Deck 23: Monetary Policy Theory

Question 1

When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run,then

A) aggregate demand curve shifts rightward.
B) output will be at its potential.
C) inflation rate will be higher.
D) all of the above.
E) both A and B.

Answer 1

D

Question 2

Nonactivists of the policies believe that

A) wages and prices are very flexible.
B) the self-correcting mechanism is very rapid.
C) government action is unnecessary.
D) all of the above.

Answer 2

D

Question 3

When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate,then

A) aggregate output drops in the short run.
B) output will return to potential output over time.
C) aggregate output is stabilized.
D) all of the above.
E) both A and B.

Answer 3

E

Question 4

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate,then

A) aggregate demand curve shifts leftward.
B) output will be unchanged.
C) output will be at its potential.
D) all of the above.
E) both A and C.

Question 5

Activists of the policies believe that

A) the self-correcting mechanism through wage and price adjustment is very slow.
B) wages and prices are sticky.
C) the government needs to pursue active policy to eliminate high unemployment when it develops.
D) all of the above.

Question 6

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy,then

A) inflation will be higher.
B) output will be at its potential.
C) output will be unchanged.
D) inflation will be unchanged.
E) both A and B.

Question 7

The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall

A) shifted the aggregate demand curve to the right.
B) shifted the aggregate demand curve to the left.
C) shifted the aggregate supply curve to the right.
D) shifted the aggregate supply curve to the left.

Question 8

When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level,then

A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will be unchanged.
E) both B and D.

Question 9

When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy,then

A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will not change.
E) both A and B.

Question 10

Which of the following statements is correct?

A) If most shocks to the economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short run.
B) If temporary supply shocks are more common, then a central bank must choose between stabilizing inflation and stabilizing output in the short run.
C) In the long run, there is no conflict between stabilizing inflation and economic activity in response to shocks.
D) all of the above.

Question 11

When the economy suffers a temporary negative supply shock,the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to

A) more stable economic activities.
B) a large deviation of output from its potential.
C) divine coincidence.
D) both B and C.

Question 12

If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output,then

A) potential output falls.
B) the long-run aggregate supply curve shifts leftward.
C) the short-run aggregate supply curve shifts upward.
D) all of the above.

Question 13

Policy makers cannot achieve both price stability and economic activity stability when facing

A) temporary supply shocks.
B) permanent supply shocks.
C) demand shocks.
D) all of the above.

Question 14

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy,then

A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will not change.
E) both A and B.

Question 15

When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy,then in the long run

A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will be unchanged.
E) both B and D.

Question 16

If aggregate output is below the natural rate level,nonactivists of policies would recommend that the government

A) do nothing.
B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right.
C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right.
D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Question 17

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy,then

A) inflation will be lower.
B) output will be at its potential.
C) output will be unchanged.
D) inflation will be unchanged.

Question 18

If aggregate output is below the natural rate level,activists of policies would recommend that the government

A) do nothing.
B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right.
C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right.
D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Question 19

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy,then

A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will not change.
E) both B and C.

Question 20

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate,then

A) aggregate demand curve shifts leftward.
B) aggregate demand curve shifts rightward.
C) output will be unchanged.
D) both A and C.

Question 21

The recognition lag is

A) the time it takes for policy makers to obtain data indicating what is happening in the economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy.
E) the time it takes for the policy actually to have an impact on the economy.

Question 22

The economist who proposed that,"Inflation is always and everywhere a monetary phenomenon" was

A) John Maynard Keynes.
B) John R. Hicks.
C) Milton Friedman.
D) Franco Modigliani.

Question 23

The effectiveness lag is

A) the time it takes for policy makers to obtain data indicating what is happening in the economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy.
E) the time it takes for the policy actually to have an impact on the economy.

Question 24

If workers do not believe that policymakers are serious about fighting inflation,they are most likely to push for higher wages,which will ________ aggregate ________ and lead to unemployment or inflation or both,everything else held constant.

A) decrease; demand
B) increase; demand
C) decrease; supply
D) increase; supply

Question 25

The time it takes for policy makers to change policy instruments once they have decided on the new policy is called

A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.

Question 26

The time it takes for policy makers to obtain data indicating what is happening in the economy is called

A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.

Question 27

If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages,then workers will not fear higher unemployment and their wage demands will result in

A) demand-pull inflation.
B) hyperinflation.
C) deflation.
D) cost-push inflation.

Question 28

If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment,this can set the stage for a higher rate of money growth and

A) cost-push inflation.
B) demand-pull inflation.
C) cost-pull inflation.
D) demand-push inflation.

Question 29

The data lag is

A) the time it takes for policy makers to obtain data indicating what is happening in the economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy.
E) the time it takes for the policy actually to have an impact on the economy.

Question 30

The implementation lag is

A) the time it takes for policy makers to obtain data indicating what is happening in the economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy.
E) the time it takes for the policy actually to have an impact on the economy.

Question 31

The legislative lag represents

A) the time it takes for policy makers to obtain data indicating what is happening in the economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy.
E) the time it takes for the policy actually to have an impact on the economy.

Question 32

The time it takes to pass legislation to implement a particular policy is called

A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.

Question 33

Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon."

A) monetary
B) political
C) policy
D) budgetary

Question 34

The combination of a successful wage push by workers and the government's commitment to high employment leads to

A) demand-pull inflation.
B) supply-side inflation.
C) supply-shock inflation.
D) cost-push inflation.

Question 35

To say that inflation is a monetary phenomenon seems to beg the question:

A) Why does inflationary monetary policy occur?
B) Why do politicians seek reelection?
C) Why is the Fed independent?
D) Why does the U.S. Treasury print so much money?

Question 36

The nonactivists who opposed the recent fiscal stimulus package argue that

A) fiscal stimulus would take too long to work because of long implementation lags.
B) fiscal stimulus might kick in after the economy had already recovered.
C) fiscal stimulus could lead to increased volatility in inflation and economic activity.
D) all of the above.
E) none of the above.

Question 37

The time it takes for the policy actually to have an impact on the economy is called

A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.

Question 38

The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called

A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.

Question 39

Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.

A) supply; less
B) supply; more
C) demand; less
D) demand; more

Question 40

The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand,thereby strengthening the case for

A) supply-side policy.
B) nonactivists.
C) activists.
D) demand-management policy.

Question 41

In the period 1965 through the 1970s,policymakers pursued ________ policies in order to achieve ________.

A) expansionary; high employment
B) expansionary; low inflation
C) contractionary; high employment
D) contractionary; low inflation

Question 42

Demand-pull inflation can result when

A) policymakers set an unemployment target that is too high.
B) a persistent budget deficit is financed by selling bonds to the public.
C) a persistent budget deficit is financed by selling bonds to the central bank.
D) workers get numerous wage increases.

Question 43

Which of the following is most likely to lead to inflationary monetary policy?

A) Declining oil prices
B) Resolution of conflict in the Middle East
C) The enactment of a free-trade agreement with Mexico
D) Rising unemployment

Question 44

Because policies in the United States were too expansionary from 1965 through 1973,the U.S.suffered

A) demand-pull inflation.
B) cost-push inflation, as workers sought higher wages in order to keep up with inflation.
C) both demand-pull and cost-push inflation.
D) neither demand-pull nor cost-push inflation.

Question 45

Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from

A) an employment target that was set too high.
B) the government's inability to sell bonds to the Fed.
C) an expansion in the money supply to finance federal government expenditures.
D) the excessive sale of government bonds to the public.

Question 46

Which of the following is most likely to lead to inflationary monetary policy?

A) Declining oil prices
B) Resolution of conflict in the Middle East
C) The enactment of a free-trade agreement with Mexico
D) Rising government budget deficits

Question 47

Theoretically,one can distinguish a demand-pull inflation from a cost-push inflation by comparing

A) how fast prices rise relative to wages.
B) the unemployment rate with its natural rate level.
C) when prices rise relative to wages.
D) government debt to real GDP.

Question 48

Which of the following is least likely to lead to inflationary monetary policy?

A) Rising unemployment
B) Expanding federal budget deficits
C) Declining oil prices
D) Conflict in the Middle East