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Question 1

Considering the money market in isolation, if real GDP increases in the short-run, then the equilibrium nominal interest rate will (A)______ should the real money stock be (B)_________ by the central bank.

a) (A) remain unchanged ; (B) sufficiently decreased

b) (A) fall ; (B) held constant

c) (A) rise; (B) decreased

d) (A) fall; (B) decreased

Question 2

The monetary base is:

a) The sum of currency in circulation and commercial bank reserves.

b) The sum of currency in circulation and the currency held by commercial banks.

c) The sum of gold and foreign exchange held by the central bank

d) The sum of real assets of the banking sector plus its net worth.

Question 3

The principal source of a central bank's control over the money supply is...

a) ...the linkage between the reserves held by banks and sight deposits held at commercial banks.

b) ...the opportunity cost of holding money, the interest rate.

c) ...the power to issue bank notes that circulate.

d) ...the monopoly of legal gold and silver reserves.

Question 4

When a central bank follows a Taylor-rule in the conduct of its monetary policy, then it (A)_______ interest rates when the output gap and the (B) ________ both fall.

a) A) lowers ; (B) underlying trend rate of potential GDP growth

b) (A) lowers ; (B) difference between the actual inflation rate and the bank's target inflation rate.

c) A) raises ; (B) underlying trend rate of potential GDP growth.

d) A) raises ; (B) difference between the actual inflation rate and the bank's target inflation rate.

Question 5

The policy dilemma faced by central banks confronted with the need to play the role of lender-of-last resort is:

a) The possibility of running out of bank reserves so that the central bank itself becomes insolvent.

b) Bankers will reduce their reserves if the risk of a run on the bank has been reduced by the central bank's policy to serve as lender-of-last-resort.

c) The central bank will begin to compete with private banks in lending to households and businesses.

d) The provision of banks with liquidity that can be relied on in a time of crisis creates an incentive for banks to take on excessive risk in their investment strategies, making even greater future demands on the lender-of-last resort more likely than before.

Oxford University Press, Online Resource Centre, Chapter 09.

Chapter 09

Instructions

Question 1

Question 2

Question 3

Question 4

Question 5