Chapter 16
Irrational exuberance bubbles appear to have ▼ smaller impacts the same impact larger impacts on the economy compared to credit-driven bubbles.
smaller impacts
Match the following definitions to the appropriate term: The rate of unemployment consistent with full employment at which the demand for labor equals the supply of labor: ▼ natural rate of output frictional unemployment potential output natural rate of unemployment structural unemployment
#10 Screenshot CH16
Match the following definitions to the appropriate term: A condition of low and stable inflation
#2 Screenshot CH16
If the Fed has an interest-rate target, why will an increase in the demand for reserves lead to a rise in the money supply?
#33 Screenshot CH16
Match the following definitions to the appropriate term: Pronounced increases in asset prices that depart from fundamental values: ▼ macroprudential regulation intermediate target operating instrument asset-price bubble policy instrument
#36 Screenshot CH16
Match the following definitions to the appropriate term: A monetary policy rule that describes the setting of the federal funds rate target under Chairmen Greenspan and Bernanke: ▼ Taylor principle Phillips curve theory Taylor rule nonaccelerating inflation rate of unemployment (NAIRU)
#42 Screenshot CH16
Since monetary policy changes through the fed funds rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or expected inflation rate, rather than the current inflation rate. In light of this, suppose that monetary policymakers employ the Taylor rule to set the fed funds rate, where the inflation gap is defined as the difference between expected inflation and the target inflation rate.
#48 Screenshot CH16
Which of the following best illustrates the time-inconsistency problemLOADING...? A. A parent says that he or she will punish a child whenever the child breaks a rule. Afterward, when the child misbehaves, the parent forgives the misbehavior because punishment is unpleasant for both the parent and child. B. Your professor says that this course will end with a final exam. After you have studied and learned all the material, you are surprised to find the exam easier than you expected. C. A nation states that they will not negotiate over hostages. Once hostages are taken, policymakers do not make any concessions to obtain the hostages' release. D. Both A and B are correct. E. All of the above are correct.
A. A parent says that he or she will punish a child whenever the child breaks a rule. Afterward, when the child misbehaves, the parent forgives the misbehavior because punishment is unpleasant for both the parent and child.
Why might inflation targeting increase support for the independence of the central bank to conduct monetary policy? A. An explicit numerical inflation target increases the accountability of the central bank and may reduce the likelihood that the central bank will try to expand output and employment in the short run by pursuing overly expansionary monetary policy. B. Inflation targeting is not well understood by the public and is highly obscure; therefore, it is better left to an independent central bank. C. An inflation target requires that the monetary authorities use just one variable to determine the best settings for monetary policy. D. Only A and B are correct. E. All of the above are correct.
A. An explicit numerical inflation target increases the accountability of the central bank and may reduce the likelihood that the central bank will try to expand output and employment in the short run by pursuing overly expansionary monetary policy.
Which of the following is not an advantage of the monetary strategy used at the Federal Reserve under Alan Greenspan and Ben Bernanke in which the nominal anchor is only implicit? A. It has a lack of transparency. B. It enables monetary policy to focus on domestic considerations. C. It does not rely on a stable money-inflation relationship. D. All of the above are advantages.
A. It has a lack of transparency.
Which of the following is a disadvantage of the monetary strategy used at the Federal Reserve under Alan Greenspan and Ben Bernanke in which the nominal anchor is only implicit? A. It is dependent on the preferences, skills, and trustworthiness of individuals in the central bank and the government. B. It forces the Federal Reserve to focus on foreign considerations rather than domestic considerations. C. It does not rely on a stable money-inflation relationship. D. All of the above are disadvantages.
A. It is dependent on the preferences, skills, and trustworthiness of individuals in the central bank and the government.
Which of the following is an advantage of inflation targeting? A. It is more transparent and more readily understood by the public. B. There is a long lag between monetary policy actions and inflation. C. Inflation targeting leads to increased exchange rate fluctuations. D. Inflation targeting is less transparent than monetary targeting. But there is ▼ conflicting much no little evidence to support the four claimed disadvantages of inflation targeting.
A. It is more transparent and more readily understood by the public. little
Why is a public announcement of numerical inflation rate objectives important to the success of an inflation-targeting central bank? A. It reduces uncertainty in inflation expectations of market participants. B. It allows market participants to influence the inflation rate. C. It reduces the costs of high inflation to society. D. It imposes a rigid rule on monetary policymakers and thus limits any change in policy actions.
A. It reduces uncertainty in inflation expectations of market participants.
Flexible inflation targeting is best described as A. allowing short-run deviations in inflation from target to better promote output stability. B. changing the desired inflation target as economic conditions change. C. an intermediate target which is rarely used by central banks. D. the monetary policy strategy employed by the Federal Reserve.
A. allowing short-run deviations in inflation from target to better promote output stability.
To prevent inflation from getting started, monetary policy needs to A. be forward-looking and preemptive. B. make unexpected monetary policy changes. C. be backward-looking and preemptive. D. make expected monetary policy changes.
A. be forward-looking and preemptive.
The Fed's monetary policy is described as a "just do it" approach because: A. it has an implicit nominal anchor. B. it is very transparent. C. it has an official nominal anchor. D. Only A and B are correct. E. All of the above are correct.
A. it has an implicit nominal anchor.
Another disadvantage of the "just do it" approach is that A. its success is highly dependent on the skills of the Fed chair. B. it is consistent with democratic principles and accountability. C. it has proved to be fairly unsuccessful because of a lack of formal commitment mechanisms. D. it has proved to be fairly successful despite a lack of formal commitment mechanisms.
A. its success is highly dependent on the skills of the Fed chair.
The goals of a dual mandate can sometimes conflict because: A. policies that increase output and employment in the short run can create excessive inflation in the long run B. low and stable rates of inflation detract from economic growth C. it is difficult to achieve both long-run price stability and the natural rate of unemployment
A. policies that increase output and employment in the short run can create excessive inflation in the long run
According to the text, the most important goal of monetary policyLOADING... is thought to be: A. price stability B. eliminating deflation C. low interest rates D. high economic growth rates
A. price stability
The problems that are created by inflationLOADING... can be mainly attributed to: A. uncertainty. B. menu costs. C. greed. D. corporations.
A. uncertainty.
The Phillips curve theory predicts an increase in inflation if output is ________ potential and the rate of unemployment is ________ the natural rate of unemployment. A. above; below B. below; above C. above; above D. below; below
A. above; below
There are two types of mandates: _________ mandates, which prioritise price stability above all other objectives, and _________ mandates, which place different objectives on equal footing. A. hierarchical; dual B. dual; hierarchical C. hierarchical; double D. policy; dual
A. hierarchical; dual
Assume that the equilibrium real federal funds rate is 2% and the target for inflation is 1.0%. Suppose that the inflation rate is at 3.0%, leading to an inflation gap of 2.0% (equal to 3.0%minus−1.01.0%), and real GDP is 1.5% above its potential, resulting in a positive output gap of 1.5%. The Taylor rule suggests that the federal funds rate should be set at: A. 4.75%. B. 6.75%. C. 2.75%. D. 8.75%.
B. 6.75%. #39 Screenshot CH16
"The zero-lower-bound on short-term interest rates is not a problem, since the central bank can just use quantitative easing to lower intermediate and longer-term interest rates instead." Is this statement true, false, or uncertain? Explain your answer. A. True. Quantitative easing can be used once the zero-lower-bound is reached on short-term interest rates. B. False. The zero-lower-bound problem can be coupled with deflationary conditions, which can be hard to design effective policies for. C. Uncertain. The answer depends on whether quantitative easing is easy or difficult to implement under existing conditions.
B. False. The zero-lower-bound problem can be coupled with deflationary conditions, which can be hard to design effective policies for.
Which of the following is a disadvantage of inflation targeting? A. Inflation targeting leads to increased exchange rate fluctuations. B. There is a long lag between monetary policy actions and inflation. C. It is more transparent and more readily understood by the public. D. Inflation targeting is less transparent than monetary targeting. But there is ▼ much no conflicting little evidence to support the four claimed disadvantages of inflation targeting.
B. There is a long lag between monetary policy actions and inflation. little
If inflation is currently low but policymakers believe inflation will rise over the next two years with an unchanged stance of monetary policy, what should they do to prevent the inflationary surge? A. They should tighten monetary policy two years after the initial inflation surges. B. They should tighten monetary policy before inflation surges. C. They should tighten monetary policy immediately after inflation surges. D. There is no monetary policy response that can affect inflation.
B. They should tighten monetary policy before inflation surges.
Which of the following is not a goal of monetary policy? A. low interest rates B. an unemployment rate as close to zero as possible C. economic growth D. high employment
B. an unemployment rate as close to zero as possible
If the Fed follows the Taylor principle, it will A. follow the Taylor rule when inflation is above the nominal interest rate. B. increase the nominal interest rate by more than an increase in inflation. C. increase the nominal interest rate by less than an increase in inflation. D. follow the Taylor rule when inflation is below the nominal interest rate.
B. increase the nominal interest rate by more than an increase in inflation.
A central bank will have better inflation performance in the long run if A. it has a "do not give in" expansionary policy. B. it does not try to surprise people with an unexpectedly expansionary policy. C. it surprises people with an unexpectedly expansionary policy. D. it surprises people with an expectedly expansionary policy.
B. it does not try to surprise people with an unexpectedly expansionary policy.
Regulatory policy to affect what is happening in credit markets in the aggregate is referred to as: A. monetary targeting. B. macroprudential regulation. C. asset-price bubble policy. D. the Taylor rule.
B. macroprudential regulation.
Which of the following is a policy instrument? A. open market operations B. reserve aggregates C. discount rate D. inflation
B. reserve aggregates
The NAIRU is the rate of unemployment at which: A. prices are constant. B. the inflation rate is constant. C. unemployment is zero. D. All of the above are correct.
B. the inflation rate is constant.
High employment is a worthy goal. A. False, high employment results in much human misery B. True, unemployment results in under-utilized resources and lower output C. False, high employment results in over-utilized resources and lower output D. True, unemployment results in over-utilized resources and higher output
B. True, unemployment results in under-utilized resources and lower output
Does inflation targeting help reduce the time-inconsistency of discretionary policy? A. No, inflation targeting decreases the accountability of monetary policymakers. B. Yes, it is a mechanism of self-discipline, which effectively ties the hands of policymakers to commit to a policy path. C. Yes, it decreases the transparency of monetary policy strategy and hence the public's expectations of inflation. D. No, there is no direct relationship between inflation targeting and solving the time-inconsistency problem.
B. Yes, it is a mechanism of self-discipline, which effectively ties the hands of policymakers to commit to a policy path.
Pronounced increases in asset prices that depart from fundamental values and eventually burst resoundingly are known as: A. stock-price fluctuations. B. asset-price bubbles. C. exchange-rate bubbles. D. the real bills doctrine.
B. asset-price bubbles.
Which of the following statements about the two types of mandates for monetary policy is false? A. Both dual mandates and hierarchical mandates are sufficient as long as they operate to make price stability the primary goal in the long run, but not the short run. B. Hierarchical mandates are a problem if they lead to a central bank that focuses solely on inflation control, even in the short run, and so undertakes policies that lead to large output fluctuations. C. Concerns that a dual mandate might lead to overly contractionary policy is a key reason why central bankers often favor hierarchical mandates. D. Dual mandates and hierarchical mandates are not very different if maximum employment is defined as the natural rate of employment because there is no inconsistency between achieving price stability in the long run and the natural rate of employment.
C. Concerns that a dual mandate might lead to overly contractionary policy is a key reason why central bankers often favor hierarchical mandates.
Which of the following statements about the two types of mandates for monetary policy is false? A. Hierarchical mandates are a problem if they lead to a central bank that focuses solely on inflation control, even in the short run, and so undertakes policies that lead to large output fluctuations. B. Both dual mandates and hierarchical mandates are sufficient as long as they operate to make price stability the primary goal in the long run, but not the short run. C. Concerns that a dual mandate might lead to overly contractionary policy is a key reason why central bankers often favor hierarchical mandates. D. Dual mandates and hierarchical mandates are not very different if maximum employment is defined as the natural rate of employment because there is no inconsistency between achieving price stability in the long run and the natural rate of employment.
C. Concerns that a dual mandate might lead to overly contractionary policy is a key reason why central bankers often favor hierarchical mandates.
The Greenspan Doctrine A. summarizes the "leaning" against asset-price bubbles view. B. suggests monetary policy can play a role in eliminating asset-price bubbles. C. advocates that monetary policymakers respond to asset-price bubbles only insofar as it affects its price stability and output objectives. D. applies only to credit-driven bubbles.
C. advocates that monetary policymakers respond to asset-price bubbles only insofar as it affects its price stability and output objectives.
If a central bank pursues a time-inconsistent policy, it will eventually lead to A. lower inflation and higher output. B. higher inflation and higher output. C. higher inflation and no gain in output. D. lower inflation and no gain in output.
C. higher inflation and no gain in output.
Credit-driven bubbles are ____ to identify and pose a ____threat to the financial system compared to bubbles driven solely by irrational exuberance. A. harder; larger B. easier; smaller C. easier; larger D. harder; smaller
C. easier; larger
When an economy is at its natural rate of unemploymentLOADING...: A. the rate of unemployment is zero. B. the economy is at a full-employment level. C. the demand for labor is equal to the supply of labor. D. Both B and C are correct. E. All of the above are correct.
D. Both B and C are correct.
Which of the following is a disadvantage of the Fed's "just do it" strategy? A. It does not rely on a stable money-inflation relationship. B. It has performed poorly over the past twenty years. C. It uses many sources of information. D. It lacks transparency.
D. It lacks transparency.
Advantages of the Fed's "just do it" approach include: A. the strong dependence on the preferences, skills, and trustworthiness of the individuals in charge of the central bank. B. its forward-looking behavior and stress on price stability that help to discourage overly expansionary monetary policy, thereby ameliorating the time-inconsistency problem. C. it does not rely on a stable money-inflation relationship. D. Only B and C are correct. E. All of the above are correct.
D. Only B and C are correct.
"Since financial crises can impart severe damage to the economy, a central bank's primary goal should be to ensure stability in financial markets." Is this statement true, false, or uncertain? Explain your answer. A. True. If financial market stability is maintained, then funds are channeled to the most productive investment opportunities, thus leading to an expansion in economic activity. B. True. If financial market stability had been pursued, the 2007-2009 recession would have been prevented. C. False. Price stability should always be the primary goal of any central bank. D. Uncertain. Although stability in financial markets is an important goal, focusing on other goals such as stabilizing employment, output, or even short-term movements in the business cycle may be more important to the economy.
D. Uncertain. Although stability in financial markets is an important goal, focusing on other goals such as stabilizing employment, output, or even short-term movements in the business cycle may be more important to the economy.
Which of the following is not an essential element of inflation targeting? A. public announcement of a numerical target for inflation B. increased transparency of monetary policy C. an institutional commitment to price stability as the primary, long-run goal of monetary policy D. a mechanism for firing the head of the central bank if the inflation target is not achieved
D. a mechanism for firing the head of the central bank if the inflation target is not achieved
Suppose the central bank sets the growth rate for nonborrowed reserves to 3% in order to achieve a growth rate of 4% for M2, which in turn should grow nominal GDP by 5%. In this case, nonborrowed reserves are _______, M2 is ____________, and nominal GDP is a _________. A. an intermediate target; a policy instrument; monetary policy goal B. a monetary policy goal; an intermediate target; policy instrument C. a policy instrument; a policy instrument; monetary policy goal D. a policy instrument; an intermediate target; monetary policy goal
D. a policy instrument; an intermediate target; monetary policy goal
The Fed should not base monetary policy solely on the Taylor rule conducted in a mechanical fashion because A. no one knows what the true model of the economy is. B. times of economic crisis may require very different monetary policy. C. the Fed looks at a much wider range of information than is contained in the Taylor rule. D. all options are correct.
D. all options are correct.
The risk-channel of monetary policy A. suggests that monetary policy should be used to lean against credit bubbles. B. is propagated by low interest rates from overly easy monetary policy. C. is caused by the incentives for asset managers to search for yield. D. all options are correct.
D. all options are correct.
Under Fed Chairmen Greenspan and Bernanke, the Fed has followed A. a money target. B. an inflation target. C. an explicit nominal anchor. D. an implicit nominal anchor.
D. an implicit nominal anchor.
The Taylor rule for the federal funds rate implies that the central bank is concerned with: A. neither the GDP gap nor inflation. B. only inflation. C. only the GDP gap. D. both the GDP gap and inflation.
D. both the GDP gap and inflation.
Legislation defining the mission of the Federal Reserve states: "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy's long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." This is an example of a: A. hierarchical mandate. B. single mandate. C. multiple mandate. D. dual mandate.
D. dual mandate.
The most important characteristic of a policy instrument is that it A. is observable and measurable. B. is a nominal anchor. C. is controllable. D. has a predictable impact on goals.
D. has a predictable impact on goals.
In the presence of a credit-driven asset price bubble, the appropriate policy is A. nothing; it is best to let the bubble run its course. B. monetary policy tightening. C. monetary policy easing. D. macroprudential regulation.
D. macroprudential regulation.
Intermediate targets A. indicate whether policy is tight or easy. B. stand between policy tools and policy instruments. C. are inconsistent with inflation targeting. D. stand between policy instruments and policy goals.
D. stand between policy instruments and policy goals.
According to the Taylor rule, if inflation increases above its target and output increases above increases above potential, A. the federal funds target will decrease. B. the equilibrium real federal funds rate will decrease. C. the equilibrium real federal funds rate will increase. D. the federal funds target will increase.
D. the federal funds target will increase.
Disadvantages of inflation targeting include: A. low economic growth. B. too much rigidity. C. delayed signaling. D. Only A and B are correct. E. All of the above are correct.
E. All of the above are correct.
Disadvantages of the Fed's "just do it" approach include: A. low accountability that may make the Fed more susceptible to the time-inconsistency problem. B. a lack of transparency, which creates doubt about the future course of inflation and output, and makes it hard to hold the Fed accountable. C. the strong dependence on the preferences, skills, and trustworthiness of the individuals in charge of the central bank. D. Only A and B are correct. E. All of the above are correct.
E. All of the above are correct.
Which of the following criteria must be satisfied when selecting a policy instrument? A. The instrument must be observable and measurable. B. The instrument must be controllable by the central bank. C. The instrument must have a predictable impact on the policy goal. D. Only B and C are correct. E. All of the above are correct.
E. All of the above are correct.
Which of the following provides an example of a policy instrument? A. Federal funds rate. B. Monetary base. C. Reserve aggregates. D. Only B and C are correct. E. All of the above are correct.
E. All of the above are correct.
The recent subprime financial crisis demonstrates ▼ an exchange-rate bubble a credit-driven bubble an irrational exuberance bubble , while the tech-stock bubble of the 1990s demonstrates ▼ an exchange-rate bubble a credit-driven bubble an irrational exuberance bubble
a credit-driven bubble an irrational exuberance bubble
The fed funds rate is ▼ an intermediate target a policy instrument because it ▼ can cannot be directly affected by the tools of the Fed.
a policy instrument can
The monetary base is ▼ a policy instrument an intermediate target because it ▼ is is not affected by the Fed's monetary policy tools and ▼ does not have has a direct effect on economic activity.
a policy instrument is does not have
M1 is ▼ a policy instrument an intermediate target because it ▼ is is not affected by the Fed's monetary policy tools and ▼ has does not have a direct effect on economic activity.
an intermediate target is not has
Classify each of the following as either a policy instrument or an intermediate target, and explain why. The ten-year Treasury bond rate is ▼ a policy instrument an intermediate target because it ▼ is is not affected by the Fed's monetary policy tools and ▼ has does not have a direct effect on economic activity.
an intermediate target is has
If an oil price shock causes the inflation rate to rise by 1 % and output to fall by 1 %an oil price shock causes the inflation rate to rise by 1% and output to fall by 1%, what does the Taylor rule imply that policymakers should do to the fed funds rate? Based on this scenario, policymakers should ▼ not change decrease increase the fed funds rate because: A. the increase in inflation would prompt the fed funds rate to rise by 1 % comma and the decrease in the output gap would the increase in inflation would prompt the fed funds rate to rise by 1%, and the decrease in the output gap would imply that it would fall by 1.5 %.imply that it would fall by 1.5%. B. the increase in inflation would prompt the fed funds rate to rise by 1.5 % comma and the decrease in the output gap would the increase in inflation would prompt the fed funds rate to rise by 1.5%, and the decrease in the output gap would imply that it would fall by 0.5 %.imply that it would fall by 0.5%. C. the increase in inflation would prompt the fed funds rate to fall by 1 % comma and the decrease in the output gap would the increase in inflation would prompt the fed funds rate to fall by 1%, and the decrease in the output gap would imply that it would rise by 1 %.imply that it would rise by 1%. D. changes in the inflation rate and output the inflation rate and output do not influence the fed funds rate.
increase B. the increase in inflation would prompt the fed funds rate to rise by 1.5 % comma and the decrease in the output gap would the increase in inflation would prompt the fed funds rate to rise by 1.5%, and the decrease in the output gap would imply that it would fall by 0.5 %.imply that it would fall by 0.5%.