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CHAPTER 26
The Process of Monetary Policy Formulation
1. The
refers to the time it takes policymakers to realize that a change in the
economy's performance has occurred.
a. impact lag
b. policy lag
c. recognition lag
d. operating lag
ANSWER: c
2. The
refers to the time that elapses between when an action is taken and when
that action has a significant influence on economic variables.
a. impact lag
b. policy lag
c. recognition lag
d. operating lag
ANSWER: a
3. The
refers to the time that elapses from the point when the need for action is
recognized and when a legislative solution is decided upon and set in motion.
a. impact lag
b. policy lag
c. recognition lag
d. operating lag
ANSWER: b
4. Which of the following choices correctly lists the three lags in the policy process in the order in
which they are expected to occur?
a. The policy lag, the recognition lag, and the impact lag
b. The recognition lag, the policy lag, and the impact lag
c. The impact lag, the recognition lag, and the policy lag
d. The recognition lag, the impact lag, and the policy lag
ANSWER: b
5. Which of the following best describes the impact lag?
a. The time it takes for policymakers to recognize that economic conditions have changed and
that a policy change is necessary
b. The time that elapses from when the need for action is recognized to when the policy
adjustment is enacted
c. The time from when the policy action is taken until there is a significant effect on the
economy
d. None of the above
ANSWER: c
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375
6. A(n)
is a target that is midway between the policy instruments and the
ultimate policy goals.
a. monetary target
b. policy directive
c. operating target
d. intermediate target
ANSWER: d
7. A(n)
is a target that is amenable to control by the policy tools and is highly
correlated with the intermediate target.
a. monetary target
b. policy directive
c. operating target
d. ultimate target
ANSWER: c
8. The statement that emerges from the FOMC Meeting and that is used to guide monetary policy
until the next FOMC meeting is called the
a. monetary target.
b. policy directive.
c. operating target.
d. intermediate target.
ANSWER: b
9. Monetary policy refers to
a. changes in taxes and government spending to ensure sustainable growth, high employment,
and low inflation.
b. attempts by the Fed to stabilize the economy and to ensure sufficient money and credit for an
expanding economy.
c. the set of regulations used to oversee depository institutions.
d. None of the above
ANSWER: b
10. The Fed can use which of the following as an intermediate target?
a. the level of real GDP
b. the level of nominal GDP
c. both an interest rate and a monetary aggregate at the same time
d. either a monetary aggregate or an interest rate but not at the same time
ANSWER: d
11. Which of the following makes timely and appropriate monetary policy more difficult to
determine?
a. The existence of uncertainty
b. The presence of lags in the policy process
c. Increasing global integration
d. All of the above
ANSWER: d
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12. In gauging the stance of monetary policy, which of the following is true?
a. The Fed relies on forecasts more than incoming data because forecasts are highly reliable
and incoming data may have random fluctuations.
b. The Fed relies more on incoming data than forecasts because forecasts are often wide of the
mark.
c. Increasing globalization makes monetary policy easier to implement.
d. Trends in incoming data can be picked up very quickly, usually in one month or less.
ANSWER: b
13. Which of the following makes timely and appropriate monetary policy more difficult to
determine?
a. The fact that the FOMC meets only 8 times per year
b. The existence of lags in the policy process
c. The fact that there are 12 Federal Reserve Banks that have to each contribute to the
formulation of monetary policy.
d. All of the above
ANSWER: b
14. Which of the following is not necessarily a desirable characteristic of an intermediate target
variable?
a. The variable should be a monetary aggregate.
b. The variable should be reliably, and thus predictably, related to the goal variables.
c. Policymakers should be able to observe the intermediate target regularly.
d. The Fed should be able to hit the targeted range of the intermediate variable.
ANSWER: a
15. Over the last decade or so, the Fed has emphasized the use of which of the following variables as
an operating target?
a. M1
b. The fed funds rate
c. Nonborrowed reserves
d. Borrowed reserves
ANSWER: b
16. Which of the following statements is false?
a. The breakdown in the traditional relationships between the monetary aggregates and
economic activity caused an abandonment of the use of monetary aggregates as either targets
or information variables in the early 1990s.
b. In July 2000, the Fed even stopped providing projections about the growth rates of the
monetary aggregates and DNFD.
c. At the eight FOMC meetings per year, emphasis is placed on long-term goals.
d. Long-term forecasts include target ranges for inflation and unemployment.
ANSWER: c
17. In describing forecasting, which of the following statements is false?
a. Even when forecasting errors are small, they can have a large impact when used for
determining large aggregates in the economy such as GDP.
b. Current economic conditions are given weight than forecasts in formulating policy.
c. Forecasting errors are usually very minor since forecasting is a nearly perfect science.
d. Forecast errors can be fairly large.
ANSWER: c
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18. Which of the following statements about FOMC decision-making is false?
a. Once the long-term policy stance is set, the focus of the FOMC shifts to the immediate
period.
b. The Fed looks at many indicators to assess current economic conditions and the economic
outlook.
c. Given its assessment of current conditions and the economic outlook, the FOMC comes up
with short-term policy goals consistent with long-range goals.
d. Short-term policy goals include only the short-term growth path for the fed funds rate.
ANSWER: d
19. In the early 2000s, the Fed uses ______________ as intermediate targets and
__________________ as an operating target.
a. GDP, the inflation rate
b. interest rates, fed fund rate
c. the money supply, interest rates
d. the fed funds rate, interest rates.
ANSWER: b
20. The time it takes for policymakers to determine that a change in the economy's performance has
occurred is called
a. the policy lag
b. uncertainty.
c. the impact lag.
d. the recognition lag.
ANSWER: d
21. On the average, when monetary policymakers act, their actions will affect the economy
a. 0 to 60 days later.
b. 6 months or more.
c. Several years later.
d. Instantaneously.
ANSWER: b
22. The time that elapses between an action being taken by policymakers and its influence on the
economy is called which of the following?
a. The policy lag
b. Uncertainty.
c. The impact lag.
d. The recognition lag.
ANSWER: c
23. Which of the following statements is an explanation of why it takes time for monetary policy
change to make an impact in the economy?
a. With large firms, investment planning is frequently long run, and plans tend to be completed
once started.
b. Cycles are expected to enable the economy to pull out of a recession.
c. Previous records indicate that demand will return.
d. There is anticipation of government help down the road.
ANSWER: a
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Chapter 26
24. Policymakers tend to give greater weight to which of the following?
a. Forecasts rather than incoming data
b. Incoming data rather than forecasts
c. Historical records of business cycles
d. Views of what they believe is politically possible
ANSWER: b
25. Which of the following is true?
a. The policy lag refers to the time that elapses from the point when a significant and
unexpected change in the economy’s performance occurs to when policymakers recognize
that such a change has occurred.
b. Most recently the Fed has emphasized the use of one or more of the monetary aggregates as
an operating target.
c. Policymakers put more emphasis on economic forecasts than on incoming data because
incoming data are often revised.
d. The comparison between the economy’s expected performance and policymakers’ policy
goals guide monetary policy actions.
ANSWER: d
26. Which of the following is false?
a. There is very little that policymakers can do today to materially affect the current
performance of the economy.
b. The Fed’s actions or its failure to take action today may aggravate inflation and cyclical
fluctuations later.
c. Increasing interdependence among the economies of the world implies that U.S.
policymakers have more control over the performance of the U.S economy than they had in
the past.
d. The rationale behind intermediate targets is this: If the Fed hits the intermediate target, it
will come reasonably close to achieving its economic objectives.
ANSWER: c
27. A major difficulty for the Fed in controlling the economy is
a. the problem of timing; if the Fed acts now, that may lead to more problems later.
b. that the public may not concur with tightening policies.
c. that observers will second guess the Fed and exert political pressure on it.
d. that too much information from the Fed scares the public.
ANSWER: a
28. The Fed’s attempt to reduce inflation may have a negative short-run impact of
a. increased unemployment and reduced growth.
b. reduced output growth and higher inflation.
c. lower inflation and higher employment.
d. lower productivity and lower employment.
ANSWER: a
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29. In the case of recession, a detrimental effect of pressure on the Fed to act immediately could
possibly
a. add to the probabilities of a policy promoting economic growth.
b. improve the data for the Fed.
c. lead to inflation later.
d. increase the likelihood of stability.
ANSWER: c
30. As our country becomes more financially integrated with the rest of world, which of the
following will occur?
a. Tokyo will be the dominant influence in our stock market.
b. The economies of the world will become more independent.
c. Fed policy making will become easier.
d. There will be increased interdependence and a greater need for global coordination of policy.
ANSWER: d
31. When the Fed selects a variable that is midway between its current policy and its eventual goal,
that variable is called
a. an intermediate target.
b. an operating target.
c. a policy target.
d. a recognition target.
ANSWER: a
32. Which of the following is true?
a. The Fed sets growth target ranges for several aggregates in order to be absolutely certain
they are correct.
b. Since the early 2000s, the Fed no longer sets growth target ranges for the aggregates because
of the instability of the relationship between changes in the aggregates and changes in
economic activity.
c. The Fed uses M1 primarily in the execution of monetary policy because it is the aggregate
most widely used to make transactions.
d. The Fed now sets rigid growth rate rules to limit the degree of discretionary monetary policy.
ANSWER: b
33. Changes in the relationship between a given monetary aggregate and the level of economic
activity is believed to be caused by
a. technological changes in payment methods.
b. reduced use of electronic transfers.
c. the reduction in numbers of new financial instruments and markets.
d. All of the above
ANSWER: a
34. Changes in the relationship between a given monetary aggregate and the level of economic
activity is believed to be caused by
a. slow technological change in payment methods.
b. the increased use of electronic transfers.
c. the reduction in numbers of new financial instruments and markets.
d. All of the above
ANSWER: b
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35. In using an interest rate target,
a. the rate is raised if there is a desire to slow down the level of economic activity.
b. the rate is lowered if there is a desire to speed things up.
c. the Fed has eliminated monitoring the money aggregates.
d. Both a and b
ANSWER: d
36. The Fed targets the interest rate by which of the following?
a. by targeting the federal funds rate
b. through the use of open market operations
c. by adjusting government spending and taxes
d. Both a and b
ANSWER: d
37. Which of the following is considered to be the Fed's main policy tool?
a. The rediscount rate
b. The reserve ratio
c. Raising taxes
d. Open market operations
ANSWER: d
38. The time that elapses from the point when the need for action is recognized and the point when a
procedural change is decided upon is called which of the following?
a. the impact lag
b. the policy lag
c. the recognition lag
d. the forecasting lag
ANSWER: b
39. If the demand for reserves is fixed, the larger the supply of reserve provided through open market
operation, the
a. higher the fed funds rate.
b. greater the rediscount rate.
c. higher the interest rate.
d. lower the fed funds rate.
ANSWER: d
40. The larger the supply of reserves and the lower the Fed funds rate, the
a. higher the concern about the economy.
b. higher the interest rate.
c. higher the monetary growth rate.
d. lower the monetary growth rate.
ANSWER: c
41. In guiding policy in recent years, the Fed has
a. moved almost completely away from both aggregates and the interest rate as targets.
b. increased the use of both the aggregates and the interest rate as targets.
c. used the aggregates more than the interest rate as targets.
d. used interest-rate targeting more than monetary-aggregate targeting.
ANSWER: d
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42. During the 1970s, the aggregate that was targeted most frequently was which of the following?
a. M1
b. M2
c. M3
d. Credit balances
ANSWER: a
43. Which of the following is true?
a. In recent decades, the relationship between various monetary aggregates and the level of
economic activity has remained stable.
b. The main difference between an intermediate target and an operating target is that the Fed
has more control over an intermediate target.
c. The Fed can maintain both an interest rate target and a money supply target, simultaneously.
d. In recent years, the Fed has emphasized interest rates as intermediate targets and used the fed
funds rate as the operating target.
ANSWER: d
44. When the Fed uses an interest rate as an intermediate target, upward pressure on the interest rate
is restricted by increasing the supply of reserves. This may lead to
a. higher fed funds rates.
b. steady economic growth.
c. a downward slide into recession.
d. higher inflation in the future.
ANSWER: d
45. If aggregate demand drops and if the Fed withdraws reserves to maintain an interest rate target,
then this can lead to
a. higher inflation in the future.
b. a more severe slowdown in the economy.
c. greater international trade.
d. a higher price level.
ANSWER: b
46. The relationship between M1 and economic activity during the mid-1980s was which of the
following?
a. Emphasized in guiding policy
b. Of absolutely no importance
c. Rather unstable
d. Stable and predictable
ANSWER: c
47. Which of the following was the primary targeted monetary aggregate in the mid-to-late 1980s?
a. M1
b. M2
c. M3
d. None of the above
ANSWER: b
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Chapter 26
48. Which of the following has the Fed used since the mid 1990s as an operating target?
a. The fed funds rate
b. Nonborrowed reserves
c. The level of reserves borrowed at the discount window
d. None of the above
ANSWER: a
49. To prevent the interest rate from increasing, the Fed accommodates an increase in aggregate
demand by which of these methods?
a. Decreasing the supply of reserves
b. Increasing the supply of reserves
c. Not changing the supply of reserves
d. Decreasing the quantity supplied of reserves
ANSWER: b
50. To prevent the interest rate from decreasing, the Fed accommodates a decrease in aggregate
demand by which of these methods?
a. Decreasing the supply of reserves
b. Increasing the supply of reserves
c. Not changing the supply of reserves
d. Decreasing the quantity supplied of reserves
ANSWER: a
51. The Fed believes the relationship between a monetary aggregate and the growth rate of GDP is
which of the following?
a. Stable
b. Unpredictable at the present time
c. A good forecasting tool
d. Useful and essential in determining monetary policy
ANSWER: b
Interest
Rate
MS
MS'
it
Mt
D
Money
D'
Figure 24–1
Use Figure 26–1 to answer Questions 52–54.
52. Assume the Fed is targeting a particular interest rate (it). If money demand increases from D to
D', what must the Fed do to maintain the interest rate target?
a. Decrease money supply
b. Increase the interest rate
c. Increase the money supply
d. The Fed cannot maintain it.
ANSWER: c
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53. Assume the Fed is targeting a particular level of money supply (Mt) as measured by one of the
monetary aggregates. If money demand increases from D to D', what will happen if the Fed
continues to leave the money supply unchanged?
a. The interest rate will rise.
b. The interest rate will fall.
c. Money demand will shift leftward.
d. Money supply will increase.
ANSWER: a
54. If the Fed increases the money supply in response to the change in demand from D to D’ in figure
26-1, then
a. the Fed is targeting the interest rate.
b. the Fed’s policy can be described as accommodating.
c. the Fed is not targeting the money supply.
d. All of the above.
ANSWER: d
55. A target that the Fed can control with it policy tools and which is correlated with the
intermediate target is the
a. ultimate target.
b. operating target.
c. policy directive.
d. economic target.
ANSWER: b
56. Which of the following is false?
a. If the incoming data and the forecasts suggest the economy’s performance is deviating
significantly from the goals and priorities, the policymakers will consider a change in policy
so as to move the economy’s likely performance closer to the goals.
b. The basic approach is to use various statistical methods and models, judgment based on
historical experience, and incoming data on the full range of factors comprising and
determining aggregate demand and aggregate supply to develop a forecast for the variables
of major concern such as real gross domestic product (GDP), inflation, the unemployment
rate, and exchange rates.
c. The data that are used include information about retail sales, industrial production, consumer
confidence, business capital spending plans, wages, personal income, profits, and the
external balance of payments.
d. In assessing policy, forecasts are generally given more weight than incoming data, because
there are long lags before incoming data is received.
ANSWER: d
57. Which of the following statements is true?
a. The money supply and interest rates can be successfully targeted simultaneously.
b. The money supply and interest rates cannot be successfully targeted simultaneously.
c. Increases in the demand for money will cause interest rates to fall if the money supply is held
constant.
d. Increases in the demand for money will require the Fed to decrease the money supply to
maintain an interest rate target.
ANSWER: b
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58. Which of the following is false?
a. As data reports are published, policymakers ask themselves if the data is consistent with our
economic outlook and desires or if the data signaling that the economy’s performance has
deviated markedly from what was expected.
b. The problem with assessing data is that many monthly data releases are quite volatile or
noisy, possessing a large element of irregular variance that makes the data unreliable as
policy indicators.
c. As a result of potentially large month-to-month fluctuations, it is often necessary to have two
to three months of data on hand before the underlying cyclical or trend movements in an
individual data series become evident.
d. Because data is so unreliable and hard to interpret, the Fed relies much more on forecasts in
determining whether or not policy should be changed.
ANSWER: d
59. Which of the following is false?
a. The Fed currently provides projections about the growth rates of the monetary aggregates
and domestic nonfinancial debt (DNFD).
b. In the early 1990s, the aggregate that was most strongly correlated with the level of economic
activity was domestic nonfinancial debt (DNFD).
c. In the 1970s, the Fed targeted M1 in formulating monetary policy.
d. In the mid-1980s, the Fed targeted M2 and M3 in formulating monetary policy
ANSWER: a
60. A recent approach used by the Fed has been observing the time it takes for manufactures to get
supplies delivered. This variable is referred to as which of the following?
a. First in first out
b. Last in first out
c. Supplier delivery time
d. Purchasing management time
ANSWER: c
61. If 80 percent of participating purchasing managers in the supplier delivery time survey responded
that delivery time was the same and 10 percent responded that delivery time was slower, the
supplier delivery time index would be which of the following?
a. 90
b. 80
c. 50
d. 40
ANSWER: c
62. A supplier delivery time index below 50 indicates which of the following?
a. More managers report faster deliveries than slower
b. More managers report slower deliveries than faster
c. Managers believe there is an unnecessary lag in delivery time
d. Managers believe delivery time is unstable and unpredictable
ANSWER: a