QUESTION 27 _____ is a central bank strategy of achieving a certain value (targe

Question

QUESTION 27

_____ is a central bank strategy of achieving a certain value (target) of the annual growth rate of a monetary aggregate and _____ is, among several elements, an institutional commitment to price stability as the primary, long-term goal of monetary policy.

Overnight lending rule; reserve rule

Federal funds rule; discount rate

Price rate; prime rate

Monetary targeting; inflation targeting

1 points   

QUESTION 28

The Fed goal of price stability often conflicts with the goal of ______.

interest rate stability.

lending to the business community.

lending to other banks.

1 points   

QUESTION 29

The Federal Reserve System was set up with twelve regional banks rather than one central bank because _______.

twelve banks were easier to manage than fifteen banks.

the U.S. Constitution limited the number of banks to twelve.

of the traditional American hostility toward centralized authority.

of Americans liking many banks.

Overnight lending rule; reserve rule

Federal funds rule; discount rate

Price rate; prime rate

Monetary targeting; inflation targeting

Explanation / Answer

Q. 27 Monetary targeting; inflation targeting

Monetary targeting is a central bank strategy of achieving a certain value (target) of the annual growth rate of a monetary aggregate and inflation targeting is, among several elements, an institutional commitment to price stability as the primary, long-term goal of monetary policy.

The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of an economy.

Inflation targeting is also a critical aim. Most mainstream economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy.

Q. 28 The Fed goal of price stability often conflicts with the goal of interest rate stability.

The goal of price stability often conflicts with the goals of interest-rate stability and high employment in the short run (but probably not in the long run). For example, when the economy is expanding and unemployment is falling, both inflation and interest rates may start to rise. If the central bank tries to prevent a rise in interest rates, this might cause the economy to overheat and stimulate inflation. But if a central bank raises interest rates to prevent inflation, in the short run unemployment could rise. The conflict among goals may thus present central banks like the Federal Reserve with some hard choices

Q.29 The Federal Reserve System was set up with twelve regional banks rather than one central bank because of the traditional American hostility toward centralized authority.

Because of a long-standing tradition of distrust of centralized power, the Federal Reserve System was spread across regional banks that prevented power from being concentrated in one location or by one interest group.  

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