the economics of money, banking, and financial markets

551 $

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15. 
    

    Which of the following criteria must be satisfied when selecting an intermediate target?
    A) The variable must be measurable and frequently available.
    B) The variable must be controllable with the use of the central bank's policy tools.
    C) The variable must have a predictable impact on the policy goal.
    D) Each of the above.
    Answer: D
    Diff: 2 Type: MC Page Ref: 455 - 457
    Skill: Recall
    Objective List: 18.1 Assess the different types of monetary policy strategy

    
    


16. 
    

    If the desired intermediate target is an interest rate, then the preferred policy instrument will
    be a(n) ____ variable like the ____.
    A) interest rate; three-month T-bill rate
    B) interest rate; overnight rate
    C) monetary aggregate; monetary base
    D) monetary aggregate; nonborrowed base
    Answer: B
    Diff: 1 Type: MC Page Ref: 478 - 480
    Skill: Recall
    Objective List: 18.1 Assess the different types of monetary policy strategy

    
    


17. 
    

    Explain and demonstrate graphically how targeting nonborrowed reserves can result in
    overnight rate instability.
    Answer: When nonborrowed reserves are held constant, increases in the demand for reserves
    result in the overnight rate increasing and decreases in the demand for nonborrowed reserves
    result in the overnight rate declining. Since fluctuations in demand do not cause monetary policy
    actions, the result is the overnight rate will fluctuate. See Figure 18-3 in the textbook.
    Diff: 3 Type: SA Page Ref: 455
    Skill: Recall
    Objective List: 18.1 Assess the different types of monetary policy strategy

    
    


18. 
    

    Explain and demonstrate graphically how targeting the overnight rate can result in
    fluctuations in nonborrowed reserves.
    Answer: With a overnight rate target, fluctuations in demand for reserves require similar
    changes in the nonborrowed reserves to keep the overnight rate constant. See Figure 18-4 in the
    textbook.
    Diff: 3 Type: SA Page Ref: 456
    Skill: Recall
    Objective List: 18.1 Assess the different types of monetary policy strategy

    
    


19. 
    

    What criteria apply when choosing a policy instrument?
    Answer: Three criteria apply when choosing a policy instrument: The instrument must be
    observable and measurable, it must be controllable by the central bank, and it
    must have a predictable effect on the goals.
    Diff: 3 Type: SA Page Ref: 455 - 457
    Skill: Recall
    Objective List: 18.1 Assess the different types of monetary policy strategy