Ch28 Monetary Policy and Bank Regulation Multiple Choice Questions 1
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| 45. The diagram above refers to a private closed economy. In this instance, the equilibrium GDP is:
A. $60 billion. B. $180 billion. C. between $60 and $180 billion. D. $60 billion at all levels of GDP. Answer: B Reference: Explanation: Type: Multiple Choice Essay Questions 1. Contrast the actions a central bank would take to increase the quantity of money in the economy with the actions it would take to produce the opposite affect. A central bank that wants to increase the quantity of money in the economy can buy bonds in an open market operation, reduce the reserve requirement, lower the discount rate, or engage in quantitative easing. Conversely, a central bank that wants to reduce the quantity of money in the economy can sell bonds in an open market operation, raise the reserve requirement, raise the discount rate, or reverse its past practices of quantitative easing. Reference: Explanation: Type: Essay 2. Contrast the actions a central bank should take when an economy is in recession with production substantially below potential GDP and those needed when an economy is producing in overdrive above potential GDP. If the economy is in a recession, with production substantially below potential GDP, then the central bank should raise the supply of money and credit, first by reducing interest rates, and then by considering the use of “quantitative easing” and direct loans. If the economy is producing in overdrive above potential GDP, experiencing high inflation, then the central bank should raise interest rates by holding down growth of the money supply. Reference: Explanation: Type: Essay 3. Briefly explain what a central bank is and what its most important task is. Discuss the U.S. central bank, including a brief explanation of what is involved in its decision making about the money supply and its ability to affect some goals of macroeconomic policy; including examples of some macroeconomic policy goals that would be affected. Conclude by explaining what is involved in its policies relating to the money and banking system. The central bank is the institution designed to control the quantity of money in the economy and also to oversee the safety and stability of the banking system. The most important task of a central bank is to determine the quantity of money in the economy. In the United States, the central bank is called the Federal Reserve. In making decisions about the money supply, a central bank decides to raise or lower interest rates, and in this way, to affect some goals of macroeconomic policy like low unemployment and inflation. Another set of policies related to the money and banking system involves reinforcing the stability of a nation’s banking system with a combination of protections for bank depositors and regular government inspections of the balance sheets of banks. Reference: Explanation: Type: Essay 4. Briefly explain the affects of time lags on monetary policy. Monetary policy affects the economy only after a time lag that is typically long and of variable length. Because monetary policy involves a chain of events: the central bank must perceive a situation in the economy, hold a meeting, and make a decision to react by tightening or loosening monetary policy. The change in monetary policy must percolate through the banking system, changing the quantity of loans and affecting interest rates. As a result of this chain of events, monetary policy has little effect in the immediate future; instead, its primary effects are felt perhaps 1–3 years in the future. Reference: Explanation: Type: Essay 5. Identify the three government policies for assuring safe and stable banking systems. The three government policies for assuring safe and stable banking systems are: (1) the provision of deposit insurance to reassure households that their bank deposits are safe; (2) examining the financial records of banks to ensure that they have positive net worth; and (3) making emergency short-term loans to banks in times of financial chaos. Reference: Explanation: Type: Essay 6. Briefly describe the tools used by a central bank to affect the money supply and identify which is the most powerful and commonly used method and which is the weakest method. A central bank has three traditional tools to affect the quantity of money in the economy: open market operations, reserve requirements, and the discount rate. The most powerful and commonly used of the three traditional tools of monetary policy is open market operations, while altering the discount rate is a relatively weak tool of monetary policy. Reference: Explanation: Type: Essay 7. Discuss the reserve requirements method of conducting monetary policy, including a description of this method, the types of adjustments banks are likely to be required to make and the affects on the economy that are likely to result. A second method of conducting monetary policy is for the central bank to raise or lower the reserve requirement, which is the proportion of its deposits that a bank is legally required to deposit with the central bank. If a bank finds that it is not holding enough in reserves to meet the reserve requirements, it needs to borrow at least for the short term from the central bank. If the central bank raises the discount rate, then banks will hold a higher level of reserves to reduce the chance of needing to borrow at that higher interest rate. When banks hold these higher reserves, it reduces the money supply in the economy as a whole. If the central bank lowers the discount rate it charges to banks, then banks will be less concerned about the prospect of needing a short-term loan to fill out their reserves. In turn, the bank will be more willing to lend aggressively, which will increase the money supply. Reference: Explanation: Type: Essay 8. Discuss the method of quantitative easing used by the Federal Reserve during the most recent U.S. recession, including any criticisms of this action. One method of quantitative easing was that the Federal Reserve began to make discount rate loans broadly available to many financial firms like those who buy and sell financial securities or even insurance companies, not just to banks. The quantitative easing policies adopted by the Federal Reserve (and by other central banks around the world) are usually thought of as temporary emergency measures. But if these steps are indeed to be temporary, then the Federal Reserve will need to stop making these additional loans and sell off the financial securities it has accumulated—and the process of quantitative easing may prove more difficult to reverse than it was to enact. Reference: Explanation: Type: Essay 9. Define and contrast contractionary monetary policy and expansionary monetary policy and their respective economic outcomes. Explain what happens if the affects of either of these policies goes too far. A monetary policy which reduces the amount of money and loans in the economy is a contractionary monetary policy or a “tight” monetary policy. A monetary policy that expands the quantity of money and loans is known as an expansionary monetary policy or a “loose” monetary policy. Tight or contractionary monetary policy that leads to higher interest rates and a reduced quantity of loanable funds will reduce two components of aggregate demand. Conversely, loose or expansionary monetary policy that leads to lower interest rates and a higher quantity of loanable funds will tend to increase business investment and consumer borrowing for big-ticket items. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation. If tight monetary policy seeking to reduce inflation goes too far, it may push aggregate demand so far to the left that a recession begins. Reference: Explanation: Type: Essay 10. Talona's latest economic data indicates that GDP is -0.08 and unemployment is 8.1%, while Genovia's economic data indicates shows continuing pressure for rising price levels. Diagnose the current health for each of these economies and provide your prescription of the appropriate remedy needed in each instance. Talona's economy is suffering a recession and high unemployment, with output below potential GDP. A loose monetary policy can help the economy return to potential GDP. Genovia's economy is producing at a quantity of output above its potential GDP. A tight or contractionary monetary policy can reduce the inflationary pressures for a rising price level. Reference: Explanation: Type: Essay Directory: economie -> Introduction-to-Economy Introduction-to-Economy -> Ch14 Poverty Economic Inequality Multiple Choice Questions 1 economie -> Management Information Systems How Businesses Use Information Systems economie -> The environment and corporate culture economie -> The Basic Theory Using Demand and Supply Introduction-to-Economy -> Ch34 Globalization and Protectionism Multiple Choice Questions 1 Introduction-to-Economy -> Ch13 Positive Externalities Public Goods Multiple Choice Questions 1 economie -> Chapter 5 Market Power Does It Help or Hurt the Economy? What's in This Chapter and Why Download 205.93 Kb. Share with your friends:
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