Reading 66: Monetary Policy in an Environment of Global Fi

答案和详解如下：

1.Do the following two statements correctly identify how central bank behavior affects financial markets?

Statement 1: “The central bank can control short-term interest rates by providing or reducing systemic liquidity”

Statement 2: “Long-term interest rates that banks charge consumers and businesses depend both on the banks’ expected funding costs and their inflation expectations.”

A)                                        Correct  Incorrect

B)                                        Incorrect       Correct

C)                                        Correct  Correct

D)                                        Incorrect       Incorrect

The correct answer was C)

Both statements are correct. The central bank provides or reduces systemic liquidity to control short-term interest rates. However, the interest rates that commercial banks charge on longer-term loans will depend, to a significant degree, on their expectations about future funding costs and inflation. Private banks’ expectations about the future direction of monetary policy and the central bank’s commitment to price stability are therefore key factors in determining longer-term interest rates.

2.Which one of the following statements regarding monetary policy in the global financial markets is least accurate?

A)   Decisions by consumers and businesses are based largely on long-term interest rates, which are beyond the control of the central bank.

B)   Interest rates that commercial banks charge on longer-term loans depend primarily on expectations about future funding costs and inflation expectations.

C)   As business financing by issuing bonds in the global financial markets becomes more prevalent, central banks are increasingly able to influence economic activity directly by adjusting systemic liquidity.

D)   Expectations of private banks about the future direction of monetary policy and the central bank’s commitment to price stability are key factors in determining interest rates.

The correct answer was C)

Central banks influence economic activity directly by increasing or decreasing systemic liquidity in the commercial banking system. As more businesses seek financing by issuing bonds in the financial markets instead of financing through commercial bank loans, the ability of a central bank to influence economic activity directly decreases.

3.Which of the following statements about the importance of communication between a central bank and the financial markets is least accurate?

A)   How financial markets react to new information that suggests risks to price stability depends on how clearly they understand how the central bank will respond to that information.

B)   Clear central bank communication to financial markets is essential, but financial market information is not useful to central bank policy makers.

C)   Poor communication of the central bank’s intent can lead to uncertainty and instability in financial markets.

D)   Because markets are subject to fads and bubbles, often overreact, and exhibit herding behavior, the central bank should not follow the markets but guide them.

The correct answer was B)

Financial market data provide the central bank with useful information. The term structure of interest rates in the bond markets gives policymakers a view of expected interest rates. Bond derivatives reflect the markets’ level of uncertainty about their interest rate expectations. Equity markets give the central bank information as a leading indicator of economic growth and as a transmitter of economic shocks.

4.Which of the following statements regarding central bank behavior and how it affects financial markets is most accurate?

A)   Central banks can control long-term interest rates directly because decisions by consumers and businesses are based on these rates.

B)   Central banks can control short-term interest rates directly, but long-term interest rates are beyond their control.

C)   Central banks can control short-term interest rates by increasing the money supply to increase interest rates or by decreasing the money supply to decrease interest rates.

D)   Central banks can control long-term interest rates directly, but short-term interest rates are beyond their control because they are affected by fluctuations in the financial markets.

The correct answer was B)

Financial markets are the conduit by which central banks communicate their monetary policy. Central banks, such as the Fed and the ECB, can control short-term interest rates directly. However, the decisions of consumers and businesses are based on long-term interest rates, which are beyond the control of central banks. Long-term interest rates are a reflection of both current short-term rates and expected future refinancing costs for commercial banks.