Reading 27: Monetary Policy-LOS c 习题精选 2011, fighting, ultimate, between, process

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Session 6: Economics: Monetary and Fiscal Economics
Reading 27: Monetary Policy

LOS c: Discuss monetary policy’s transmission mechanism (chain of events) between changing the federal funds rate and achieving the ultimate monetary policy goal when fighting either inflation or recession, and explain loose links and time lags in the adjustment process.

 

 

If a monetary policy is focused on combating inflation, which open market actions by the Federal Reserve will most effectively accomplish this?

A) Purchase Treasury securities, causing aggregate demand to decrease.

B) Sell Treasury securities, causing aggregate demand to decrease.

C) Sell Treasury securities, causing aggregate demand to increase.

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If the Federal Reserve wants to slow inflation, it needs to decrease aggregate demand (i.e., business investment, consumer purchases of durable goods, and exports). To accomplish this, the Federal Reserve could engage in open market sales of Treasury securities.

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Which of the following statements concerning monetary policy is most likely to be accurate? Monetary policy changes affect the economy:

A) by stimulating or dampening aggregate supply.

B) with a significant lag.

C) as soon as they are announced.

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Monetary policy changes tend to affect the economy via aggregate demand, but only after a significant lag. Consequently, changes in policy designed to stimulate (dampen) the economy may occur after the economy has been to recover (decelerate) and may make economic cycles more severe.

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Which of the following statements regarding the monetary policy transmission mechanism 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 by increasing the money supply to increase interest rates or by decreasing the money supply to decrease interest rates.

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

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Central banks 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. Increasing the money supply will decrease interest rates and decreasing the money supply will increase interest rates.

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Silvano Jimenez, an analyst at Banco del Rey, is reviewing recent actions taken by the U.S. Federal Reserve (the Fed) in setting monetary policy. Recently, the Fed decided to increase the money supply, which has resulted in a decrease in real interest rates. At a staff meeting, Jimenez brings this matter to the attention of his colleagues and makes the following statements:

Statement 1: Although the money supply increase has led to a decrease in real interest rates, we should begin to see U.S. investors decrease their investments abroad and the U.S. dollar will appreciate in the foreign exchange market.

Statement 2: The Fed’s increase in the money supply will increase the amount of imports into the U.S.

Are Statement 1 and Statement 2 as made by Jimenez CORRECT?

Statement 1

Statement 2

A) Incorrect Incorrect

B) Correct Incorrect

C) Incorrect Correct

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If the Fed increases the money supply and real interest rates decline, U.S. investors will seek higher real rates of return abroad and the U.S. dollar will depreciate as the dollar will be exchanged for foreign currencies in order to buy the foreign investments. Likewise, the decrease in real interest rates will reduce the inflow of funds from abroad as foreign investors seek higher rates of return outside the U.S. With a dollar that has depreciated, U.S. exports should increase, as U.S. products will become cheaper for foreign buyers. As such, both statements are incorrect.

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The open market sale of Treasury securities by the Federal Reserve is least likely to result in:

A) increased exports of U.S. goods.

B) increased longer-term interest rates.

C) a decreased rate of inflation.

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When the Fed sells Treasuries, it causes both short- and long-term interest rates to increase. This rate increase causes the dollar to appreciate, which reduces foreign demand for domestic goods, causing exports to decline. The interest rate increase also puts downward pressure on price levels, which causes inflation to slow.

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