings is: A. The nominal interest rate less the rate of inflation B. The real interest rate less the rate of inflation C. The nominal interest rate D. Zero 46. A decline in the yields earned by bonds should: A. Also decrease the demand for money B. Increase the velocity of money C. Increase the demand for money D. Not impact the demand for money since money doesn't earn any interest 47. The demand for money varies: A. Directly with the liquidity of other financial assets B. Not all with the liquidity of other assets since money is liquid C. Inversely with the liquidity of other financial assets D. Inversely with wealth 48. The only solution available to a country experiencing extremely high rates of inflation is to: A. Raise interest rates B. Reduce money growth C. Peg your currency to another country's currency D. Revert to a gold standard 7 49. For the Fed to use money growth as a direct monetary policy target, which of the following needs to exist? A. A highly variable deposit expansion multiplier B. A predictable relationship between the quantity of money and the rate of inflation C. A stable link between the monetary base and the quantity of money and a predictable relationship between the quantity of money and the rate of inflation D. A stable link between the monetary base and the quantity of money 50. If a central bank sets an explicit inflation target, the central bank must: A. Be willing to live with more volatility in the interest rate B. Shift its focus entirely to a nominal interest rate target C. Give up control of targeting the monetary base D. Put more emphasis on the interest rate target and less on a money target Please turn in to me the exam and scantron when you are done. Good luck with your future academic and professional endeavors. 8 ...
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- Spring '11