1. The criteria on which to judge the merits of a variable as an intermediate target of monetary policy include:

A. stability

B. controllability

C. political feasibility

D. all of the above

2. Suppose that economic activity is strongly increasing during the expansion phase of the business cycle. Then endogenous forces (forces "within" the economy) tend to cause:

A. interest rates to rise

B. the monetary base to rise

C. net free reserves to fall

D. all of the above

3. Suppose aggregate expenditures decline and the nation slips into a recession. Then endogenous forces tend to cause:

A. the money supply to rise

B. net free reserves to rise

C. interest rates to rise

D. the nonborrowed base to fall

4. Which of the following variables can the Fed most quickly and accurately influence?

A. the unemployment rate

B. M1

C. the federal funds rate

D. the real bond yield

5. Which of the following variables do Keynesians believe is the most appropriate intermediate monetary policy target variable?

A. M2

B. net free reserves

C. Treasury bill yields

D. the nonborrowed monetary base

6. Monetarists prefer that the Fed employ which of the following as an intermediate monetary policy target?

A. net free reserves

B. M2

C. real short-term interest rates

D. nominal short-term interest rates

7. The case for abandoning discretionary monetary policy in favor of a fixed money growth rule is strengthened by the fact that:

A. we have had nine recessions since 1945

B. the monetary base typically rises faster is recessions than in recoveries

C. more often than not since 1945, the monetary base has increased faster during economic expansions than in recessions

D. inflation has been higher in the past 15 years than in the previous 15 years

8. Exchange rate misalignments can:

A. lead to unnaturally large trade imbalances

B. place undue competitive pressures on domestic manufacturers

C. contribute substantially to inflationary pressures

D. do all of the above

9. The Federal Reserve bond support program of 1942-1951 resulted in:

A. excessive growth of M1 and M2

B. extremely low real interest rates

C. a dramatic increase in the Fed security portfolio (P)

D. all of the above

10. Which of the following potential target variables scores the lowest on the measurability criterion?

A. the real Treasury note rate

B. total bank reserves

C. M1 money supply

D. all of the above are equally measurable

11. Net free reserves:

A. are highly exogenous

B. are defined as excess reserves less discounts and advances

C. tend to move procyclically (rising during economic expansions)

D. were used as a target of policy in the 1980s

Answers: 1B, 2D, 3B, 4C, 5C, 6B, 7C, 8D, 9D, 10A, 11B.