M+B CH. 15

Specific goals of central banks include all of the following:

1. low and stable inflation 2. high and stable real growth 3. a stable exchange rate 4. low and stable unemployment 5. reduce systematic risk

In its role as a bankers' bank a central bank performs each of the following

1. providing loans during times of financial distress 2. overseeing commercial banks and the financial system 3. managing the payments system

at a growth rate of 6% an economy will double in size in

12 years

in a survey of forecasts towards the end of the financial crisis of 2007-2009 forecast inflation rates for the next decade in the US were

2%

over very long periods, the US real economic growth averaged around

3% per year

In 2015, the average daily volume on the Fed's Fedwire system was

3.3 trillion

T/F: periods of growth above the potential level are periods of low unemployment

False

Monetary policy in the US is under the control of

Federal Reserve

T/F: Printing currency can be a profitable venture for a government

True

T/F: central bank statements in developed countries differ in length but are similar in the speed with which policy changes are announced

True

most central banks of industrialized countries have monetary policy formed by

a committee made up of members of their central bank

Which of the following is the best analogy? Inflation is like:

a minute having fewer seconds

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

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 the annual output growth

a) stability results in higher output growth rates

the 1990s saw inflation fall and real growth increase in the US and in many other countries. this is partially attributed to:

a) technological innovation b) redesign of many central banks c) central banks became better at their jobs

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

above zero for fears of deflation

today most central banks announce their policy actions

almost immediately

in the UK 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

which of the following statements is most accurate?

as the inflation rate increases, inflation becomes less stable

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 goals of

both transparency and accountability

which of the following would give the most importance to the goal of exchange rate stability? a) large, closed economies b) US, 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

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

during the financial crisis of 2007-2009 the Fed used its powers in all but which of the following ways a) lending to nonbanks b) accepting very illiquid collateral against loans c) lowered bank reserve requirements d) lowered its policy rate to zero

c) lowered bank reserve requirements

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

can impact the rate of inflation

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

can increase spending by having the central banks purchase its bonds

the interest rate decisions made by the FOMC

cannot be overridden by anyone outside of the Fed

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

central bankers to make their priorities clear

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

choose monetary policies that are overly accommodative

in the US monetary policy is formed by

committee

to be independent a central bank must have

control of its own budget

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

control short term interest rates

Which is a function of modern central banks?

control the availability of money and credit

empirical research seems to verify that

countries that have 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

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

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) weakens the independence of the central banks

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) how goals will be measured c) the goal that is currently receiving the most attention d) why zero inflation is not desirable

d) why zero inflation is not desirable

in the US the Fed is asked to

deliver price stability as one of a number of objectives

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

emerging market economies that the central bank of the US

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

firms would have to cut the nominal wage to reduce the real wage

since the Fed was created it has

improved its skill at securing financial stability

in the US one problem with central bank independence is

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

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

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 formed

independently of political pressure

main problem from inflation as seen by most economists is

inflation creates risk

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

Modern central banks have a monopoly in

issuing currency

interest rate volatility is a problem because

it adds to uncertainty, thereby diminishing the investment

one reason for having monetary policy framework is

it makes clear what specific goals the central bankers are pursuing

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

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

the means for assuring accountability and transparency

may differ across the central banks of different countries

one thing that is true about economic policy in the US is

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 its decisions publicly is

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

which of the following statements is the most true concerning economic policy in the US?

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

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 Fed's policy regarding announcing its policy decisions has

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

Number of central banks that exist in the world today

over 180

to say monetary policy is transparent implies

policymakers offer plausible explanations for their decisions along with supporting data

central bank accountability means

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

Primary objective of most central banks in industrialized economies is

price stability

Many governments give their central bank control over issuing currency because

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

the autonomy of modern central banks mean that governments cannot increase their spending by

printing money

A primary goal of central banks is to

reduce systematic risk

one argument of an independent central bank is

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

stable inflation implies

that inflation is predictible

the efficient allocation of resources requires:

that prices reflect the relative value of goods and services

In the U.S. the authority to issue currency is held by

the Federal Reserve

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

the number of firms in the economy

one problem for the fed regarding setting policy stems from the fact that

there are multiple goals that may be inconsistent with each other

central banks often find

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