kim226

A country is experiencing a core inflation rate of 7% during a recessionary period of real GDP growth. If the central bank has a single mandate to achieve price stability and uses inflation targeting with an acceptable range of zero to 4%, its monetary policy response is most likely to decrease:

A) GDP growth in the short run.

B) short-term interest rates.

C) the foreign exchange value of the country’s currency.

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If the central bank has a price stability mandate, it will most likely respond to the above-target inflation rate by decreasing the money supply, even though GDP growth is in a recessionary phase. Decreasing the money supply will result in higher short-term interest rates and appreciation of the currency, but will likely cause GDP growth to decrease further in the short run.

kim226

Which of the following is least likely to be a function of the central bank?

A) Issue currency.

B) Control money supply.

C) Tax collection.

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The three functions of a central bank are to issue a country’s currency, regulate its banking system, and to manage the money supply. Tax collection is typically conducted by a government agency created specifically to carry out that function.

kim226

If a bank needs to borrow funds from the Federal Reserve to fund a temporary shortage in reserves, it would borrow funds at the:

A) federal funds rate.

B) prime rate.

C) discount rate.

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Banks are able to borrow from the Fed at the discount rate. The federal funds rate is the interest rate banks charge other banks to borrow reserves from other banks. The prime rate is the rate that commercial banks charge their best customers.

kim226

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

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

B) Purchase 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.

kim226

When the Federal Reserve sells government securities on the open market, bank reserves are:

A) increased, which increases the amount of money banks are able to lend, causing a decrease in the federal funds rate.

B) decreased, which reduces the amount of money banks are able to lend, causing a decrease in the federal funds rate.

C) decreased, which reduces the amount of money banks are able to lend, causing an increase in the federal funds rate.

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When the Federal Reserve wants to increase the federal funds rate through open market operations, it sells government securities. Open-market sales reduce bank reserves and cause the federal funds rate to increase.

kim226

Assume the U.S. economy is undergoing a recession. In its efforts to stimulate the economy by trying to influence short-term interest rates the Fed is most likely to take which two actions?

A) Sell Treasury securities and increase bank reserve requirements.

B) Sell Treasury securities and decrease bank reserve requirements.

C) Buy Treasury securities and decrease bank reserve requirements.

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If the economy is in a recession, the Fed is likely to attempt to decrease short-term interest rates. Thus, the Fed will buy Treasury securities and decrease bank reserve requirements.

kim226

Which of the following statements regarding U.S. Federal Reserve open market operations is least accurate?

A) If the Fed wants to stimulate the economy, it will sell Treasury securities to banks.

B) When the Fed buys Treasury securities, short-term interest rates will generally decrease.

C) When the Fed sells Treasury securities, excess reserves decrease.

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If the Fed intends to stimulate the economy, they will buy, not sell, Treasury securities. Buying Treasury securities injects reserves into the banking system.

kim226

What are the three essential qualities an effective central bank should possess?

A) Independence, credibility, and transparency.

B) Understandability, relevance, and reliability.

C) Transparency, comprehensiveness, and consistency.

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A central bank that is independent from political interference, possesses credibility, and exhibits transparency is more likely to achieve its monetary policy objectives than a central bank that lacks these qualities. The characteristics listed in the other answer choices relate to financial statements and financial reporting standards.

karoliukas

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) Correct Incorrect

B) Incorrect 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.

karoliukas

If a country’s economy is growing at an unsustainably rapid rate and the central bank decreases its target overnight interest rate, the country’s:

A) long-term rate of economic growth will increase.

B) expected rate of inflation is likely to decline.

C) inflation rate is likely to increase.

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The central bank should increase target interest rates when the economy is growing at an unsustainable (above-full-employment) level. Decreasing the target overnight rate is likely to further increase aggregate demand and cause inflation to accelerate, which will be detrimental to the long-term growth rate of the economy.