Deck 16: The Macroeconomic Policy Model

Question 1

Previous variables used by the Fed for monetary policy since 1970 include all of the following except

A) money supply growth rates.
B) nominal interest rates.
C) average long-term inflation rates.
D) business cycle fluctuations.
E) none of the above; each has been used at some time during the past three decades.

Answer 1

none of the above; each has been used at some time during the past three decades.

Question 2

The Taylor rule has stabilizing effects on

A) output.
B) interest rates.
C) inflation.
D) all of the above.
E) only a and c.

Answer 2

only a and c.

Question 3

The harder the Fed applies the brakes of restrictive monetary policy in an attempt to reduce an excessive rate of inflation,

A) the larger is the resulting gap between actual and potential GDP in the short run.
B) the tighter is the spiral of recovery as the economy moves quickly toward equilibrium at a lower rate of inflation with a minimum of overshooting.
C) the wider is the spiral of recovery as the economy more-dramatically overshoots equilibrium on the low side of the long-run rate of inflation.
D) a and c only.
E) a and b only.

Answer 3

a and c only.

Question 4

The Federal Reserve, like other central banks, considers the role of monetary policy to be one of

A) maintaining low and stable inflation.
B) achieving a targeted level of real GDP and unemployment over the long run.
C) maintaining a constant level of long-run monetary growth, thus keeping inflation in check.
D) influencing real GDP and unemployment in the short run.
E) both a and d.

Question 5

Each of the following statements describes the behavior of the Taylor rule, which does not belong?

A) The Taylor rule works equally well in the context of either an open or a closed economy.
B) One way for exchange rate fluctuations show up in the Taylor rule is through the behavior of Y^{^}.
C) One way for exchange rate fluctuations show up in the Taylor rule is through the behavior of .
D) One way for exchange rate fluctuations show up in the Taylor rule is through the behavior of r.
E) The Taylor rule requires a flexible exchange rate.

Question 6

Each of the following statements about the principles underlying the Taylor rule is true except

A) the Fed desires to minimize inflation deviation from its target level.
B) the Fed desires to minimize real output fluctuations.
C) the Fed desires to minimize unemployment fluctuations.
D) the Fed desires to minimize interest rate fluctuations.
E) the Fed desires to minimize inflation fluctuations.

Question 7

A decision on the part of the FOMC to raise interest rates must necessarily be followed by

A) Fed open market purchases, which lower the money supply and reduce interest rates.
B) Fed open market purchases, which increase the money supply and reduce interest rates.
C) Fed open market sales, which lower the money supply and increase interest rates.
D) Fed open market sales, which increase the money supply and reduce interest rates.

Question 8

Since the mid-1980s, the FOMC's chief policy focus has been the behavior of

A) the growth rate of the money supply.
B) the federal funds rate.
C) margin requirements on stock purchases.
D) the discount rate.
E) reserve requirements.

Question 9

Given a monetary policy rule of the form r = p + 0.5Y^{^} + 0.5p - p*) + 0.03, a negative aggregate demand shock resulting in a -5 percent GDP gap leads the Fed to

A) lower nominal interest rates by 5 percent.
B) lower the real interest rate target by 2.5 percent.
C) lower nominal interest rates by 2.5 percent.
D) lower the inflation target by 2.5 percent.
E) wait and see if the shock turned out to be a permanent change.

Question 10

Suppose government deficits increase such that real interest rates rise by 1.5 percentage points. According to the Taylor rule, if inflation targets remain unchanged, then nominal interest rates should rise by

A) less than 1 percent.
B) between 1 and 1.5 percent.
C) exactly 1.5 percent.
D) between 1.5 and 2 percent.
E) more than 2 percent.

Question 11

The Taylor principle describes Fed behavior that nominal
Interest rates _ .

A) raises, by the same amount as inflation
B) lowers, by less than the amount of inflation
C) lowers, by more than the amount of inflation
D) raises, by less than the amount of inflation
E) raises, by more than the amount of inflation

Question 12

Given the monetary policy rule, r = p + 0.5Y^{^} + 0.5p - p*) + 3 and
Assuming Y^{^} = 0 and p = p*, let inflation increase by 2 percentage points. By how much would the Fed increase interest rates?

A) 6 percentage points
B) 2 percentage points
C) 3 percentage points
D) 5 percentage points
E) Less than 2 percentage points

Question 13

Since the late 1980s, under Alan Greenspan, the Fed's operating instructions to the New York trading desk typically took the form of

A) a short-term interest rate target.
B) ^{an M}1 ^target.
C) ^{an M}3 ^target.
D) a nominal GDP target.
E) a real GDP target.

Question 14

Each of the following statements about the principles underlying the Taylor rule is true except

A) the Fed desires to maintain real output approximately at potential GDP.
B) the Fed desires to maintain unemployment at its natural rate.
C) the Fed desires to maintain inflation at its target level.
D) the Fed desires to maintain interest rates at their target level.
E) all of the above statements are true.

Question 15

The Federal Reserve, like other central banks, has several objectives. Which of the following does not belong?

A) low and stable inflation
B) low unemployment
C) low monetary growth
D) low levels of real GDP fluctuations
E) low inflation targets

Question 16

The Taylor rule describes a Fed that raises real interest rates when

A) real output exceeds potential real output.
B) interest rates fall unexpectedly.
C) inflation is expected to rise.
D) inflation rises about its targeted level.
E) both a and d.

Question 17

The Taylor rule describes a Fed that raises real interest rates when

A) real output falls short of potential real output.
B) interest rates fall unexpectedly.
C) inflation is expected to rise.
D) inflation rises about its targeted level.
E) both c and d.

Question 18

For a macroeconomic policy curve of the forY ^ˆ higher inflation means

A) lower aggregate demand because the Fed raises interest rates according to its policy rule.
B) higher aggregate demand because higher interest rates produce higher levels of net exports.
C) higher aggregate demand because higher interest rates increase personal consumption.
D) b and c.
E) none of the above.

Question 19

Given a monetary policy rule of the form r = p + 0.5Y^{^} + 0.5p - p*) + 0.03 and assuming that the output gap equals zero, an unexpected price shock of

A) raise nominal interest rates by 5 percent.
B) raise the real interest rate target by 2.5 percent.
C) raise nominal interest rates by 7.5 percent.
D) raise the inflation target by 2.5 percent.
E) wait and see if the shock turned out to be a permanent change.

Question 20

A decision on the part of the FOMC to lower interest rates must necessarily be followed by

A) Fed open market purchases, which lower the money supply and reduce interest rates.
B) Fed open market purchases, which increase the money supply and reduce interest rates.
C) Fed open market sales, which lower the money supply and reduce interest rates.
D) Fed open market sales, which increase the money supply and reduce interest rates.
E) Fed open market purchases, which increase the money supply and increase interest rates.

Question 21

A reduction in actual GDP down toward its potential from a demand- induced boom can be expected to be quicker

A) the more sensitive inflation is to economic conditions.
B) the more heavily recent inflationary experience is weighted in the computation of inflationary expectations.
C) the more responsive interest rates are to changes in inflation.
D) all of the above.
E) none of the above.

Question 22

According to the price adjustment equatio
The price adjustment line
Ê ˆ
Π = Á ˜ + π ^e + Z, Ë Y* ¯

A) shifts up, indicating higher inflation, if real GDP was above its potential GDP last year and shifts down if real GDP was below its potential.
B) shifts up if the expected rate of inflation p^e rises and shifts down if the expected rate of inflation falls.
C) shifts up if there is a positive price shock positive value of Z) and shifts down if there is a negative price shock.
D) all of the above.
E) only a and b.

Question 23

Of the following statements regarding macroeconomic performance since 1960, which is not true?

A) The 1980s and 1900s are the longest peacetime expansions the United States has experienced.
B) Since the mid-1980s, real GDP fluctuations have fallen substantially.
C) The period from the late 1960s through the mid-1980s is characterized by both high inflation and large GDP fluctuations.
D) Since the mid-1980s, both inflation and real GDP fluctuations have fallen substantially.
E) The period from the late 1960s through the mid-1980s is characterized by low inflation and large GDP fluctuations.

Question 24

During the early phases of recovery from stagflation,

A) inflation continues to climb even though it eventually falls.
B) inflation begins to decline almost immediately.
C) inflation is initially unaffected.
D) any of the above depending on economic circumstances.
E) either a or c only) depending on economic circumstance.

Question 25

During the early phases of recovery from stagflation,

A) inflation always begins to fall immediately.
B) inflation may rise or fall depending on whether or not inflationary expectations push prices up harder than excess supply pressures push them down.
C) output begins to increase immediately in all but very exceptional cases.
D) a and c.
E) b and c.

Question 26

Stagflation is defined as a period of

A) positive inflationary expectations with unemployment exceeding the natural rate.
B) positive inflationary expectations with actual GDP exceeding potential.
C) positive inflationary expectations associated with negative growth in net exports.
D) positive inflationary expectations associated with high real interest rates.
E) none of the above.

Question 27

In an economy described collectively by a macroeconomic policy curve of the formY^ˆ = ⁻ π − π *), an expectations-augmented

A) lower inflation increasing nominal interest rates.
B) higher inflation increasing nominal interest rates.
C) lower inflation decreasing nominal interest rates.
D) higher inflation decreasing nominal interest rates.
E) changes in real variables and not adjustments in prices.

Question 28

Much of the strong economic performance since the mid-1980s is attributed to successful Fed policy. Which of the following statements does not help explain that success?

A) The stabilizing effect of monetary policy conducted in accordance with the Taylor rule
B) A greater monetary response higher federal funds rates) to inflation threats since the mid 1980s than during the 1960s and 1970s
C) A more accommodative monetary policy before the mid-1980s than afterward
D) All of the above
E) Only a and b

Question 29

Consider an economy described collectively by a schedule of the form
_ˆ − δ
Y = _B+
Α
Π − π *), an expectations-augmented Phillips curveand a
Partially backward-looking definition of how price expectations are formed. Which of the following is not an accurate description of a step in recovery from recession?

A) Inflation falls as expectations gradually decline.
B) The microeconomic policy curve shifts to the right and predicts lower interest rates.
C) Higher investment dominates diminishing net exports to drive aggregate demand higher.
D) Higher output production drives employment and, thus, aggregate demand higher.
E) None of the above.

Question 30

The sequence that brings an economy back toward equilibrium from a boom includes

A) an increase in inflation that works its way into expectations.
B) higher inflationary expectations that reduce aggregate demand.
C) actual GDP converging to its potential even before inflation subsides completely.
D) all of the above.
E) none of the above.

Question 31

Recovery from a recession can be expected to be quicker

A) the more sensitive inflation is to economic conditions.
B) the more heavily recent inflationary experiences are incorporated into the computation of inflationary expectations.
C) the more responsive interest rates are to changes in inflation.
D) all of the above.
E) none of the above.

Question 32

Recovery from a period of stagflation will be

A) longer than recovery from a recession with the same gap between actual and potential GDP and no inflation.
B) almost identical to recovery from a recession with the same gap between actual and potential GDP and no inflation.
C) shorter than recovery from a recession with the same gap between actual and potential GDP and no inflation.
D) any of the above depending on circumstances defined within the domestic economy.
E) any of the above depending on situations that, from the perspective of writing policy, are entirely random and unpredictable.