Inflation Targeting and Central Bank Policies Quiz
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Questions and Answers

Which central bank's primary objective is to maintain price stability?

  • US Federal Reserve
  • European Central Bank (correct)
  • Reserve Bank of Australia
  • Central Bank of Brazil

    • What is the primary objective of the US Federal Reserve?

  • Promote maximum employment (correct)
  • Ensure stability of the currency's purchasing power
  • Maintain price stability
  • Support general economic policies

    • Which central bank's mission includes ensuring the stability of the currency, maintenance of full employment, and economic prosperity?

  • European Central Bank
  • Central Bank of Brazil
  • US Federal Reserve
  • Reserve Bank of Australia (correct)

    • What is the primary purpose of the Bank of Korea?

    <p>Maintain price stability</p> Signup and view all the answers

    According to the text, which interest rate is the most important in US monetary policy?

    <p>Federal funds rate</p> Signup and view all the answers

    What is the primary way in which central banks can limit or increase the supply of money in an economy?

    <p>Manipulating reserve requirements</p> Signup and view all the answers

    Why are reserve requirements not used much today in developed market economies?

    <p>They are disruptive for banks</p> Signup and view all the answers

    What is the transmission mechanism of a central bank's interest rate?

    <p>The process of affecting real economic variables</p> Signup and view all the answers

    Which of the following is NOT one of the primary tools available to central banks to control inflation?

    <p>Discount rate</p> Signup and view all the answers

    What is the purpose of a central bank's policy rate?

    <p>To influence short- and long-term interest rates</p> Signup and view all the answers

    What is the name of the official interest rate set by a central bank?

    <p>Refinancing rate</p> Signup and view all the answers

    Why would commercial banks immediately increase their base rates when the central bank's refinancing rate increases?

    <p>To align their rates with the central bank's rate</p> Signup and view all the answers

    Which of the following is a common element of inflation-targeting frameworks?

    <p>A clear, symmetric, and forward-looking medium-term inflation target</p> Signup and view all the answers

    Why do central banks target an inflation rate of 2 percent?

    <p>To ensure price stability</p> Signup and view all the answers

    Which central bank does not target an explicit measure of inflation?

    <p>Bank of Japan</p> Signup and view all the answers

    What is a limitation of monetary policy mentioned in the text?

    <p>Inability to deal with periods of deflation</p> Signup and view all the answers

    According to the text, what might happen if short-term interest rates increase?

    <p>The price of bonds and the value of capital projects could fall</p> Signup and view all the answers

    What might be a consequence of a rise in interest rates causing a country’s exchange rate to appreciate?

    <p>Exporters’ profits might increase</p> Signup and view all the answers

    How might an increase in the central bank’s policy rate affect real domestic demand and net external demand?

    <p>It would decrease real domestic demand and net external demand</p> Signup and view all the answers

    What are the three key concepts thought to be important for the success of inflation-targeting frameworks?

    <p>Central bank independence, credibility, and transparency</p> Signup and view all the answers

    According to the text, which of the following is true about the selection process for the head of the central bank?

    <p>The head of the central bank is appointed by the president of the United States of America.</p> Signup and view all the answers

    According to the text, which of the following is true about the independence of central banks?

    <p>Central banks in New Zealand, Sweden, and the United Kingdom are only operationally independent.</p> Signup and view all the answers

    Based on the text, why is credibility important in the design of an inflation-targeting regime?

    <p>Credibility helps maintain public confidence in the central bank.</p> Signup and view all the answers

    According to the text, why do central banks pay a great deal of attention to inflation expectations?

    <p>Inflation expectations can influence wage claims and other nominal contracts.</p> Signup and view all the answers

    Which central bank does not have an explicit inflation target?

    <p>US Federal Reserve</p> Signup and view all the answers

    What is the statutory goal of the US Federal Reserve as laid out in the Federal Reserve Act?

    <p>All of the above</p> Signup and view all the answers

    What is the Fed's target core inflation rate as measured by the personal consumption expenditure (PCE) deflator?

    <p>2%</p> Signup and view all the answers

    Why might inflation targeting compromise the goal of 'maximum employment' according to the text?

    <p>Inflation targeting diverts resources from job creation</p> Signup and view all the answers

    What must economic agents believe for an inflation-targeting policy to be effective?

    <p>The central bank has a credible plan to achieve the target</p> Signup and view all the answers

    Which central bank has failed to engineer persistent, positive inflation according to the text?

    <p>Bank of Japan</p> Signup and view all the answers

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