Fin 307 Ch. 15

33. Over very long periods, U.S. real economic growth 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.

24. Which of the following statements is most accurate? A. As the inflation rate increases, inflation becomes less stable. B. As the inflation rate decreases inflation becomes less stable. C. As the inflation rate decreases inflation becomes more volatile. D. As the inflation rate increases, inflation becomes more stable.

A. As the inflation rate increases, inflation becomes less stable.

79. Which of the following statements is most true concerning economic policy in the U.S.? A. Monetary policymakers tend to have a long view while fiscal policymakers tend to ignore the long-run inflationary ramifications of their actions. B. Fiscal policymakers tend to focus on inflation and unemployment while monetary policymakers focus most of their attention on the money supply and the exchange rate. C. Fiscal policymakers tend to focus more on pleasing their constituents and so are willing to sacrifice the short run for the long run. D. Monetary policy independence is enshrined in the U.S. Constitution.

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

7. Which of the following statement 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. Too much money printed 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.

37. Which of the following statements regarding growth was brought out from the material in Chapter 15? 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.

11. 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.

47. 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.

43. 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 U.S. B. the U.S. 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 U.S.

16. The specific goals of central banks include all of the following except: A. high stock prices. B. low and stable inflation. C. high and stable real growth. D. a stable exchange rate.

A. high stock prices.

41. Interest rate volatility is a problem because: A. it adds to uncertainty, thereby diminishing the investment. 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.

A. it adds to uncertainty, thereby diminishing the investment.

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

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

63. 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; increasing one means decreasing the other.

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

21. 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.

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

A. politicians will establish goals and central bankers will report on their progress.

8. Many governments give their central bank control over issuing currency because: A. printing currency can be profitable for a government so government officials may have 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.

A. printing currency can be profitable for a government so government officials may have a strong incentive to print too much.

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

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

53. One argument for an independent central bank is: 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.

23. 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.

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

A. the Federal Reserve.

6. 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.

75. 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.

61. 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%. B. 2%. C. 4%. D. 7%.

B. 2%.

35. Which of the following statements is not true? A. The potential growth rate in the U.S. economy may have fallen following the financial crisis of 2007-2009. 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 employment. 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.

68. Today, most central banks announce their policy actions: A. one year after the policy is put in place. B. almost immediately. C. within a 3 to 5 year "window". D. usually six months after the policy is put in place.

B. almost immediately.

13. 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 on-line. 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.

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

56. 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.

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

B. control of its own budget.

55. Empirical research seems to verify that: A. countries that have less independent central banks experience lower rates of inflation. B. countries that have 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 that have high rates of inflation seem to have central banks with low levels of independence.

77. 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.

58. In the United States, one problem with central bank independence is: 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 issues currency.

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

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

B. inverse; high inflation usually means low economic growth.

49. 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.

78. One thing that is true about economic policy in the U.S. is: 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.

29. 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.

69. The Federal Reserve's policy regarding announcing its policy decisions has: A. always been to announce it immediately; that 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.

9. In its role as the bankers' bank, a central bank performs each of the following, except: A. providing loans during times of financial distress. B. providing deposit insurance. C. overseeing commercial banks and the financial system. D. managing the payments system.

B. providing deposit insurance.

18. 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.

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

B. that inflation is predictable.

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

B. the Federal Reserve.

32. Potential output depends on all of the following except: A. technology. B. the number of firms in the economy. C. the size of the capital stock. D. the number of people who can work.

B. the number of firms in the economy.

19. Central banks often find: 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.

12. In 2012, the average daily volume on the Federal Reserve's Fedwire system was: A. $24 billion. B. $240 billion. C. $2.4 trillion. D. $240 million.

C. $2.4 trillion.

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

C. 12 years.

44. Which of the following would give the most importance to the goal of exchange rate stability? A. Large, closed economies B. The U.S. and Japan and other developed countries C. Emerging market countries where exports and imports are central to the structure of the economy D. Europe

C. Emerging market countries where exports and imports are central to the structure of the economy

14. Which is a function of modern central banks? A. To control securities markets B. To control the government's budget C. To control the availability of money and credit D. To manage fiscal policy

C. To control the availability of money and credit

57. 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.

22. Which of the following is the best analogy? Inflation is like: A. a pound having more ounces. B. a day having more hours. C. a minute having fewer seconds. D. a mile having more feet.

C. a minute having fewer seconds.

40. 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.

72. 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.

27. Most economists agree that the target rate of inflation for the 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.

66. 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.

10. The central bank has the ability to create money; this means 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.

54. 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.

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

C. control short-term interest rates.

28. The problem for a central bank setting a zero inflation policy would be: A. the 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.

17. The specific goals of central banks include each of the following, except: A. high and stable real growth. B. low and stable inflation. C. high levels of exports. D. low and stable unemployment.

C. high levels of exports.

39. 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.

34. Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank: A. will keep interest rates low to keep the momentum. 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. is likely to lower the interest rate thinking a slowdown is coming to offset this boom.

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

84. 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.

31. 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.

60. During the financial crisis of 2007-2009 the U.S. Federal Reserve used its powers in all but which of the following ways: A. lending to nonbanks. B. accepting very illiquid collateral against its loans. C. lowered bank reserve requirements. D. lowered its policy rate to zero.

C. lowered bank reserve requirements.

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

2. The number of central banks that exist in the world today is: A. less than 10. B. about 250. C. over 170. D. over 50 but less than 100.

C. over 170.

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

C. policymakers offer plausible explanations for their decisions along with supporting data.

20. 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.

83. 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.

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

C. the Federal Reserve.

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

C. the institutional environment.

71. Which of the following statements is most accurate? A. Central bank statements in developed countries are similar both in length and in the speed with which policy changes are announced. B. Central bank statements in developed countries differ both in length and in the speed with which policy changes are announced. C. Central bank statements in developed countries are similar in length but differ in the speed with which policy changes are announced. D. Central bank statements in developed countries differ in length but are similar in the speed with which policy changes are announced.

D. Central bank statements in developed countries differ in length but are similar in the speed with which policy changes are announced.

64. 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.

52. 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.

76. Whenever central bankers face more than one goal, the policy framework requires: A. the central bank 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.

45. The 1990s saw inflation fall and real growth increase in the U.S. and in many other countries. This is partially attributed to all of the following except: A. technological innovation. B. redesign of many central banks. C. central banks became better at their jobs. D. central banks focused more on exchange rates in a global environment.

D. central banks focused more on exchange rates in a global environment.

67. 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.

15. 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.

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

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

D. independently of political pressure.

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

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

D. issuing currency.

81. Fiscal policymakers may actually welcome some inflation for all of the following reasons except: 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.

70. One reason given for more central bankers releasing its decisions publicly is: 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. so that central banks across the world can 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.

36. All of the following are consequences of an economy operating above its potential level except: A. high rates of inflation. B. high interest rates. C. low unemployment. D. stable prices.

D. stable prices.

74. One use of a monetary policy framework is to clarify all of the following except: A. the likely response when policy goals are in conflict with one another. B. the goal that is currently receiving the most attention. C. how goals will be measured. D. why zero inflation is not desirable.

D. why zero inflation is not desirable.