Question 1

Which of the following is not a disadvantage of of the Fed's "just do it" approach to monetary policy?

Accepted Answer

The statement "It relies on a stable money-inflation relationship" is actually an advantage of the "just do it" approach to monetary policy. The other options, low transparency, low accountability, and reliance on policy-makers, are indeed disadvantages of this approach.

Question 2

The mandate for the monetary policy goals that has been given to the European Central Bank is an example of a ________ mandate.

Accepted Answer

The European Central Bank (ECB) has a hierarchical mandate, with the primary objective being price stability, and other objectives considered secondary, thus making it a hierarchical mandate.

Question 3

Which set of goals can,at times,conflict in the short run?

Accepted Answer

In the short run, achieving high employment can sometimes conflict with price level stability. This is because increasing employment may lead to higher demand and higher prices for goods and services, which can result in inflation. Therefore, policymakers need to balance their goals of achieving high employment and price level stability.

Question 4

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.

Accepted Answer

The answer of Estimates suggest that,in the United States economy,it...

Question 5

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.

Accepted Answer

The answer of The decision by inflation targeters to choose...

Question 6

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.

Accepted Answer

Inflation targets are usually set as a range within which the central bank aims to keep inflation. In case of a decline in aggregate demand that causes inflation to fall below the lower limit of the target range, the central bank can "loosen" monetary policy (i.e. increase the money supply, lower interest rates) to stimulate spending without worrying about triggering higher inflation expectations. This flexibility is not available if the inflation target is not in place.

Question 7

Which of the following is not a disadvantage to inflation targeting?

Accepted Answer

Transparency is actually an advantage of inflation targeting as it provides clarity and predictability for businesses and households, which can improve economic decision-making. The other options are all potential disadvantages of inflation targeting.

Question 8

Which of the following is not an element of inflation targeting?

Accepted Answer

The element of using only monetary aggregates in making decisions about monetary policy is not a part of inflation targeting. In fact, inflation targeting typically involves a flexible approach that takes into account a wide range of economic data and indicators beyond just monetary aggregates.

Question 9

The type of monetary policy that is used in Canada,New Zealand,and the United Kingdom is

Accepted Answer

Inflation targeting is the type of monetary policy used in Canada, New Zealand, and the United Kingdom. This approach involves setting a target for the rate of inflation and using monetary policy tools to achieve that target. The central bank may adjust interest rates or take other actions to influence the money supply and control inflation.

Question 10

Having interest rate stability

Accepted Answer

Interest rate stability allows businesses and individuals to better plan for the future, as they can anticipate the cost of borrowing and the return on savings with greater certainty. This reduces uncertainty and promotes economic stability. A stable interest rate policy also helps to maintain financial market stability by minimizing sudden fluctuations. However, having interest rate stability does not guarantee full employment nor does it lead to demands to curtail the Fed's power.

Question 11

Which of the following is not an advantage of inflation targeting?

Accepted Answer

The answer of Which of the following is not an...

Question 12

Explain what inflation targeting is.What are the advantages and disadvantages of this type of monetary policy strategy?

Accepted Answer

The answer of Explain what inflation targeting is.What are the...

Question 13

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

Accepted Answer

In both New Zealand and Canada, the unemployment rate has declined substantially after a sharp increase since the countries adopted inflation targeting. In New Zealand, the unemployment rate rose from 6.2% in 1989 to 10.7% in 1991, but by 1997, it fell to 6.1%. Similarly, in Canada, the unemployment rate increased from 7.5% in the early 1990s to 11.4% in 1993 but fell to 6.5% by 2017.

Question 14

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate.

Accepted Answer

The mandate for the monetary policy goals given to the Federal Reserve System is an example of a dual mandate. This means that the Federal Reserve is mandated to pursue two goals: maximum employment and price stability. These goals are of equal importance and are complementary to each other. Therefore, the correct answer is B.

Question 15

The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as

Accepted Answer

The Federal Reserve has been following a policy with an implicit nominal anchor, which means that their actions are largely guided by keeping inflation close to their target of 2%. While they do not explicitly target a specific monetary aggregate, they do use a variety of tools to influence the economy and keep inflation stable.

Question 16

The primary goal of the European Central Bank is

Accepted Answer

The primary goal of the European Central Bank is price stability, which means maintaining inflation in the economy at a low level (specifically, below but close to 2%). While the ECB also considers other factors such as economic growth and employment, its primary objective is to ensure price stability through its monetary policy decisions.

Question 17

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.

Accepted Answer

The answer of When compared to the Fed's ________ anchor...

Question 18

The first country to adopt inflation targeting was

Accepted Answer

New Zealand was the first country to adopt inflation targeting as a monetary policy framework in 1990. Canada followed in 1991, while the United Kingdom and Australia adopted inflation targeting in 1992.

Question 19

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.

Accepted Answer

A decline in the value of the domestic currency (i.e. depreciation) will increase the inflation rate as imports become more expensive. An increase in the value of the domestic currency (i.e. appreciation) makes domestic industries less competitive with foreign industries because exports become more expensive and imports become cheaper. Therefore, stability in foreign exchange rates is important to maintain a moderate and predictable inflation rate, and to ensure that domestic industries remain competitive in the global market. The answer is B because a decline in the value of the domestic currency (depreciation) increases the inflation rate, while an increase in the value of the domestic currency (appreciation) makes domestic industries less competitive.

Question 20

Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________.

Accepted Answer

The primary goal of a central bank should be price stability in the long run. A hierarchial mandate gives price stability priority over other goals, such as reducing business-cycle fluctuations, while a dual mandate adds reducing unemployment to the mix. However, ultimately, the focus should be on maintaining price stability to provide a stable economic foundation for the long-term growth and prosperity of the economy.

Quiz 16: The Conduct of Monetary Policy: Strategy and Tactics