Download Problem Set 7

Problem Set 7
Econ 333 (01) Summer 2002
(Dr. Tin-Chun Lin)
1. The objectives of the Federal Reserve in its conduct of monetary policy include
(A) Economic growth.
(B) Price stability.
(C) High employment
(D) Interest-rate stability
(E) All of the above.
(Answer: (E))
2. Price stability is desirable because
(A) Inflation creates uncertainty, making it difficult to plan for the future.
(B) Everyone is better off when prices are stable.
(C) Price stability increases the profitability of the Fed.
(D) It guarantees full employment.
(E) None of the above.
(Answer: (A))
3. Although the goals of high employment and economic growth are closely related,
policies can be specifically aimed at encouraging economic growth by
(A) Encouraging firms to invest.
(B) Encouraging people to save.
(C) Doing both (A) and (B) of the above.
(D) Doing neither (A) nor (B) of the above.
(Answer: (C))
4. Which of the following is a potential operating target for the central bank?
(A) The monetary base.
(B) The M1 money supply.
(C) Nominal GNP.
(D) The discount rate.
(E) Money demand.
(Answer: (A))
5. If the central bank targets a monetary aggregate, it is likely to lose control over the
interest rate because
(A) Of fluctuations in the money demand function.
(B) Of fluctuations in the consumption function.
(C) Bond values will tend to remain stable.
(D) Of fluctuations in the business cycle.
(Answer: (A))
6. Although the goals of high employment and economic growth are closely related,
policies can be specifically aimed at encouraging economic growth by
(A) Encouraging firms to invest and people to save.
(B) Encouraging firms to limit their price increases.
(C) Doing both (A) and (B) of the above.
(D) Doing neither (A) nor (B) of the above.
(Answer: (A))
7. “Unemployment is a bad thing, and the government should make every effort to
eliminate it.” Do you agree or disagree? Explain your answer. (Answer: Disagree.
Some unemployment is beneficial to the economy because the availability of vacant
jobs makes it more likely that a worker will find the right job and that the employer
will find the right worker for the job.)
8. “If the demand for money did not fluctuate, the Fed could pursue both a money
supply target and an interest-rate target at the same time.” Is this statement true,
false, or uncertain? Explain your answer. (Answer: True. In such a world, hitting a
monetary target would mean that the Fed would also hit its interest target, or vice
versa. Thus the Fed could pursue both a monetary target and an interest-rate target at
the same time.)
9. The Federal Reserve desires interest rate stability because
(A) It allows for less uncertainty about future planning.
(B) Interest-rate volatility often leads to demands to curtail the Fed’s power.
(C) It guarantees full employment.
(D) Of both (A) and (B) of the above.
(Answer: (D))
10. The Fed accidentally discovered open market operations when
(A) It came to the rescue of failing banks in the early 1930s, and found that its
purchases of bank loans injected reserves into the banking system.
(B) It purchased securities for income and found that its purchases injected reserves
into the banking system.
(C) It attempted to slow inflation in 1919 by selling securities and found that its sales
drained reserves from the banking system.
(D) None of the above occurred.
(Answer: (B))
11. Why might the Fed say that it wants to control the money supply but in reality not be
serious about doing so? (Answer: The Fed may prefer to control interest rates rather
than the money supply because it wishes to avoid the conflict with Congress that
occurs when interest rates rise. The Fed might also believe that interest rates are
actually a better guide to future economic activity.)