Chapter 15 Money and Banking

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

$2.8 trillion

At a growth rate of 6 percent an economy will double in size in

12 years

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

2 percent

Over very long periods, US real economic growth has averaged around

3 percent per year

To be independent, a central bank must have

Control of its own budget

In the US, the authority to issue currency is held by the

Federal Reserve

Monetary policy in the United States is under the control of

Federal Reserve

The central bank in the United States is the

Federal Reserve

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?

In principles of economics we learn that information enables prices to adjust faster and if prices adjust markets are more efficient. In a sense that is what is happening here. If the central bank is going to be a stabilizing force it should provide information on a timely basis so that financial markets can adjust faster and minimize the volatility that otherwise would occur. Rapid adjustment in financial and other markets speeds the response of the economy to monetary policy, making it more effective.

One monopoly that modern central banks have is in

Issuing currency

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

It weakens the independence of the central bank

Most central banks of industrialized countries have monetary policy formed by

a committee made up of members of their central bank

A time-consistent policy is one where

a future policymaker lacks the opportunity or incentive to renege

Keeping interest rates stable is

a secondary goal for central banks

The central bank for the euro area tries to achieve accountability and transparency through

a standard numerical objective for inflation over the medium term

The monetary policy framework is

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

about 180

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

above zero for fears of deflation

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

add a risk premium, driving down prices of US assets

Interest rate volatility is a problem because it

adds to uncertainty, thereby diminishing an investment

Today, most central banks announce their policy actions

almost immediately

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 Federal Reserve's Fedwire system is used mainly to provide

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

The actions of central banks around the world

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

The stability of the financial system is enhanced by the ability of central banks to

be a lender of last resort

Most economists agree that a well-designed central bank would

be independent of political pressure

Setting an explicit numerical inflation target is most associated with the goal(s) of

both transparency and accountability

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

can impact the rate of inflation

If a government were to find that it cannot raise taxes any further, and it cannot borrow any further from financial markets, the government

can increase spending by having the central banks purchase its bonds

The interest rate decisions made by the Federal Open Market Committee

cannot be overridden by anyone outside of the Federal Reserve

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

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?

central banks focusing more on exchange rates in a global environment

Compared to an independent central bank, elected officials are likely to

choose monetary policies that are overly accommodative

In the United States, monetary policy is formed by

committee

One function of modern central banks is to

control the availability of money and credit

Operation Bernhard was a German operation to attack the United Kingdom by using

counterfeit British pounds

Empirical research seems to verify that

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

credibility

In the United States, the Federal Reserve is asked to

deliver price stability as one of a number of objectives

Central Banks around the world

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

Central bank statements in developed countries

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

Which one of the following would give the most importance to the goal of exchange rate stability?

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

Exchange rate stability is likely to be a more important goal for the central banks of

emerging market economies than the central bank of the United States

The rationale for the existence of central banks is mainly that

financial systems are prone to periods of extreme volatility

The problem for a central bank setting a zero inflation policy would be that

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?

high levels of exports

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

high stock prices

Since the Federal Reserve was created, it has

improved its skill at securing financial stability

In the United States, one problem with central bank independence is that

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

Which one of the following is evidence of the link between persistent increases in public debt and slower long-run growth?

increased concern about debt sustainability

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

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

As the inflation rate

increases, inflation becomes less stable.

There is a strong consensus among economists that monetary policy is more effective when it is formulated

independently of political pressure

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

inflation creates risk

Stable inflation implies that

inflation is predictable

The correlation between high rates of inflation and economic growth is

inverse; high inflation usually means low economic growth

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

is likely to raise interest rates to slow the rate of growth

The idea that central banks should be independent of political pressure is an idea that

is relatively new

All of the following are true about central bank independence except that it

is usually guaranteed by a country's constitution

In terms of economic growth, the central bank would like to

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?

lowering bank reserve requirements

One reason for having a monetary policy framework is that it

makes clear what specific goals the central bankers are pursuing

The means for assuring accountability and transparency

may differ across the central banks of different countries

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

minute having fewer seconds

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

monetary and fiscal policy need not, but may, conflict

The operational components required for truly independent central banks include

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

One reason given for more central bankers releasing decisions publicly is that

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

If prices are not stable,

money becomes less useful as a store of value

Higher than expected inflation will increase the

nominal amounts people need to save for retirement.

The Federal Reserve's policy regarding announcing its policy decisions has

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

Which one of the following statements is not true?

periods of growth below the potential level are periods of low unemployment

To say monetary policy is transparent implies that

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

The primary objective of most central banks in industrialized economies is

price stability

Which one of the following statements is true?

printing currency can be a profitable venture for a government

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

The autonomy of modern central banks means that governments cannot increase their spending by

printing money

In its role as the bankers' bank, a central bank performs each of the following except which one?

providing deposit insurance

A primary goal of central banks is to

reduce systematic risk

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

short-term interest rates

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

stability results in higher output growth rates

All of the following are consequences of an economy operating above its potential level except which one?

stable prices

One argument for an independent central bank is that

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

In the United States, monetary policymakers

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

that prices reflect the relative value of goods and services.

The ability to create money means the central bank can control

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

Successful monetary policy relies most on

the institutional environment

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

the number of firms in the economy

One problem for the Federal Reserve regarding setting policy stems from the fact that

there are multiple goals that may be inconsistent with each other

Central banks often find that

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?

time consistency of both monetary and fiscal policy

A monetary policy framework is used to clarify all of the following except which one?

why zero inflation is not desirable

Central bank accountability means that central bankers

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