Money and Banking Final

Which of the following statements is an example of the Fed's conditional commitment policy? "Policy accommodation can be removed at a pace that is likely to be measured." "The exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal." "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period." "The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

"The exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal."

Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be 0 percent. 1 percent. 2 percent. 3 percent.

1 percent.

According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is 25 pesos per real. 0.4 pesos per real. 40 pesos per real. 100 pesos per real.

25 pesos per real. 4 x 25 = 100

Using Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be 5 percent. 5.5 percent. 6 percent. 6.5 percent.

6.5 percent.

Lessons that economists and policy makers have learned from the recent global financial crisis include Developments in the financial sector have a far greater impact on economic activity than was earlier realized. The zero lower bound on interest rates can be a serious problem. The cost of cleaning up after a financial crisis is very high. Price and output stability do not ensure financial stability. All of these.

All of these.

The "Greenspan doctrine"—central banks should not try to prick bubbles—was based on which of the following arguments? Asset-price bubbles are nearly impossible to identify. Monetary actions would be likely to affect asset prices in general, rather than the specific assets that are experiencing a bubble. Raising interest rates has often been found to cause a bubble to burst more severely. Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy. All of these.

All of these.

________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant. A decrease; increase A decrease; decrease An increase; increase An increase; decrease

An increase; decrease

________ bubble is driven entirely by unrealistic optimistic expectations. A credit-driven A debt-driven An irrational exuberance A stock

An irrational exuberance

The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the General Agreement on Tariffs and Trade. Balance of Payments Compliance Accord. Bretton Woods system. International Settlement Fund.

Bretton Woods system.

________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply. Changes in reserve requirements; money multiplier Open market operations; money multiplier Changes in reserve requirements; monetary base Open market operations; monetary base

Open market operations; monetary base

If the dollar depreciates relative to the Swiss franc American computers will become more expensive in Switzerland. Swiss chocolate will become more expensive in the United States. Swiss chocolate will become cheaper in the United States. Swiss computers will become cheaper in the United States.

Swiss chocolate will become more expensive in the United States.

Which of the following is not a disadvantage to inflation targeting? There is a delayed signal about achievement of the target. There is potential for larger output fluctuations. There is a lack of transparency. Inflation targets could impose a rigid rule on policymakers.

There is a lack of transparency.

Which of the following is not an advantage of inflation targeting? increased monetary policy transparency There is an immediate signal on the achievement of the target. consistency with democratic principles reduction of the time-inconsistency problem

There is an immediate signal on the achievement of the target.

China chooses to have ________ and ________ and therefore, cannot have free capital mobility at the same time. a flexible exchange rate; an independent monetary policy a fixed exchange rate; an independent monetary policy a fixed exchange rate; no control of monetary policy a flexible exchange rate; no control of monetary policy

a fixed exchange rate; an independent monetary policy

A central bank has ________ chance to identify a credit-driven bubble compared to an irrational exuberance bubble. a greater less of a a greater, less or about the same level of a about the same level of a

a greater

Which of the following does NOT appear in the current account part of the balance of payments? a loan of $1 million from Bank of America to Brazil foreign aid to El Salvador an Air France ticket bought by an American income earned by General Motors from its plants abroad

a loan of $1 million from Bank of America to Brazil

Which of the following appears in the capital account part of the balance of payments? a gift to an American from his English aunt income earned by the Honda corporation on its automobile plant in Ohio a purchase by the Honda corporation of a U.S. Treasury bill a purchase by the Bank of England of a U.S. Treasury bill

a purchase by the Honda corporation of a U.S. Treasury bill

If the Fed wants to temporarily inject reserves into the banking system, it will engage in a matched sale-purchase transaction. an open market sale. a repurchase agreement. a reverse repurchase agreement.

a repurchase agreement.

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called a sterilized foreign exchange intervention. an exchange rate feedback rule. a money neutral foreign exchange intervention. an unsterilized foreign exchange intervention.

a sterilized foreign exchange intervention.

A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending. a decrease; a decrease; a further decrease a decrease; a decrease; an increase an increase; an increase; a further increase a decrease; an increase; an increase

an increase; an increase; a further increase

Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets the monetary base. nominal GDP. a monetary aggregate. an interest rate.

an interest rate.

A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal anchor. guideline. benchmark. tether.

anchor.

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should depreciate. appreciate. float. do none of these.

appreciate (imports go down)

Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant. appreciate; long depreciate; short appreciate; short depreciate; long

appreciate; long

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant. depreciate; lower appreciate; higher depreciate; higher appreciate; lower

appreciate; lower

Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad. depreciate; more appreciate; less appreciate; more depreciate; less

appreciate; more

When the effects of the global financial crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________. appreciated; decreased depreciated; decreased appreciated; increased depreciated; increased

appreciated; increased

The Fed prefers that ________ so that ________. banks borrow reserves from the Fed; banks can monitor each other for credit risk banks borrow reserves from each other; banks can monitor each other for credit risk banks borrow reserves from the Fed; the Fed can monitor banks for credit risk banks borrow reserves from each other; the Fed can monitor banks for credit risk

banks borrow reserves from each other; banks can monitor each other for credit risk

The Fed's lender-of-last-resort function cannot prevent runs by large depositors. creates a moral hazard problem. has proven to be ineffective. is no longer necessary due to FDIC insurance.

creates a moral hazard problem.

The account that shows international transactions involving currently produced goods and services is called the balance of payments. capital account. trade balance. current account.

current account.

Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________. increase; appreciate increase; depreciate decrease; appreciate decrease; depreciate

decrease; depreciate

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the supply of reserves causing the federal funds rate to ________, everything else held constant. decreases; increase increases; increase decreases; decrease increases; decrease

decreases; increase (Sale = fed res selling) (Discount rate - interest on the money the fed res lends to the banks)

If float is predicted to decrease because of good weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. defensive; inject defensive; drain dynamic; inject dynamic; drain

defensive; inject

Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. defensive; purchase defensive; sale dynamic; sale dynamic; purchase

defensive; sale

Under the current managed float exchange rate regime, countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation. surpluses; appreciate deficits; depreciate surpluses; depreciate deficits; appreciate

deficits; depreciate

When the exchange rate for the Mexican peso changes from 9 pesos to the U.S. dollar to 10 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________. appreciated; appreciated depreciated; appreciated appreciated; depreciated depreciated; depreciated

depreciated; appreciated

Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency. depreciating; devalue depreciating; revalue appreciating; revalue appreciating; devalue

depreciating; devalue

Which of the following is NOT an operating instrument? monetary base discount rate federal funds interest rate nonborrowed reserves

discount rate

As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant. dollar; foreign dollar; dollar foreign; dollar foreign; foreign

dollar; foreign

When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets. foreign; dollar foreign; foreign dollar; foreign dollar; dollar

dollar; foreign

Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate. foreign; domestic domestic; domestic domestic; foreign foreign; foreign

domestic; foreign

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate. hierarchical primary dual secondary

dual

The two types of open market operations are dynamic and reactionary. dynamic and defensive. active and passive. offensive and defensive.

dynamic and defensive.

The interest rate charged on overnight loans of reserves between banks is the prime rate. discount rate. Treasury bill rate. federal funds rate.

federal funds rate.

Which of the following is NOT a requirement in selecting a policy instrument? controllability predictability flexibility measurability

flexibility

If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent fluctuations of nonborrowed reserves will be large. the Fed will probably quickly abandon this policy, as it did in the 1960s. fluctuations of nonborrowed reserves will be small. the Fed will probably quickly abandon this policy, as it did in the 1950s.

fluctuations of nonborrowed reserves will be large.

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a forward transaction. spot transaction. deposit transaction. future transaction.

forward transaction.

The Policy Trilemma states that a country or a monetary union can't pursue the following three policies at the same time capital control, a flexible exchange rate, and an independent monetary policy. free capital mobility, a flexible exchange rate, and an independent monetary policy. capital control, a fixed exchange rate, and an independent monetary policy. free capital mobility, a fixed exchange rate, and an independent monetary policy.

free capital mobility, a fixed exchange rate, and an independent monetary policy.

When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment. underemployment. structural unemployment. cyclical unemployment.

frictional unemployment.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2% lowers the federal funds rate. raises the federal funds rate. has no effect on the federal funds rate. has an indeterminate effect on the federal funds rate.

has no effect on the federal funds rate. (Equilibrium is the federal funds rate)

The mandate for the monetary policy goals that has been given to the European Central Bank is an example of a ________ mandate. primary secondary dual hierarchical

hierarchical

Which set of goals can, at times, conflict in the short run? high employment and economic growth interest rate stability and financial market stability exchange rate stability and financial market stability high employment and price level stability

high employment and price level stability

Of the following, the one that appears in the current account of the balance of payments is a loan by a Swiss bank to an American corporation. an Italian investor's purchase of IBM stock. a purchase of a British Treasury bond by the Fed. income earned by U.S. subsidiaries of Barclay's Bank of London.

income earned by U.S. subsidiaries of Barclay's Bank of London.

When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would conduct massive open market purchase. increase discount rate. increase the interest rate paid on excess reserves. increase the required reserve ratio.

increase the interest rate paid on excess reserves.

Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar will ________. increase; depreciate increase; appreciate decrease; depreciate decrease; appreciate

increase; appreciate

According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase. decreased; more increased; less increased; more decreased; less

increased; more

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant. decreases; rise increases; rise decreases; fall increases; fall

increases; fall

A current account surplus indicates that America is ________ its claims on foreign wealth, while a deficit indicates that this country is ________ its claims on foreign wealth. increasing; increasing increasing; reducing reducing; increasing reducing; reducing

increasing; reducing

The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule. unemployment rate inflation rate foreign exchange rate interest rate

inflation rate

The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is targeting with an implicit nominal anchor. monetary targeting. inflation targeting. interest-rate targeting.

inflation targeting.

A nominal anchor promotes price stability by stabilizing interest rates. keeping inflation expectations low. outlawing inflation. keeping economic growth low.

keeping inflation expectations low.

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. left; appreciate left; depreciate right; appreciate right; depreciate

left; depreciate

A balance of payments deficit is associated with a ________ of international reserves, while a balance of payments surplus is associated with a ________. loss; gain loss; loss gain; loss gain; gain

loss; gain

The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to increase the short term interest rates. increase the long term interest rates. lower the long term interest rates. lower the short term interest rates.

lower the long term interest rates.

The opportunity cost of holding excess reserves is the federal funds rate plus the interest rate paid on excess reserves. plus the discount rate. minus the interest rate paid on excess reserves. minus the discount rate.

minus the interest rate paid on excess reserves. (When holding reserves the cost: ffr & the gain minus the interest rate paid on excess reserves.)

Open market purchases raise the ________ thereby raising the ________. money multiplier; money supply monetary base; money supply money multiplier; monetary base monetary base; money multiplier

monetary base; money supply

Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble. about the same amount of more less either more, less, or the same amount of

more

Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become ________ expensive. more; more more; less less; more less; less

more; less

To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase commercial papers. Treasury bills and Treasury notes. mortgage-backed securities. long-term Treasuries.

mortgage-backed securities.

Everything else held constant, if a central bank makes a sterilized sale of foreign assets, then the domestic currency will appreciate. depreciate. either appreciate, depreciate, or remain constant. not be affected.

not be affected.

Suppose it takes roughly two years for monetary policy to have a significant impact on inflation. If inflation is currently low but policymakers believe inflation will rise over the next two years with an unchanged stance of monetary policy, when should they tighten monetary policy to prevent the inflationary surge? wait until overt signs of inflation appear now two years later next year

now

The time-inconsistency problem in monetary policy can occur when the central bank conducts policy using a strict and inflexible rule. using a nominal anchor. using a flexible, discretionary rule. on a discretionary, day-by-day basis.

on a discretionary, day-by-day basis.

Capital ________ are American purchases of foreign assets, and capital ________ are foreign purchases of American assets. outflows; outflows outflows; inflows inflows; outflows inflows; inflows

outflows; inflows

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets. undervalued; above overvalued; above overvalued; below undervalued; below

overvalued; below

Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from depreciating will result in a ________ of international reserves. overvalued; gain undervalued; loss overvalued; loss undervalued; gain

overvalued; loss

The type of monetary policy regime that the Federal Reserve has followed From the 1980s up until the time Ben Bernanke became chair of the Federal Reserve in 2006 can best be described as monetary targeting. exchange-rate targeting. inflation targeting. policy with an implicit nominal anchor.

policy with an implicit nominal anchor.

Monetary policy is considered time-inconsistent because of the lag times associated with the implementation of monetary policy and its effect on the economy. policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. policymakers are tempted to pursue discretionary policy that is more contractionary in the short run. of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.

policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.

The primary goal of the European Central Bank is interest rate stability. price stability. high employment. exchange rate stability.

price stability.

Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________. price stability; long run reducing business-cycle fluctuations; long run price stability; short run reducing business-cycle fluctuations; short run

price stability; long run

The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows. secondary seasonal primary temporary

primary

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant. sale; purchase sale; sale purchase; sale purchase; purchase

purchase; sale

Real interest rates are difficult to measure because they fluctuate too often to be accurate. they cannot be controlled by the Fed. real interest rates depend on the hard-to-determine expected inflation rate. data on them are not available in a timely manner.

real interest rates depend on the hard-to-determine expected inflation rate.

Under the Bretton Woods system, the United States was designated as the dollar-standard country. reserve-currency country. fixed-rate country. par-standard country.

reserve-currency country.

According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target. drops below; rises above drops below; drops below rises above; drops below rises above; rises above

rises above; rises above

Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will decrease and the domestic currency will ________. sale; appreciate sale; depreciate purchase; appreciate purchase; depreciate

sale; appreciate

If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves. sales; increase purchases; decrease purchases; increase sales; decrease

sales; increase

When gold production was low in the 1870s and 1880s, the money supply grew ________ causing ________. rapidly; inflation rapidly; disinflation slowly; disinflation slowly; deflation

slowly; deflation

The immediate (two-day) exchange of one currency for another is a spot transaction. forward transaction. exchange transaction. money transaction.

spot transaction.

Unemployment resulting from a mismatch of workers' skills and job requirements is called structural unemployment. seasonal unemployment. frictional unemployment. cyclical unemployment.

structural unemployment.

Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem? required reserve ratio open market operation the Fed's liquidity provision discount policy

the Fed's liquidity provision

If, in retaliation for "unfair" trade practices, Congress imposes a 30 percent tariff on Japanese DVD recorders, but at the same time, U.S. demand for Japanese goods increases, then, in the long run, ________, everything else held constant. the Japanese yen should depreciate relative to the U.S. dollar there is no effect on the Japanese yen relative to the U.S. dollar the Japanese yen should appreciate relative to the U.S. dollar the Japanese yen could appreciate, depreciate or remain constant relative to the U.S. dollar

the Japanese yen could appreciate, depreciate or remain constant relative to the U.S. dollar

According to the purchasing power parity theory, a rise in the United States price level of 5 percent, and a rise in the Mexican price level of 6 percent cause the dollar to appreciate 5 percent relative to the peso. the dollar to depreciate 5 percent relative to the peso. the dollar to depreciate 1 percent relative to the peso. the dollar to appreciate 1 percent relative to the peso.

the dollar to appreciate 1 percent relative to the peso.

Which of the following is a potential operating instrument for the central bank? the M1 money supply nominal GDP the discount rate the monetary base

the monetary base

The difference between merchandise exports and imports is called the ________ balance. official reserve transactions trade capital account current account

trade

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets. undervalued; above overvalued; above undervalued; below overvalued; below

undervalued; above

Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from appreciating will result in a ________ of international reserves. overvalued; loss overvalued; gain undervalued; gain undervalued; loss

undervalued; gain

A speculative attack involves massive sales of a ____ currency or purchases of a ____ currency that cause a sharp change in the exchange rate under a ____ exchange rate system. weak; strong; floating weak; strong; fixed strong; weak; floating strong; weak; fixed

weak; strong; fixed

Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate when the demand for federal funds intersects the vertical section of the reserve supply curve. when the demand for federal funds equals zero. when the funds rate is below the discount rate. when the funds rate equals the discount rate.

when the funds rate equals the discount rate.

Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate when the funds rate equals the interest rate paid on excess reserves. when the funds rate is below the discount rate. when the funds rate equals the discount rate. when the funds rate is below the interest rate paid on excess reserves.

when the funds rate equals the interest rate paid on excess reserves. (The lower the interest rate the more demand for reserves)

If the British pound appreciates from $0.50 per pound to $0.75 per pound, the U.S. dollar depreciates from ________ per dollar to ________ per dollar. £2; £1.5 £2; £1.33 £2; £2.5 £2; £1.25

£2; £1.33 1/0.5 = 2 1/0.75 = 1.33