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

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Match the following definitions to the appropriate​ term: A condition of low and stable inflation​

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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?

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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

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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)

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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.

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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%.