Ch. 15 Money and Banking

Over very long periods, U.S. real economic growth has averaged around A)3 percent per year.B)1 percent per year.C)5 percent per year.D)7 percent per year.

A) 3 percent per year.

In the U.S., the authority to issue currency is held by the A)Federal Reserve.B)U.S. Treasury.C)Office of the Comptroller of the Currency.D)U.S. Mint.

A) Federal Reserve.

Which one 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.

A) Printing currency can be a profitable venture for a government.

The relationship between stability and economic growth is best summarized by which one of the following statements? 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.

A) Stability results in higher output growth rates.

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)a specific target for unemployment and economic growth.C)following the monetary policy guidance of the European Parliament.D)a specific target for the dollar euro exchange rate.

A) a standard numerical objective for inflation over the medium term.

Beginning in July of 2018, President Donald Trump openly and frequently criticized the Federal Reserve and its Chairman Jay Powell. Blatantly undermining the independence of the Fed in this way would likely A)add a risk premium, driving down prices of U.S. assets.B)cause the Fed to change course and move in the opposite direction of Trump's wishes.C)result in the Fed carrying out the monetary policy recommended by President Trump.D)illustrate the strength of the U.S. economy and encourage investment from abroad.

A) add a risk premium, driving down prices of U.S. assets.

Interest rate volatility is a problem because it A)adds to uncertainty, thereby diminishing an investment.B)decreases risk.C)can impact productivity in a positive way.D)can make financial decisions less difficult.

A) adds to uncertainty, thereby diminishing an investment.

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.

A) be a lender of last resort.

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

A) be independent of political pressure

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 United States.B)the United States 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.

A) emerging market economies than the central bank of the United States.

The specific goals of central banks include all of the following except which one? A) high stock pricesB)low and stable inflationC)high and stable real growthD)a stable exchange rate

A) high stock prices

As the inflation rate A)increases, inflation becomes less stable.B)decreases, inflation becomes less stable.C)decreases, inflation becomes more volatile.D)increases, inflation becomes more stable.

A) increases, inflation becomes less stable.

One reason for having a monetary policy framework is that it A)makes clear what specific goals the central bankers are pursuing.B)provides leeway for central bankers to change their goals without communicating the change and disrupting financial markets.C)provides central bankers the secrecy needed to perform their jobs effectively.D)can make goal setting vague enough so that the central bankers can always claim success.

A) makes clear what specific goals the central bankers are pursuing.

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 so that increasing one means decreasing the other.

A) may differ across the central banks of different countries.

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.

A) money becomes less useful as a store of value.

One argument for an independent central bank is that 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.

A) successful monetary policy requires a long time horizon, usually well beyond the next election of most public officials

In the United States, monetary policymakers A)tend to have a long view while fiscal policymakers tend to ignore the long-run inflationary ramifications of their actions.B)focus most of their attention on the money supply and the exchange rate while fiscal policymakers tend to focus on inflation and unemployment.C)tend to focus less on pleasing constituents while fiscal policymakers are more willing to sacrifice the short run for the long run.D)observe monetary policy independence because it is enshrined in the U.S. Constitution.

A) tend to have a long view while fiscal policymakers tend to ignore the long-run inflationary ramifications of their actions.

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.

A) that prices reflect the relative value of goods and services

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.

A) the availability of money and credit in a country's economy.

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.

A) there are multiple goals that may be inconsistent with each other.

Central bank accountability means that central bankers A)will report on the progress of goals that are established by politicians.B)are not accountable to any elected officials.C)are only accountable to the banks in their respective countries.D)must hold press conferences to explain their monetary policy views.

A) will report on the progress of goals that are established by politicians.

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 percent.B)2 percent.C)4 percent.D)7 percent.

B) 2 percent.

Which one of the following statements is not true? A)Periods of growth above the potential level are periods of high employment.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 unemployment.D)Periods of growth below the potential level are periods of high unemployment.

B) Periods of growth below the potential level are periods of low unemployment.

A time-consistent policy is one where A)actions are taken each month on the same day.B)a future policymaker lacks the opportunity or incentive to renege.C)there is means and motivation to break the commitment in the future.D)policymakers operate with complete discretion now and in the future.

B) a future policymaker lacks the opportunity or incentive to renege.

Today, most central banks announce their policy actions A)one year after the policy is put in place.B)almost immediately.C)within a three- to five-year "window".D)usually six months after the policy is put in place

B) almost immediately.

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 online.D)a means for the Treasury to collect tax payments.

B) an inexpensive and reliable way for financial institutions to transfer funds to one another.

If a government were to find that it cannot raise taxes any further, and 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

B) can increase spending by having the central banks purchase its bonds.

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.

B) committee.

To be independent, a central bank must have A)policies that can be overturned only by the president.B)control of its own budget.C)board members who are appointed for very short terms.D)the chairperson serve as a member of the president's cabinet.

B) control of its own budget.

Empirical research seems to verify that A)countries that have less independent central banks experience lower rates of inflation.B)countries with 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 inflation.D)the rate of inflation seems to vary directly with the amount of central bank independence.

B) countries with high rates of inflation seem to have central banks with low levels of independence.

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.

B) credibility.

In the United States, one problem with central bank independence is that 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 controls the money supply.

B) in a representative democracy, monetary policymakers must be held accountable to the public.

Stable inflation implies that A)the rate of inflation averaged over many years is zero.B)inflation is predictable.C)the rate of inflation conceals relative price changes.D)there are low rates of unemployment.

B) inflation is predictable.

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)nonexistent; there is no correlation between these measures.D)direct at low rates of economic growth and inverse at high rates.

B) inverse; high inflation usually means low economic growth

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.

B) is relatively new.

One thing that is true about economic policy in the United States is that 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.

B) monetary and fiscal policy need not, but may, conflict

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.

B) nominal amounts people need to save for retirement.

The Federal Reserve's policy regarding announcing its policy decisions has A)always been to announce it immediately because this 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.

B) only recently gone to immediate announcement; until 1994 these policy decisions were secret.

In its role as the bankers' bank, a central bank performs each of the following except which one? A)providing loans during times of financial distressB)providing deposit insuranceC)overseeing commercial banks and the financial systemD)managing the payments system

B) providing deposit insurance

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.

B) reduce systematic risk.

Successful monetary policy relies most on A)luck.B)the institutional environment.C)having an ample supply of highly qualified people.D)knowledgeable citizens who know how to react to the policy.

B) the institutional environment.

Potential output depends on all of the following except which one? A)technologyB)the number of firms in the economyC)the size of the capital stockD)the number of people who can work

B) the number of firms in the economy

Central banks often find that 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.

B) there are tradeoffs that make pursuing all of their goals simultaneously impossible.

What is needed in order to keep inflation low over the long run? A)fiscal policy that dominates monetary policyB)time consistency of both monetary and fiscal policyC)primacy of monetary policy regardless of fiscal policyD)restrictive monetary policy coupled with expansionary fiscal policy

B) time consistency of both monetary and fiscal policy

In 2018, the average daily volume on the Federal Reserve's Fedwire system was A)$28 billion.B)$280 billion.C)$2.8 trillion.D)$280 million.

C) $2.8 trillion.

At a growth rate of 6 percent an economy will double in size in A)7 years.B)14 years.C)12 years.D)6 years.

C) 12 years.

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

C) a committee made up of members of their central bank.

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.

C) a secondary goal for central banks.

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.

C) a way to prioritize and implement the central bank's objectives when they are in conflict.

The number of central banks that exist in the world today is A)less than 10.B)about 250.C)about 180.D)over 50 but less than 100.

C) about 180.

Most economists agree that the target rate of inflation for 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.

C) above zero for fears of deflation.

The actions of central banks around the world A)are most extreme in developing economies.B)are politically controversial during financial crises.C)are vital to the day-to-day operation of any modern economy.D)affect citizens of modern economies only during times of financial crisis.

C) are vital to the day-to-day operation of any modern economy.

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.

C) both transparency and accountability.

The central bank has the ability to create money, which means that 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.

C) can impact the rate of inflation.

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.

C) choose monetary policies that are overly accommodative.

One function of modern central banks is to A)control securities markets.B)control the government's budget.C)control the availability of money and credit.D)manage fiscal policy.

C) control the availability of money and credit.

Which one of the following would give the most importance to the goal of exchange rate stability? A)large, closed economiesB)the United States and Japan and other developed countriesC)emerging market countries where exports and imports are central to the structure of the economy

C) emerging market countries where exports and imports are central to the structure of the economy

The problem for a central bank setting a zero-inflation policy would be that A)there is 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.

C) firms would have to cut the nominal wage to reduce the real wage.

The specific goals of central banks include each of the following except which one? A)high and stable real growthB)low and stable inflationC)high levels of exportsD)low and stable unemployment

C) high levels of exports

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.

C) improved its skill at securing financial stability.

Which one of the following is evidence of the link between persistent increases in public debt and slower long-run growth? A)fiscal dominanceB)a declining equilibrium real interest rateC)increased concern about debt sustainabilityD)a budget surplus that is less than the risk premium times the level of debt

C) increased concern about debt sustainability

Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank

C) is likely to raise interest rates to slow the rate of growth.

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.

C) is usually guaranteed by a country's constitution.

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.

C) keep the economy close to its potential or sustainable rate of growth.

During the financial crisis of 2007-2009 the U.S. Federal Reserve used its powers in all but which one of the following ways? A)lending to nonbanksB)accepting very illiquid collateral against its loansC)lowering bank reserve requirementsD)lowering its policy rate to zero

C) lowering bank reserve requirements

Which one of the following is the best analogy? Inflation is like a

C) minute having fewer seconds.

The operational components required for truly independent central banks include A) a budget controlled by Congress. B) the ability to have policies reversed by Congress or the president. 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.

C) monetary policies that cannot be reversed by anyone outside of the central bank

To say monetary policy is transparent implies that A)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)policy makers offer plausible explanations for their decisions along with supporting data.D)when faced with the same problem, policy makers will always react the same way.

C) policy makers offer plausible explanations for their decisions along with supporting data.

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.

C) price stability.

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.

C) printing money.

Central banks are in a position to control risk in the economy because they control A)the unemployment rate.B)the economy's real growth rate.C)short-term interest rates.D)tax rates.

C) short-term interest rates.

Fiscal policymakers may actually welcome some inflation for all of the following reasons except which one? 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.

D) It weakens the independence of the central bank.

Time consistency is critical for economic policy to be credible because A) people make decisions today with no regard for the future. B) the ability to update decisions over time is necessary for policy to be effective. C) it is not possible to improve outcomes by limiting discretion in future time periods. D) an effective policy is a strategy for the future, so it must be costly for policymakers to renege.

D) an effective policy is a strategy for the future, so it must be costly for policymakers to renege.

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.

D) an explicit numerical target for inflation

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 majority.D)cannot be overridden by anyone outside of the Federal Reserve.

D) cannot be overridden by anyone outside of the Federal Reserve.

Whenever central bankers face more than one goal, the policy framework requires A) central bankers 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.

D) central bankers to make their priorities clear.

The 1990s saw inflation fall and real growth increase in the United States and in many other countries. This is partially attributed to all of the following except which one? A)technological innovationB)redesign of many central banksC) central banks becoming better at their jobsD)central banks focusing more on exchange rates in a global environment

D) central banks focusing more on exchange rates in a global environment

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.

D) deliver price stability as one of a number of objectives.

Central bank statements in developed countries A)are similar both in length and in the speed with which policy changes are announced.B)differ both in length and in the speed with which policy changes are announced.C)are similar in length but differ in the speed with which policy changes are announced.D)differ in length but are similar in the speed with which policy changes are announced.

D) differ in length but are similar in the speed with which policy changes are announced.

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.

D) financial systems are prone to periods of extreme volatility.

For fiscal policymakers, one of the results of an independent central bank is that 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.

D) increased government spending has to be financed with either higher taxes or increased government borrowing.

There is a strong consensus among economists that monetary policy is more effective when it is formulated A)by an individual rather than a committee.B)in secrecy without the reasoning behind it being revealed for many years.C)in a manner that keeps financial markets guessing.D)independently of political pressure.

D) independently of political pressure.

The main problem from inflation as seen by most economists is that 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.

D) inflation creates risk.

One monopoly that modern central banks have is in A)regulating commercial banks.B)making loans to banks.C)issuing U.S. Treasury securities.D)issuing currency.

D) issuing currency.

One reason given for more central bankers releasing decisions publicly is that 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)it gives central banks across the world a chance to coordinate their policies.D)monetary policy is more effective when households and businesses can understand and anticipate it.

D) monetary policy is more effective when households and businesses can understand and anticipate it.

39) All of the following are consequences of an economy operating above its potential level except which one? A)high rates of inflationB)high interest ratesC)low unemploymentD)stable prices

D) stable prices

A monetary policy framework is used to clarify all of the following except which one? A)the likely response when policy goals are in conflict with one anotherB)the goal that is currently receiving the most attentionC)how goals will be measuredD)why zero inflation is not desirable

D) why zero inflation is not desirable

The central bank in the United States is the A)Bank of America.B)Federal Reserve.C)U.S. Treasury.D)Bank of the United States

Federal Reserve

Monetary policy in the United States is under the control of the A)U. S. Treasury.B)President.C)Federal Reserve.D)U.S. Senate.

Federal Reserve.

Operation Bernhard was a German operation to attack the United Kingdom by using A)German Panzers.B)counterfeit British pounds.C)tariffs and other trade barriers to limit British exports to Germany.D)sophisticated economic policy to discredit the British Parliament.

counterfeit British pounds

Central banks around the world A)saw the Financial Crisis of 2007-2009 coming and tried to prevent it.B)saw the Financial Crisis of 2007-2009 coming but could not prevent it.C)did not see the Financial Crisis of 2007-2009 coming and were not able to prevent it.D)did not see the Financial Crisis of 2007-2009 coming but had processes in place to

did not see the Financial Crisis of 2007-2009 coming and were not able to prevent it.

Many governments give their central bank control over issuing currency because A)printing currency can be profitable for a government, providing 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.

printing currency can be profitable for a government, providing a strong incentive to print too much.