Deck 12: Monetary Policy and the Phillips Curve

Question 1

The federal funds rate is:

A)equal to the rate of inflation.
B)the interest rate at which banks borrow from the Federal Reserve.
C)the interest rate at which banks borrow from and loan to each other overnight.
D)an interest rate that is some fixed amount above the prime lending rate.
E)the return to stock markets over the long term.

Answer 1

C

Question 2

According to the Fisher equation,the real interest rate is given by

A)zero.
B)the nominal interest rate plus the rate of inflation.
C)the nominal interest rate minus the rate of unemployment.
D)the rate of economic growth.
E)the nominal interest rate minus the rate of inflation.

Answer 2

E

Question 3

Which of the following is(are)the mission of the Federal Reserve Bank?
I)Preserve price stability.
Ii)Foster stable fiscal policy.
Iii)Ensure taxes are fair.

A)ii only.
B)i only.
C)iii only.
D)i and ii.
E)i and iii.

Answer 3

B

Question 4

According to the Fisher equation,the nominal interest rate is equal to:

A)the rate of inflation.
B)the real interest rate minus the rate of inflation.
C)the real interest rate plus the rate of inflation.
D)the rate of unemployment.
E)the real interest rate plus short-run economic fluctuations.

Question 5

Which of the following is (are)the mission of the Federal Reserve Bank?
I)Preserve price stability.
Ii)Foster economic growth and employment.
Iii)Ensure taxes are fair.

A)i only.
B)ii only.
C)iii only.
D)i and ii.
E)i and iii.

Question 6

A key assumption of the short-run model is:

A)zero inflation.
B)perfect price flexibility.
C)that unemployment always equals its natural rate.
D)that the economy never deviates from its long-run equilibrium.
E)sticky inflation.

Question 7

An implication of sticky inflation is that,through monetary policy changes,the Federal Reserve:

A)has no impact on inflation.
B)can alter the real interest rate in the long run.
C)can alter the real interest rate in the short run.
D)has no impact on the real interest rate.
E)has no impact on the unemployment rate.

Question 8

When economists say "sticky inflation," they mean:

A)inflation does not react directly to changes in monetary policy.
B)inflation adjusts slowly.
C)inflation does not react directly to changes in fiscal policy.
D)taxes do not react to changes in prices.
E)a and b are correct.

Question 9

Firms alter their prices based on:

A)expected inflation.
B)expected inflation and supply conditions.
C)expected inflation and demand conditions.
D)demand conditions.
E)the previous period's aggregate supply.

Question 10

Which of the following is the Fisher equation?

A)
B)
C)
D)
E)

Question 11

In Figure 12.1,if the Federal Reserve sets the real interest rate at
,which line represents the MP curve?

A)
B)
C)
D)
E)Not enough information is given.

Question 12

In a weakening economy,you might expect producers to:

A)lower wages to increase quantity demand for their output.
B)lower prices to increase quantity demand for their output.
C)increase prices to increase quantity demand for their output.
D)lower prices to reduce quantity demand for their output.
E)raise wages to hire more productive workers.

Question 13

The link between real and nominal interest rates is called:

A)the MP curve.
B)the Phillips curve.
C)Okun's law.
D)the Fisher equation.
E)Jones's equality.

Question 14

Which of the following is (are)the mission of the Federal Reserve Bank?
I)Preserve price stability.
Ii)Foster economic growth and employment.
Iii)Promote a stable financial system.

A)i only.
B)ii only.
C)iii only.
D)all of the above
E)i and ii.

Question 15

The MP curve stands for __________ and describes __________.

A)monopoly pricing;how firms set prices
B)monetary policy;how the Federal Reserve sets the inflation rate
C)monetary policy;how the federal government sets short-run output fluctuations
D)money-prices;how the Federal Reserve sets the inflation rate
E)monetary policy;how the Federal Reserve sets the real interest rate

Question 16

The structure of the short-run model is best described as which of the following?

A)Nominal interest rate Real interest rate
Shortrun output
Change in inflation
B)Nominal interest rate Real interest rate
Change in inflation
C)Nominal interest rate Short-run output
Change in inflation
D)Real interest rate Short-run output
Change in inflation
Nominal interest rate
E)Short-run output Change in inflation
Real interest rate
Nominal interest rate

Question 17

What is the main policy tool available to the Federal Reserve?

A)discount rate
B)federal funds rate
C)government expenditures
D)printing money
E)taxes

Question 18

What is the main policy tool available to the Federal Reserve?

A)reserve rate
B)discount rate
C)federal funds rate
D)printing money
E)mortgage rate

Question 19

Economists who study monetary policy believe that it takes anywhere from __________ for monetary policy to have a substantial effect on economic activity.

A)three to six weeks
B)6 to 18 days
C)6 to 18 months
D)three to six months
E)6 to 18 weeks

Question 20

If prices are sticky and there are no aggregate demand shocks,and if the Fed raises the interest rate,__________ and __________.

A)unemployment falls;potential output falls
B)the real interest rate falls;short-run output falls
C)the unemployment rate rises;short-run output rises
D)the real interest rate rises;short-run output falls
E)the real interest rate falls;current output falls

Question 21

Which of the following contributed to high levels of inflation in the 1970s?
I)oil price shocks
Ii)lower taxes
Iii)a productivity slowdown

A)i only
B)ii only
C)iii only
D)i and iii
E)ii and iii

Question 22

Start from any equilibrium in Figure 12.5 to answer the following question.In 1980,U.S.inflation hit about 14 percent;Federal Reserve chairman __________ engineered a decline in inflation by __________,shown in the figure as movement from __________.

A)Volcker;raising inflation rates;b to c
B)Bernanke;raising interest rates;b to d
C)Volcker;lowering interest rates;c to b
D)Volcker;raising interest rates;b to c
E)Greenspan;lowering interest rates;a to b

Question 23

The most immediate and visible form of inflation shock is:

A)the real wage.
B)the price of corn.
C)the price of oil.
D)growth in the stock market.
E)bond prices.

Question 24

Expected inflation is:

A)equal to zero.
B)equal to the real interest rate.
C)equal to future periods' inflation rate.
D)the rate of inflation that firms believe will prevail in macroeconomy.
E)about 2 percent.

Question 25

According to the Phillips curve,if:

A)the inflation rate is falling,the economy is booming.
B)the inflation rate is rising,the economy is in recession.
C)the inflation rate is rising,the economy is booming.
D)the unemployment rate is falling,the economy is booming.
E)None of the above is correct.

Question 26

According to the Phillips curve,if current output is above potential output,

A)inflation falls.
B)inflation rises.
C)unemployment falls.
D)inflation is constant.
E)tax rates rise.

Question 27

According to the Phillips curve,if current output equals potential output,

A)unemployment is zero.
B)inflation fluctuates a lot.
C)inflation is steady.
D)unemployment is negative.
E)the economy is booming.

Question 28

The Phillips curve assumes that inflation expectations are:

A)rational.
B)adaptive.
C)always wrong.
D)equal to zero.
E)none of the above

Question 29

With adaptive expectations,the Phillips curve is written as:

A) .
B) .
C) .
D)Dpt = u¯ut.
E)Either a or b is correct.

Question 30

The economywide rate of inflation is given by:

A) .
B) .
C) .
D) .
E) .

Question 31

In the Phillips curve Dpt = u¯
T + o¯,
Measures:

A)a price shock.
B)how sensitive inflation is to interest rates.
C)how sensitive inflation is to aggregate demand conditions.
D)how sensitive inflation is to aggregate supply conditions.
E)how sensitive inflation is to price shocks.

Question 32

Adaptive expectations imply that firms:

A)adapt their prices to what the Fed does.
B)constantly update their inflation expectations.
C)slowly adjust their inflation expectations.
D)base prices on the rate of unemployment.
E)always know what the rate of inflation is.

Question 33

An increase in interest rate by the Federal Reserve will affect only real interest rates because:

A)inflation is sticky in the short run.
B)the relationship between money growth and inflation does not necessarily hold in the short run.
C)prices are flexible in the short and long runs.
D)contracts apply only in the very short run.
E)a and b are correct.

Question 34

Consider the Phillips curve in Figure 12.3.At point a,__________;and at point c,__________.

A)the economy is in recession;the economy is booming
B)the economy is in recession;the economy is in recession
C)the economy is in recession;the economy is in its long-run equilibrium
D)the economy is booming;the economy is in recession
E)the economy is in its long-run equilibrium;the economy is in recession

Question 35

Recent energy legislation that dictates increased use of ethanol as automobile fuel might __________ overall inflation because corn prices __________,affecting all downstream industries that use corn __________.

A)decrease;will rise;as a final good
B)increase;will rise;as an input
C)not change;will stay constant;as a final good
D)increase;will rise;as a final good
E)Not enough information is given.

Question 36

In the Phillips curve
,
Is:

A)a temporary demand shock.
B)a permanent price change.
C)a temporary price shock.
D)a temporary unemployment shock.
E)a structural macroeconomic change.

Question 37

In the Phillips curve
If
Is large,then

A)price-setting behavior is completely insensitive to short-run fluctuations.
B)price-setting behavior is very insensitive to short-run fluctuations.
C)inflation is not very sensitive to short-run fluctuations.
D)price-setting behavior is very sensitive to short-run fluctuations.
E)Not enough information is given.

Question 38

Consider the Phillips curve in Figure 12.3.At point b,__________,and at point a,__________.

A)the economy is in recession;the economy is booming
B)the economy is in recession;the economy is in its long-run equilibrium
C)the economy is in recession;the economy is in recession
D)the economy is booming;the economy is in recession
E)the economy is in its long-run equilibrium;the economy is in recession

Question 39

In the Phillips curve

Is:

A)a demand shock.
B)an inflation shock.
C)a measure of the sensitivity of inflation to demand conditions.
D)a permanent price trend.
E)fiscal policy shock.

Question 40

Oil prices are closely watched because:

A)they hurt automobile owners.
B)they affect inflation directly.
C)of their impact on stock markets.
D)of their immediate impact on subsidies and taxes.
E)they affect inflation both directly and indirectly.

Question 41

Which of the following scenarios best describes the short-run model?

A)
B)
C)
D)
E)None of the above is correct.

Question 42

Consider Figure 12.8,which shows the change in inflation
From 1995.1 to 2000.4,by quarter.You are Federal Reserve chairman Greenspan and today's date is the second quarter of 1997 (1997.2).Given the information you have,using the Phillips curve,to stabilize the economy you would __________,risking __________.

A)raise interest rates;inflation
B)lower interest rates;inflation
C)raise interest rates;recession
D)lower interest rates;higher unemployment
E)Not enough information is given.

Question 43

The nominal interest rate:

A)is set by Congress.
B)is equal to the rate of inflation.
C)always is equal to the 10-year bond rate of return.
D)is the opportunity cost of holding money.
E)is constant.

Question 44

Consider Figure 12.10,which shows the change in inflation
From 1977.1 to 1981.4,by quarter.You are Federal Reserve chairman Volcker and today's date is the first quarter of 1980 (1980.1).You suggest the appropriate policy would be to __________.In 1981.2,you consider your performance,and you conclude that you __________;using the Phillips curve,you see the country is now in __________.

A)lower taxes;failed to tame inflation;debt
B)lower interest rates;failed at taming inflation;recession
C)raise interest rates;succeeded in taming the recession;booming
D)raise interest rates;succeeded in taming inflation;recession
E)raise taxes;succeeded in taming inflation;debt

Question 45

Consider Figure 12.8,which shows the change in inflation
From 1995.1 to 2000.4,by quarter.You are Federal Reserve chairman Greenspan and today's date is the first quarter of 1999 (1999.1).Given the information you have,using the Phillips curve,to stabilize the economy,you would __________,risking __________.

A)raise interest rates;inflation
B)raise interest rates;recession
C)lower interest rates;recession
D)lower interest rates;higher unemployment
E)Not enough information is given.

Question 46

If the Federal Reserve reduces the money supply,

A)households would prefer to hold more wealth in an interest-bearing account than as cash.
B)households would prefer to hold more wealth in a zero-interest account than as cash.
C)households would prefer to hold all their wealth in an interest-bearing account.
D)foreigners would refuse to hold dollars.
E)the federal government would become insolvent.

Question 47

Which of the following statements is not true?

A)Many agents suffer from money illusion.
B)Small menu prices lead to price stickiness.
C)Under adaptive expectations,prices are perfectly flexible.
D)In the classical dichotomy,all prices are flexible.
E)Imperfect competition may lead to price inflexibility.

Question 48

Which of the following scenarios best describes the short-run model?

A)
B)
C)
D)
E)None of the above is correct.

Question 49

Consider Figure 12.9,which shows short-run output fluctuations
From 1990.1 to 2000.4,by quarter.If this is all the information you have,during the period 1997.1-1993.4,from the Phillips curve,you would conclude that:

A)inflation is decelerating, .
B)inflation is accelerating, .
C)unemployment is falling.
D)unemployment is rising.
E)Not enough information is given.

Question 50

When the Federal Reserve loosens money,the __________ and interest rates __________.

A)money supply curve shifts right;rise
B)money supply curve shifts right;fall
C)money demand curve shifts right;rise
D)money demand curve shifts left;rise
E)money supply and demand curves don't change;rise

Question 51

If the central bank is targeting the money supply,the money supply is __________ and __________ the nominal interest rate.

A)equal to money velocity;is vertical with respect to
B)whatever level is dictated by the president;is horizontal with respect to
C)whatever level is dictated by the central bank;is horizontal with respect to
D)whatever level is dictated by the central bank;is vertical with respect to
E)whatever level is dictated by the central bank;slopes downward with respect to

Question 52

If the central bank reduces the money supply,

A)the inflation rate rises and individuals hold more money.
B)the nominal interest rate rises and individuals hold more money.
C)the nominal interest rate falls and individuals hold no money.
D)the nominal interest rate rises and individuals hold less money.
E)the unemployment rate rises and individuals hold less money.

Question 53

Consider Figure 12.6.You are chairman of the Federal Reserve in 1975.You believe potential output follows the dotted line after 1973,but in actuality,it follows the line denoted "True potential output." The current state of the economy is given by the curve "Actual output." Given the information in the figure,you __________,because you believe the economy is in a __________;but your advice instead __________.

A)lower interest rates;recession;accelerates inflation
B)raise interest rates;recession;accelerates inflation
C)keep interest rates the same;boom;accelerates inflation
D)lower interest rates;boom;increases unemployment
E)Not enough information is given.

Question 54

Consider Figure 12.8,which shows the change in inflation
From 1995.1 to 2000.4,by quarter.You are Federal Reserve chairman Greenspan and today's date is the second quarter of 1997 (1997.2).Given the information you have,using the Phillips curve,to stabilize the economy,you would __________,risking __________.

A)raise interest rates;recession
B)raise interest rates;inflation
C)lower interest rates;inflation
D)lower interest rates;higher unemployment
E)Not enough information is given.

Question 55

Which of the following contributed to high levels of inflation in the 1970s?
I)Soviet invasion of Afghanistan
Ii)loose monetary policy
Iii)a productivity slowdown

A)i only
B)ii only
C)iii only
D)i and iii
E)ii and iii

Question 56

The money demand curve:

A)slopes downward with respect to the discount rate.
B)slopes downward with respect to the nominal interest rate.
C)slopes upward with respect to the nominal interest rate.
D)always is flat with respect to the nominal interest rate.
E)is flat with respect to the inflation rate.

Question 57

Which of the following statements is not true?

A)Small menu prices lead to price stickiness.
B)In the classical dichotomy,some prices are sticky.
C)In the classical dichotomy,an increase in money supply growth leads to a corresponding increase in inflation.
D)Short-run contracts lead to price persistence.
E)Imperfect information may lead to price inflexibility.

Question 58

Consider Figure 12.7.You are chairman of the Federal Reserve in 1995.You believe potential output follows the dotted line after 1993,but in actuality,it follows the line denoted "True potential output." The current state of the economy is given by the curve "Actual output." Given the information in the figure,you __________,because you believe the economy is in a __________;but your advice instead __________.

A)lower interest rates;recession;accelerates inflation
B)raise interest rates;boom;accelerates a recession
C)keep interest rates the same;boom;accelerates inflation
D)lower interest rates;boom;increases unemployment
E)Not enough information is given.

Question 59

If nominal interest rates are high,you:

A)hold only cash.
B)hold less savings and more cash.
C)hold all your money in a different currency.
D)never have any cash in your checking account.
E)hold less cash and more savings.

Question 60

Consider Figure 12.9,which shows short-run output fluctuations
From 1990.1 to 2000.4,by quarter.If this is all the information you have,during the period 1997.1-1999.4,from the Phillips curve,you would conclude that:

A)inflation is accelerating, .
B)inflation is decelerating, .
C)unemployment is falling.
D)unemployment is rising.
E)Not enough information is given.

Question 61

When the Federal Reserve increases the interest rate,the MP curve shifts up and short-term output falls.

Question 62

When a central bank targets the money supply,it adopts a policy to adjust __________ to accommodate __________.

A)interest rates;tax changes
B)interest rates;money demand shocks
C)money demand;government debt
D)interest rates;money supply
E)money demand;money supply shocks

Question 63

The real interest rate is given by Real interest rate = Nominal interest rate + Inflation.

Question 64

In most advanced economies,central banks target __________ to conduct monetary policy.

A)tax rates
B)money supply
C)interest rates
D)government debt
E)exchange rates

Question 65

Starting at any equilibrium in Figure 12.11,if the Fed tightens money,the money market would move from:

A)point C to A.
B)point B to D.
C)point B to C.
D)point A to D.
E)Not enough information is given.

Question 66

When the Federal Reserve wants to increase the money supply,it:

A)conducts open-market purchases.
B)conducts open-market sales.
C)increases the reserve rate.
D)buys euros.
E)prints money.

Question 67

Monetary economists find that it takes anywhere from six to eight weeks for monetary policy to have a substantial impact on economic activity.

Question 68

One of the main missions of the Federal Reserve is to stabilize the dollar-pound exchange rate.

Question 69

When a central bank targets interest rates,it adopts a policy to adjust __________ to accommodate __________.

A)money supply;money demand shocks
B)money supply;tax changes
C)money demand;government debt
D)interest rates;money supply
E)money demand;money supply shocks

Question 70

Starting at any equilibrium in Figure 12.11,if the Fed loosens money,the money market would move from:

A)point A to B.
B)point A to D.
C)point B to D.
D)point C to A.
E)Not enough information is given.

Question 71

The link between real and nominal interest rates is the Fisher equation.

Question 72

Once a __________ is chosen,the main tool the Federal Reserve uses to change the money supply is __________.

A)federal funds rate;open market operations
B)federal funds rate;changing the discount rate
C)tax rate;changing the exchange rate
D)number of dollars in circulation;changing the reserve rate
E)discount rate;borrowing money from the federal government

Question 73

When the Federal Reserve increases the interest rate,the MP curve shifts up and potential output falls.

Question 74

The structure of the short-run model is best described by Nominal interest rate
Real interest rate
Change in inflation.

Question 75

The main tool used by the Federal Reserve is the federal funds rate.

Question 76

If the central bank targets the interest rate,the:

A)money demand curve is flat.
B)money supply curve is vertical.
C)money supply curve slopes upward.
D)money supply curve is flat.
E)money demand curve is vertical.

Question 77

When economists say "sticky inflation," they mean that inflation does not react directly with the monetary policy.

Question 78

Starting at any equilibrium in Figure 12.11,if individuals want to hold more wealth in savings,the money market would move from:

A)point B to A.
B)point B to C.
C)point B to D.
D)point A to C.
E)Not enough information is given.

Question 79

Which of the following innovations has (have)become commonplace in financial markets over the past few decades?

A)ATM cards
B)credit cards
C)money market accounts
D)mutual funds
E)all of the above

Question 80

"Adaptive expectations" implies that firms adjust their inflation expectations immediately.