Econ 2035 Ch 14

A central bank has ________ chance to identify a credit-driven bubble compared to an irrational exuberance bubble. A) a greater B) less of a C) about the same level of a D) a greater, less or about the same level of a

A

A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal A) anchor. B) benchmark. C) tether. D) guideline

A

A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called ________ anchor. A) a nominal B) a real C) an operating D) an intermediate

A

According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase. A) increased; more B) increased; less C) decreased; more D) decreased; less

A

Economists believe that countries recently suffering hyperinflation have experienced A) reduced growth. B) increased growth. C) reduced prices. D) lower interest rates.

A

Estimates suggest that, in the United States economy, it takes just over ________ for monetary policy to affect output and just over ________ for monetary policy to affect the inflation rate. A) 1 year; 2 years B) 2 years; 1 year C) 1 year; 6 months D) 6 months; 1 year

A

Even if the Fed could completely control the money supply, monetary policy would have critics because A) the Fed is asked to achieve many goals, some of which are incompatible with others. B) the Fed's goals do not include high employment, making labor unions a critic of the Fed. C) the Fed's primary goal is exchange rate stability, causing it to ignore domestic economic conditions. D) it is required to keep Treasury security prices high

A

Having interest rate stability A) allows for less uncertainty about future planning. B) leads to demands to curtail the Fed's power. C) guarantees full employment. D) leads to problems in financial markets

A

High unemployment is undesirable because it A) results in a loss of output. B) always increases inflation. C) always increases interest rates. D) reduces idle resources

A

If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to A) boost output in the short run. B) constrain output in the short run. C) constrain prices. D) boost prices in the short run

A

If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because A) of fluctuations in the demand for reserves. B) of fluctuations in the consumption function. C) bond values will tend to remain stable. D) of fluctuations in the business cycle

A

The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule. A) inflation rate B) unemployment rate C) interest rate D) foreign exchange rate

A

When asset prices increase above their fundamental values it is called an A) asset-price bubble. B) irrational bubble. C) asset-price spike. D) irrational spike

A

Which of the following is a potential operating instrument for the central bank? A) The monetary base B) The M1 money supply C) Nominal GDP D) The discount rate

A

________ bubble is driven entirely by unrealistic optimistic expectations. A) An irrational exuberance B) A credit-driven C) A stock D) A debt-driven

A

Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________. A) price stability; short run B) price stability; long run C) reducing business-cycle fluctuations; short run D) reducing business-cycle fluctuations; long run

B

Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries. A) increase; more B) increase; less C) decrease; more D) decrease; less

B

If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent, A) fluctuations of nonborrowed reserves will be small. B) fluctuations of nonborrowed reserves will be large. C) the Fed will probably quickly abandon this policy, as it did in the 1960s. D) the Fed will probably quickly abandon this policy, as it did in the 1950s.

B

Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations. A) demand: tighten B) demand; loosen C) supply; tighten D) supply; loosen

B

Real interest rates are difficult to measure because A) data on them are not available in a timely manner. B) real interest rates depend on the hard-to-determine expected inflation rate. C) they fluctuate too often to be accurate. D) they cannot be controlled by the Fed

B

Suppose interest rates are kept very low for a long time such that there is a spike in the amount of lending. Everything else held constant, this could cause ________ bubble. A) an irrational exuberance B) a credit-driven C) a stock D) a debt-driven

B

The Federal Reserve System was created to A) make it easier to finance budget deficits. B) promote financial market stability. C) lower the unemployment rate. D) promote rapid economic growth

B

The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future. A) moral hazard B) time-inconsistency C) nominal-anchor D) rational-expectation

B

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate. A) primary B) dual C) secondary D) hierarchical

B

The rate of inflation tends to remain constant when A) the unemployment rate is above the NAIRU. B) the unemployment rate equals the NAIRU. C) the unemployment rate is below the NAIRU. D) the unemployment rate increases faster than the NAIRU increases

B

The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is A) monetary targeting. B) inflation targeting. C) targeting with an implicit nominal anchor. D) interest-rate targeting

B

Unemployment resulting from a mismatch of workers' skills and job requirements is called A) frictional unemployment. B) structural unemployment. C) seasonal unemployment. D) cyclical unemployment

B

Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent

B

When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment

B

A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending. A) a decrease; a decrease; an increase B) a decrease; an increase; an increase C) an increase; an increase; a further increase D) a decrease; a decrease; a further decrease

C

A nominal anchor promotes price stability by A) outlawing inflation. B) stabilizing interest rates. C) keeping inflation expectations low. D) keeping economic growth low

C

According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target. A) rises above; drops below B) drops below; drops below C) rises above; rises above D) drops below; rises above

C

Due to the lack of timely data for the price level and economic growth, the Fed's strategy A) targets the exchange rate, since the Fed can control this variable. B) targets the price of gold, since it is closely related to economic activity. C) uses an intermediate target, such as an interest rate. D) stabilizes the consumer price index, since the Fed can control the CPI

C

Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble. A) less B) about the same amount of C) more D) either more, less, or the same amount of

C

Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets A) a monetary aggregate. B) the monetary base. C) an interest rate. D) nominal GDP

C

Monetary policy is considered time-inconsistent because A) of the lag times associated with the implementation of monetary policy and its effect on the economy. B) policymakers are tempted to pursue discretionary policy that is more contractionary in the short run. C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. D) of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy

C

The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) frictional level of unemployment. B) structural level of unemployment. C) natural rate level of unemployment. D) Keynesian rate level of unemployment

C

The rate of inflation increases when A) the unemployment rate equals the NAIRU. B) the unemployment rate exceeds the NAIRU. C) the unemployment rate is less than the NAIRU. D) the unemployment rate increases faster than the NAIRU increases

C

The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes is referred to as the A) adverse selection problem. B) moral hazard problem. C) time-inconsistency problem. D) nominal-anchor problem

C

The time-inconsistency problem in monetary policy can occur when the central bank conducts policy A) using a nominal anchor. B) using a strict and inflexible rule. C) on a discretionary, day-by-day basis. D) using a flexible, discretionary rule

C

The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as A) monetary targeting. B) inflation targeting. C) policy with an implicit nominal anchor. D) exchange-rate targeting

C

Which of the following is NOT an advantage of inflation targeting? A) There is simplicity and clarity of the target. B) Inflation targeting does not rely on a stable money-inflation relationship. C) There is an immediate signal on the achievement of the target. D) Inflation targeting reduces the effects of inflation shocks

C

Which of the following is NOT an element of inflation targeting? A) A public announcement of medium-term numerical targets for inflation B) An institutional commitment to price stability as the primary long-run goal C) An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy D) Increased accountability of the central bank for attaining its inflation objectives

C

Which of the following is not a requirement in selecting a policy instrument? A) Measurability B) Controllability C) Flexibility D) Predictability

C

Which set of goals can, at times, conflict in the short run? A) High employment and economic growth. B) Interest rate stability and financial market stability. C) High employment and price level stability. D) Exchange rate stability and financial market stability

C

Inflation results in A) ease of planning for the future. B) ease of comparing prices over time. C) lower nominal interest rates. D) difficulty interpreting relative price movements

D

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity. A) below; high B) below; low C) above; high D) above; low

D

The monetary policy strategy that provides the least accountability is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor

D

The monetary policy strategy that suffers a lack of transparency is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor

D

The most common definition that monetary policymakers use for price stability is A) low and stable deflation. B) an inflation rate of zero percent. C) high and stable inflation. D) low and stable inflation.

D

The problems of raising the level of the inflation target include A) if the zero-lower-bound problem is rare, then the benefits of a higher inflation target are not very large. B) the costs of higher inflation in terms of the distortions it produces in the economy are high. C) it is more difficult to stabilize the inflation rate at a higher targeting level. D) all of the above

D

Using Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be A) 5 percent. B) 5.5 percent. C) 6 percent. D) 6.5 percent

D

When compared to the Fed's ________ anchor approach, ________ targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles. A) nominal; inflation B) implicit; monetary C) nominal; monetary D) implicit; inflation

D

When it comes to choosing an policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay. A) three-month T-bill; monetary B) three-month T-bill; reserve C) federal funds; monetary D) federal funds; reserve

D

Which of the following criteria need not be satisfied for choosing a policy instrument? A) The variable must be measurable. B) The variable must be controllable. C) The variable must be predictable. D) The variable must be transportable.

D

Which of the following is NOT a disadvantage of of the Fed's "just do it" approach to monetary policy? A) There is low transparency of policy. B) There is low accountability for central bankers. C) This type of policy relies on the policy-makers in charge. D) It relies on a stable money-inflation relationship

D

Which of the following is NOT a disadvantage to inflation targeting? A) There is a delayed signal about achievement of the target. B) Inflation targets could impose a rigid rule on policymakers. C) There is potential for larger output fluctuations. D) There is a lack of transparency

D

Which of the following is NOT an argument against using monetary policy to prick asset-price bubbles? A) The effect of increasing interest rates on asset prices is uncertain. B) A bubble may only exist in some asset-prices and monetary policy will affect all asset prices. C) Using monetary policy to prick an asset-price bubble may have adverse effect on the aggregate economy. D) Even though credit-drive bubbles are easier to identify, they are still relatively hard to identify.

D

Which of the following is not an operating instrument? A) Nonborrowed reserves B) Monetary base C) Federal funds interest rate D) Discount rate

D

Lessons that economists and policy makers have learned from the recent global financial crisis include A) Developments in the financial sector have a far greater impact on economic activity than was earlier realized. B) The zero lower bound on interest rates can be a serious problem. C) The cost of cleaning up after a financial crisis is very high. D) Price and output stability do not ensure financial stability. E) All of the above.

E

The "Greenspan doctrine" - central banks should not try to prick bubbles - was based on which of the following arguments? A) Asset-price bubbles are nearly impossible to identify. B) Monetary actions would be likely to affect asset prices in general, rather than the specific assets that are experiencing a bubble. C) Raising interest rates has often been found to cause a bubble to burst more severely. D) Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy. E) all of the above.

E