Chapter 15 & 18

The primary monetary policy tool most used by central banks today is

interest rates.

One monopoly that modern central banks have is in

issuing currency.

Central bank accountability means that central bankers

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

In 2018, the average daily volume on the Federal Reserve's Fedwire system was

$2.8 trillion.

How does the time consistency problem apply to the conduct of monetary policy? How might long terms of office for central bankers help overcome this?

- Long Appointments allow central bankers to resit reneging on desirable long run policies for short term gains. - Long terms allow central bankers to develop reputations that enhances policy credibility.

With the policy rate at the effective lower bound, how might a central bank counter unwanted deflation?

-Targeted asset purchases -foward guidance -quantitative easing

As of 2020, the largest expansion of the Fed's balance peaked in what year?

2015

How did the Federal Reserve change its discount lending practices in 2002?

Before 2002, the Fed discouraged banks from borrowing at the discount window and actually created volatility in the market for reserves.

Federal Reserve buying of mortgage-backed securities is an example of a targeted asset purchase. Explain how the Fed's actions are intended to work.

By purchasing mortgage-backed securities (MBS), the Fed sought to lower mortgage rates in order to increase home sales, raise house prices, and promote housing construction.

The central bank in the United States is the

Federal Reserve.

Suppose in an election year, the economy started to slow down. At the same time, clear signs of inflationary pressures were apparent. How might the central bank with a primary goal of price stability react?

In this case, the appropriate response is to tighten Correctmonetary policy, increasing Correctinterest rates to curb the emerging inflationary pressures in pursuit of the long-run goal of price stability. How might members of the incumbent political party who are up for reelection react? It is likely that the politicians due for reelection would be more concerned with the slowdown in the economy and would be in favor of a cut Correctin interest rates. In the absence of influence over an independent central bank, they may push for immediate increases Correctin government spending or reductions Correctin taxes.

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

Stability results in higher output growth rates.

Considering the market for bank reserves, how can the Fed control independently both the price and quantity of aggregate bank reserves in the post-2008 environment?

The Fed can control the price in the market for reserves by changing the interest rate it pays on reserves Correct. When the Fed raises this rate, banks would be willing to pay a(n) higher Correctrate to borrow from nonbank participants in the federal funds market in order to deposit these funds at the IOER at the Fed. This process does not change Correctthe supply of aggregate reserves. It is reflected in an upward shift in the flat Correctportion of the demand curve for reserves.

The long list of central bank goals includes the stability of interest rates and exchange rates. You look on the the central bank website and note that they have increased interest rates at every one of their meetings over the last year. You read the financial press and see references to how the exchange rate has moved in response to these interest-rate changes. How could you reconcile this behavior with the central bank pursuing its objectives?

The central bank faced a situation where increasing interest rates was necessary to curb emerging inflationary pressures and considered low and stable inflation a more important objective than interest-rate and exchange-rate stability.

Prior to the euro-area crisis, the ECB's deposit facility contained nearly all of the excess reserves in the Eurosystem's banks. What has changed this in recent years?

The deposit facility interest rate fell.

Suppose ECB officials ask your opinion about their operational framework for monetary policy. You respond by commenting on their success at keeping short-term interest rates close to target but also express concern about the complexity of their process for managing the supply of reserves. What specific changes would you suggest the ECB should make to its system in the future?

You might suggest that the ECB concentrate its operations in Frankfurt instead of having to coordinate these operations at all the national central banks simultaneously. You might also suggest that the ECB narrow the relatively long list of institutions that qualify as counterparties to open market operations and reduce the range of assets it accepts as collateral for these operations.

The number of central banks that exist in the world today is

about 180.

Most economists agree that the target rate of inflation for central banks should be

above zero for fears of deflation.

Time consistency is critical for economic policy to be credible because

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

an explicit numerical target for inflation.

The types of loans the Fed makes consist of each of the following, except which one?

conditional credit

To be independent, a central bank must have

control of its own budget.

Empirical research seems to verify that

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

During the 1990s many countries developed a monetary policy framework that focused on inflation targeting. This is an example of policymakers focusing

directly on an objective.

The European Central Bank's equivalent of the Fed's open market operations (OMO) is

dissimilar to the Fed's OMO in that the operations are conducted at all 19 of the National Central Banks simultaneously.

If the Fed sees no need to engage in expansionary monetary policy, then

eventually, the Fed will shrink its balance sheet by letting securities it holds expire.

Since the Great Recession in the United States, reserves have been so abundant that the

federal funds rate is not easily manipulated with open market operations.

The specific goals of central banks include each of the following except which one?

high levels of exports

Often, central banks that employ inflation targeting have a hierarchical mandate that means that

hitting the inflation target comes first, and everything else comes second.

The fact that there is a market for federal funds enables banks to

hold a lower level of excess reserves than they would otherwise hold.

If prices are not stable,

money becomes less useful as a store of value.

If the current market federal funds rate is in the target rate range and the demand for reserves decreases, the likely response in the federal funds market will be that the market federal funds rate will

not change because the reserve supply is so high that the market federal funds rate will be unchanged.

The Fed will make a discount loan to a bank during a crisis

only if the bank is sound financially and can provide collateral for the loan.

Seasonal credit provided by the Fed is not as common as it used to be because

other sources for long-term loans have developed for banks in these areas.

Many governments give their central bank control over issuing currency because

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

Central banks are in a position to control risk in the economy because they control

short-term interest rates.

Potential output depends on all of the following except which one?

the number of firms in the economy

The interest rate on excess reserves is

the upper bound of the federal funds target rate range.

A good monetary policy instrument is

tightly linked to monetary policy objectives.