Deck 17: The Conduct of Monetary Policy: Strategy and Tactics

Question 1

Current estimates of NAIRU place it between ________ and ________.

A)4 percent; 6 percent
B)4 percent; 20 percent
C)1 percent; 3 percent
D)1 percent; 4 percent

Answer 1

A

Question 2

Increases in interest rates ________.

A)cause large capital losses
B)could lead to bank failures
C)affect consumers' willingness to buy houses
D)all of the above

Answer 2

D

Question 3

High unemployment ________.

A)results in lower GDP
B)leads to increased human misery
C)cannot be a target of monetary policy
D)A and B only

Answer 3

D

Question 4

Inflation leads to ________.

A)price instability
B)lower economic growth
C)public hostility
D)all of the above

Question 5

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

Question 6

Inflation targeting includes ________.

A)a public announcement of medium-term targets for inflation
B)an institutional commitment to price stability as the primary long run goal
C)an information-inclusive approach in which many variables are used in making decisions about monetary policy
D)all of the above

Question 7

The nominal anchor ________.

A)acts like behavioural rule
B)leads to inflation
C)creates the time-inconsistency problem
D)avoids the natural rate of unemployment

Question 8

Hierarchical mandates ________.

A)puts the goal of price stability first and then allows for other goals
B)requires all goals to be met simultaneously
C)is only used by the Bank of Canada
D)is only used by the Federal Reserve

Question 9

Price stability is defined as ________.

A)low inflation
B)low and stable inflation
C)stable inflation
D)core inflation

Question 10

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

Question 11

Concerns about a dual mandate include ________.

A)over expansionary policy
B)policies that lead to large output fluctuations
C)time-inconsistency problems
D)decreases in output and unemployment

Question 12

The importance of a nominal anchor is to ________.

A)limit the time-inconsistency problem
B)reduce inflation
C)promote low inflation
D)allow discretionary day-to-day monetary policy

Question 13

The natural rate of unemployment ________.

A)is consistent with full employment
B)is equal to zero
C)equals structural employment
D)is the same as frictional employment

Question 14

Interest rate stability is desirable because ________.

A)fluctuations in interest rates create uncertainty
B)it leads to financial market stability
C)stability in the foreign exchange markets
D)all of the above

Question 15

In the long-run, there is no trade-off between ________ and ________.

A)inflation; unemployment
B)inflation; price stability
C)unemployment; price stability
D)unemployment; economic growth

Question 16

The first country to adopt inflation targeting was ________.

A)the United Kingdom
B)Canada
C)New Zealand
D)Australia

Question 17

Which of the following countries have hierarchical mandates?

A)Reserve Bank of New Zealand
B)Bank of Canada
C)Bank of England
D)all of the above

Question 18

Describe the time-inconsistency problem as it pertains to monetary policy outcomes.

Question 19

Price stability is often the primary goal of central banks. Describe the five other goals of monetary policy

Question 20

The natural rate of output is also known as ________.

A)potential output
B)NAIRU
C)structural output
D)GDP

Question 21

New Zealand adopted inflation targeting in ________.

A)1990
B)1991
C)1992
D)1994

Question 22

Peak inflation in the United Kingdom was ________ in ________.

A)9 percent; 1991
B)4 percent; 1997
C)12 percent; 1991
D)8 percent; 1995

Question 23

Tight monetary policy in New Zealand ________.

A)brought inflation down to below 2 percent
B)reduced unemployment
C)experienced a growth rate occasionally greater than 5 percent
D)all of the above

Question 24

Which of the following is an advantage 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)It is easily understood by the public.

Question 25

Which of the following is 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)It is understood by the public and is transparent.
D)All of the above.

Question 26

Which of the following is an advantage 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)It increases accountability of the central bank.

Question 27

The Reserve Bank of New Zealand ________.

A)is one of the most independent central banks
B)as the sole objective of price stability
C)negotiates with the minister of finance to make a Policy Targets Agreement
D)all of the above

Question 28

Which of the following is a disadvantage of inflation targeting?

A)There is transparency.
B)Inflation targeting does not rely on a stable money-inflation relationship.
C)It imposes a rigid rule.
D)Inflation targeting reduces the effects of inflation shocks.

Question 29

Which of the following is a disadvantage 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 a delayed signal on the achievement of the target.
D)Inflation targeting reduces the effects of inflation shocks.

Question 30

Which of the following is an advantage 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)The performance has been quite good.

Question 31

Which of the following is disadvantage 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)It may lead to larger output fluctuations.
D)Inflation targeting reduces the effects of inflation shocks.

Question 32

Which of the following is a disadvantage 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)It imposes a rigid rule.
D)Inflation targeting reduces the effects of inflation shocks.

Question 33

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 economic growth.

A)below; high
B)below; low
C)above; high
D)above; low

Question 34

Inflation targeting has the potential to reduce the likelihood that the central bank will fall into the time-inconsistency trap of trying to ________ output and employment in the short run by pursuing overly ________ monetary policy.

A)lower; tight
B)expand; expansionary
C)lower; expansionary
D)expand; tight

Question 35

Canada's adoption of inflation targeting led to an unemployment rate of ________.

A)above 10 percent
B)nearly 8 percent
C)over 5 percent
D)5 percent

Question 36

The United Kingdom uses ________ as its nominal anchor.

A)inflation target
B)monetary aggregates
C)interest rate target
D)none of the above

Question 37

The target inflation range set by the Bank of England is ________.

A)1-4 percent
B)1-3 percent
C)2-4 percent
D)2-3 percent

Question 38

What are the advantages inflation targeting?

Question 39

Which of the following is an advantage 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 transparency.

Question 40

In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?

A)The unemployment rate increased sharply.
B)The unemployment rate remained constant.
C)The unemployment rate has declined substantially after a sharp increase.
D)The unemployment rate declined sharply immediately after the inflation targets were adopted.

Question 41

Why is the zero lower bound on interest rates a serious problem?

Question 42

What are some of the costs of cleaning up after a financial crisis?

Question 43

Define the two types of asset-price bubbles and explain why one of these is more is more problematic for the economy.

Question 44

Why might a policy of low interest rates encourage excessive risk taking?

Question 45

Which of the following is a potential operating instrument for the central bank?

A)Nonborrowed reserves
B)The overnight funds rate
C)The monetary base
D)Each of the above

Question 46

Due to the lack of timely data for the price level and economic growth, the Bank of Canada's strategy ________.

A)targets the exchange rate, since the Bank of Canada 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 Bank of Canada can control the CPI

Question 47

Give five reasons why central banks should not try to prick an asset-price bubble.

Question 48

Which of the following is not an operating instrument?

A)Nonborrowed reserves
B)Monetary base
C)Overnight interest rate
D)Bank rate

Question 49

Did the financial crisis reveal that developments in the financial sector were less important than previously thought?

Question 50

The two types of asset-price bubbles are ________ and ________ bubbles.

A)credit-driven; debt driven
B)rational; optimistic
C)irrational exuberance; optimistic
D)credit-driven; irrational exuberance

Question 51

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 Bank of Canada

Question 52

What are credit booms and why might a policy of leaning against a credit boom be preferred to leaning against asset-price bubbles?

Question 53

Fluctuations in the demand for reserves cause the Bank of Canada to lose control over a monetary aggregate if the Bank of Canada targets ________.

A)a monetary aggregate
B)the monetary base
C)an interest rate
D)nominal GDP

Question 54

What are the disadvantages inflation targeting?

Question 55

Which of the following is a potential operating instrument for the central bank?

A)The monetary base
B)The exchange rate
C)The inflation rate
D)The bank rate

Question 56

Which of the following is not an operating instrument?

A)Nonborrowed reserves
B)Monetary base
C)Overnight funds interest rate
D)Bank rate

Question 57

A potential policy instrument for the Bank of Canada is ________.

A)the monetary base
B)borrowed reserves
C)the overnight funds rate
D)the nonborrowed monetary base
E)All of the above

Question 58

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

Question 59

Which of the following is a potential operating instrument for the central bank?

A)The monetary base
B)The M1 money supply
C)GDP
D)The Bank rate

Question 60

Did the Great Moderation protect economies from financial instability.

Question 61

According to the Taylor rule, the Bank of Canada should raise the overnight interest rate when inflation ________ the Bank of Canada's inflation target or when real GDP ________ the Bank of Canada's output target.

A)rises above; drops below
B)drops below; drops below
C)rises above; rises above
D)drops below; rises above

Question 62

Explain and demonstrate graphically how targeting the overnight rate can result in fluctuations in nonborrowed reserves.

Question 63

If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ________ and monetary policy will be too ________.

A)rise; tight
B)rise; loose
C)fall; tight
D)fall; loose

Question 64

Using Taylor's rule, when the equilibrium real overnight 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 overnight rate target should be ________.

A)5 percent
B)5)5 percent
C)6 percent
D)6)5 percent

Question 65

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

Question 66

What criteria apply when choosing a policy instrument?

Question 67

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

Question 68

If the desired intermediate target is an interest rate, then the preferred policy instrument will be a(n)________ variable like the ________.

A)interest rate; three-month T-bill rate
B)interest rate; overnight rate
C)monetary aggregate; monetary base
D)monetary aggregate; nonborrowed base

Question 69

Which of the following is not a requirement in selecting an intermediate target?

A)Measurability
B)Controllability
C)Flexibility
D)Predictability

Question 70

Explain the Taylor rule, including the formula for setting the overnight rate target, and the components of the formula. If the Bank of Canada were to use this rule, how many goals would it use to set monetary policy?

Question 71

Which of the following criteria need not be satisfied for choosing an intermediate target?

A)The variable must be measurable.
B)The variable must be controllable.
C)The variable must be predictable.
D)The variable must be stable.

Question 72

Using Taylor's rule, when the equilibrium real overnight 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 overnight rate should be ________.

A)0 percent
B)1 percent
C)2 percent
D)3 percent

Question 73

Explain and demonstrate graphically how targeting nonborrowed reserves can result in overnight rate instability.

Question 74

Which of the following criteria must be satisfied when selecting an intermediate target?

A)The variable must be measurable and frequently available.
B)The variable must be controllable with the use of the central bank's policy tools.
C)The variable must have a predictable impact on the policy goal.
D)Each of the above.

Question 75

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

Question 76

Under monetary targeting, a central bank announces an annual growth rate target for ________.

A)a monetary aggregate
B)a reserve aggregate
C)the monetary base
D)GDP

Question 77

According to the Taylor rule, the overnight interest rate should be set at ________.

A)π + iₒᵣ - 0.5(π - π*) - 0.5(y - y)
B)π - iₒᵣ - 0.5(π - π*) - 0.5(y - y)
C)r + π
D)r - π
E)none of the above

Question 78

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)overnight rate; monetary
D)overnight rate; reserve

Question 79

According to the Taylor rule, the overnight interest rate should be set at ________.

A)π + iₒᵣ - 0.5(π - π*) - 0.5(y - y)
B)π + iₒᵣ + 0.5(π - π*) + 0.5(y - y)
C)r + π
D)r - π

Question 80

Which of the following best explains why the Bank of Canada does not use nominal GDP as an intermediate target?

A)Nominal GDP has little connection with Bank policy goals.
B)Nominal GDP is unaffected by open market operations.
C)The Bank has little direct control over nominal GDP.
D)None of the above.