Parkin&Bade, Macroeconomics, 2nd edition

Chapter 15: Monetary Policy

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1) Which of the following is a monetary policy goal?

i. Keeping the inflation rate in the target of 2 to 3 per cent.

ii. Attaining minimum employment.

iii. The stability of the currency in Australia.

A) i only

B) ii only

C) iii only

D) i and iii

E) i, ii and iii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

2) The Reserve Bank monetary policy objective is

A) to keep unemployment below the natural unemployment rate.

B) to maintain a zero per cent consumer price inflation rate.

C) to keep frictional unemployment at zero per cent over the business cycle.

D) to keep consumer price inflation between 2 and 3 per cent over the business cycle.

E) to maintain a zero per cent inflation rate.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

3) The benefit of adopting an inflation-control target

i. is that the Reserve Bank's policy actions are clearly understood in financial markets.

ii. is that it provides an anchor for future expectations of inflation.

iii. is that Reserve Bank policy actions are hidden from financial markets.

A) i and ii

B) iii only

C) i only

D) ii only

E) None of the above answers is correct.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

4) Which of the following statements are correct?

i. The Reserve Bank has responsibility for the conduct of monetary policy.

ii. The Commonwealth government determines monetary policy.

iii. The Reserve Bank Act requires regular consultation on monetary policy between the governor and the treasurer.

A) i only

B) ii only

C) i and iii

D) i and ii

E) iii only

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

5) The interest rate in the inter-bank loans market is called the

A) cash rate.

B) required reserve rate.

C) real interest rate.

D) coupon rate.

E) discount rate.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

6) The monetary policy instrument the Reserve Bank chooses to use is the

A) monetary base.

B) cash rate.

C) exchange rate.

D) discount rate.

E) flexible exchange rate.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

7) Which of the following are policy instruments available to the Reserve Bank as it tries to achieve its macroeconomic goals?

i. Government expenditure on goods and services and taxes.

ii. The government budget deficit or surplus.

iii. Changes in the cash rate.

A) iii only

B) ii only

C) i and ii

D) i and iii

E) ii and iii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

8) An instrument rule is based on ________ of the economy while a targeting rule is based on ________ of the economy.

A) a forecast; the previous state

B) the current state; the previous state

C) a forecast; the current state

D) the current state; a forecast

E) the previous state; the current state

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

9) Which of the following are the tools used by the Reserve Bank to move the actual cash rate to the target cash rate?

i. Open market operations

ii. The interest rate on exchange settlement balances

iii. Selling foreign reserves

A) i only

B) ii only

C) iii only

D) i and ii

E) i, ii and iii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

10) If the Reserve Bank wants to raise the cash rate, it

A) instructs large commercial banks to sell government securities in the open market.

B) sells government securities in the open market.

C) buys government securities in the open market.

D) tells large commercial banks to raise their interest rates.

E) sells government securities in the foreign exchange market.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

11) The higher the cash rate, the ________ the opportunity cost of holding reserves, which ________ the incentive for banks to hold reserves.

A) lower; does not change

B) higher; decreases

C) lower; increases

D) higher; increases

E) lower; decreases

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

12) If the Reserve Bank increases the quantity of reserves, a new equilibrium is reached by a

A) movement down the demand for reserves curve.

B) movement up the demand for reserves curve.

C) leftward shift of the demand for reserves curve.

D) rightward shift of the demand for reserves curve.

E) None of the above answers is correct.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

13) In the market for bank reserves, if the target rate is higher than the cash rate, the Reserve Bank will take action to ________ reserves.

A) increase the demand for

B) decrease the demand for

C) decrease the supply of

D) increase both the demand for and the supply of

E) increase the supply of

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

14) Which of the following is NOT an effect from a change in the cash rate?

A) A change in government expenditures

B) A change in the real interest rate

C) A change in aggregate demand

D) A change in investment

E) A change in the exchange rate

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

15) After a few months following a change in the cash rate,

A) the inflation rate rises.

B) banks' reserves increase.

C) the long-term interest rate changes.

D) other short-term interest rates change.

E) None of the above answers is correct.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

16) If the Reserve Bank decreases the cash rate, other short-term interest rates ________ and the quantity of money and the supply of loanable funds ________.

A) fall; decrease

B) rise; increase

C) rise; do not change

D) rise; decrease

E) fall; increase

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

17) If the Reserve Bank decreases the cash rate, in the months following the long-term interest rate ________ and, other things being equal, consumption expenditure and investment ________.

A) rises; increase

B) falls; decrease

C) falls; increase

D) rises; do not change

E) rises; decrease

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

18) Suppose the Reserve Bank lowers the cash rate. The short-term impact is that other short-term interest rates ________, the exchange rate ________ and the quantity of money and supply of loanable funds ________.

A) fall; rises; decrease

B) fall; rises; increase

C) fall; falls; increase

D) rise; falls; increase

E) rise; rises; decrease

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

19) Refer to the figure above. If the Reserve Bank raises the cash rate, in the days following, other short-term interest rates ________ and the exchange rate ________.

A) rise; rises

B) do not change; rises

C) fall; falls

D) rise; falls

E) rise; does not change

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

20) Suppose the Reserve Bank lowers the cash rate. In the months that follow, the quantity of money and the supply of loanable funds ________, and the long-term real interest rate ________.

A) decrease; rises

B) decrease; falls

C) increase; rises

D) increase; falls

E) do not change; rises

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

21) If the Reserve Bank lowers the cash rate, which of the following occurs?

A) Consumption expenditure decreases.

B) Net exports decreases.

C) Government expenditures on goods and services increase.

D) The price of the dollar on the foreign exchange market increases.

E) Investment increases.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

22) Suppose the Reserve Bank raises the cash rate. Put the following changes in the order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards:

i. Short-term interest rates rise.

ii. Long-term interest rate rises.

iii. Aggregate demand decreases.

iv. Inflation rate decreases.

A) ii-i-iv-iii

B) i-ii-iii-iv

C) i-iii-ii-iv

D) i-ii-iv-iii

E) ii-i-iii-iv

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

23) The Reserve Bank raises the cash rate. Which of the following changes takes the longest time before it occurs?

A) Aggregate demand decreases.

B) The supply of loanable funds decreases.

C) The exchange rate rises.

D) The quantity of money decreases.

E) Short-term interest rates rise.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

24) In the long run, the real interest rate is determined by

A) the expected inflation rate.

B) savings supply and investment demand.

C) the multiplier effect.

D) Reserve Bank actions.

E) the nominal interest rate.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

25) If the Reserve Bank raises the target cash rate, which of the following happens?

A) Net exports increase.

B) Real GDP increases.

C) The real interest rate falls.

D) The price level rises.

E) Aggregate demand decreases.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

26) The Reserve Bank is concerned about inflation and alters the target cash rate. Its policy will ________ short-term interest rates and, in the foreign exchange market, lead to the value of the Australian dollar ________.

A) raise; rising

B) raise; not changing

C) lower; not changing

D) lower; falling

E) lower; rising

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

27) When the Reserve Bank increases the cash rate, bank loans ________, the supply of loanable funds ________, and the real interest rate ________.

A) increase; increases; falls

B) do not change; decreases; rises

C) decrease; decreases; rises

D) decrease; does not change; rises

E) increase; increases; rises

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

28) Suppose monetary policy results in the exchange rate falling. As a result,

A) exports increase and imports increase.

B) exports decrease and imports decrease.

C) net exports increase.

D) exports do not change because they are autonomous and imports decrease.

E) net exports decrease.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

29) If the Reserve Bank buys government securities, other things the same, the exchange rate ________ and Australian exports ________.

A) rises; increase

B) falls; do not change because they are autonomous expenditure

C) rises; decrease

D) falls; decrease

E) falls; increase

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

30) Because investment, consumption expenditure and net exports are interest-sensitive components of expenditure, a ________ in the cash rate brings ________ in ________.

A) fall; an increase; aggregate demand

B) fall; a decrease; aggregate supply

C) fall; a decrease; aggregate demand

D) rise; an increase; aggregate demand

E) rise; an increase; aggregate supply

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

31) If the Reserve Bank is concerned about a possible recession, it ________ the target cash rate and ________ securities in open market operations. The supply of money ________ and the short-term interest rate ________.

A) lowers; sells; decreases; rises

B) raises; buys; increases; falls

C) lowers; buys; increases; falls

D) raises; sells; increases; rises

E) raises; buys; decreases; falls

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

32) If the Reserve Bank uses open market operations to offset a recession, it ________ government securities in order to ________ the cash rate.

A) sells; lower

B) buys; lower

C) buys; not change

D) sells; raise

E) buys; raise

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

33) When the economy is in a recession, the Reserve Bank can ________ the cash rate, which ________ aggregate demand and ________ real GDP.

A) lower; increases; decreases

B) lower; increases; increases

C) raise; decreases; increases

D) raise; increases; decreases

E) lower; decreases; decreases

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

34) In a recession, the Reserve Bank's monetary policy aims to ________ the real interest rate, ________ aggregate demand, and ________ aggregate supply.

A) decrease; increase; increase

B) decrease; increase; not change

C) increase; decrease; not change

D) increase; not change; increase

E) increase; increase; increase

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

35) Using the data in the above table, if potential GDP for this economy is $25 billion, then in order to restore full employment, the cash rate can be

A) raised so that consumption expenditure, investment and net exports increase.

B) lowered so that consumption expenditure, investment and net exports increase.

C) lowered so that government expenditure on goods and services increases.

D) raised so that net exports increase.

E) lowered so that consumption expenditure and investment increase, though net exports decrease.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

36) The economy is at the equilibrium shown as point a in the above figure. To restore the economy to potential GDP, the Reserve Bank should

A) sell government securities to lower the cash rate and thereby decrease aggregate demand.

B) buy government securities to raise the cash rate and thereby decrease aggregate demand.

C) buy government securities to raise the cash rate and thereby increase aggregate supply.

D) sell government securities to raise the cash rate and thereby increase aggregate demand.

E) buy government securities to lower the cash rate and thereby increase aggregate demand.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

37) The economy is at the equilibrium shown at point a in the above figure. If the Reserve Bank

A) lowers the cash rate, the economy moves to an equilibrium at point b.

B) sells government securities, the economy moves to an equilibrium at point c.

C) raises the cash rate, the economy moves to an equilibrium at point c.

D) sells government securities, the economy moves to an equilibrium at point b.

E) None of the above is correct because the economy will remain at point a in any case.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

38) When the Reserve Bank wants to slow inflation, it

A) increases taxes on interest income.

B) lowers the cash rate.

C) cuts the cash rate target aggressively to almost zero.

D) increases aggregate income, output and employment.

E) raises the cash rate target.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

39) The Reserve Bank is concerned that inflation might occur. To help eliminate this possibility, it could ________ government securities to ________ the cash rate in the short run.

A) sell; lower

B) sell; raise

C) buy; raise

D) buy; lower

E) sell; not change

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

40) When the Reserve Bank fears inflation, it will ________ the target cash rate by _______ government securities in open market operations and the quantity of money ________.

A) lower; buying; increases

B) lower; selling; decreases

C) raise; selling; decreases

D) raise; buying; decreases

E) raise; selling; increases

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

41) If real GDP exceeds potential GDP, to move the economy to potential GDP, the Reserve Bank

A) raises the cash rate to decrease real GDP but not potential GDP.

B) lowers the cash rate to increase potential GDP but not real GDP.

C) lowers the cash rate to decrease real GDP but not potential GDP.

D) raises the cash rate to increase potential GDP but not real GDP.

E) raises the cash rate to decrease both real GDP and potential GDP.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

42) If the Reserve Bank raises the cash rate, eventually the

A) AS curve shifts leftward, decreasing real GDP and increasing the price level.

B) AD curve shifts leftward, decreasing real GDP and increasing the price level.

C) AS curve shifts rightward, decreasing real GDP and increasing the price level.

D) AD curve shifts leftward, decreasing real GDP and the price level.

E) AD curve shifts rightward, increasing real GDP and the price level.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

43) Which of the following is a problem in pursuing monetary policy?

A) Monetary policy must be approved by an Act of Parliament.

B) The lag between a change in the quantity of money and its effect on economic activity may be long.

C) The Reserve Bank announces all policy changes to the public.

D) The Reserve Bank cannot control the cash rate.

E) None of the above answers is correct.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

44) When the Reserve Bank lowers the cash rate, which of the following economic variables responds most rapidly?

A) The long-term real interest rate

B) The supply of loanable funds

C) Consumption expenditure

D) The inflation rate

E) Other short-term interest rates

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

45) Inflation targeting requires that the central bank

A) publicise its targeted inflation rate.

B) adopt a k-percent rule for the inflation rate.

C) avoid changing the amount of the monetary base.

D) set a fixed price for real assets.

E) use a short-term interest rate as its policy instrument.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

46) In comparing inflation targeting across countries it is clear that

A) central banks have been generally successful in hitting the target on average.

B) the level of public awareness and discussion has decreased since inflation targeting was adopted.

C) there is wide variability in the targets.

D) central banks generally have not kept inflation within the target range.

E) None of the above.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

47) The goals of inflation targeting are

i. to keep inflation low and stable.

ii. maintain a high and stable level of employment.

iii. to establish accountability.

A) i, ii and iii

B) i and iii

C) i only

D) i and ii

E) ii only

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

48) Maintaining the growth of the money supply at a constant rate is an example of

A) a nominal GDP targeting rule.

B) a money targeting rule.

C) discretionary policy.

D) a money demand rule.

E) an inflation targeting rule.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

49) Milton Friedman's k-percent rule says to set the rate of growth of the quantity of money equal to

A) the unemployment rate.

B) a constant rate.

C) last year's growth rate of real GDP.

D) the real interest rate.

E) the rate of growth of potential GDP.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

50) Under a k-percent rule, if the economy goes into expansion, the central bank would

A) lower tax rates to keep revenue constant.

B) lower the short-term interest rate.

C) increase the quantity of money.

D) raise the short-term interest rate.

E) None of the above answers is correct.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

51) The k-percent rule, an example of a money targeting rule, relies on a relatively stable

A) nominal GDP.

B) supply of money.

C) cash rate.

D) real interest rate.

E) demand for money.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

52) Under a nominal GDP targeting rule, the central bank

A) must publish its expected inflation rate.

B) lowers its interest rate when nominal GDP falls below target.

C) loses its ability to influence the inflation rate.

D) changes the interest rate only when real GDP, and hence nominal GDP, is off target.

E) cannot use short-term interest rates to conduct monetary policy.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

53) If the central bank bases its monetary policy on the judgements of its policymakers about the current needs of the economy, it is following

A) a money targeting rule.

B) a wait-and-see policy.

C) discretionary policy.

D) a monetary base instrument rule.

E) an inflation targeting rule.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking