Question 1

The primary goal of the European Central Bank is

Accepted Answer

The primary goal of the European Central Bank is price stability, which means keeping inflation in check and maintaining the purchasing power of the euro. While employment and economic growth are also taken into consideration, they are not the primary goals of the ECB.

Question 2

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

Accepted Answer

The "just do it" approach does rely on a stable money-inflation relationship, so this is not a disadvantage. However, A, B, and C are all disadvantages of this approach, as it lacks transparency, accountability, and depends heavily on the individuals in charge of making the policy decisions.

Question 3

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 4

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 makes imports more expensive, contributing to higher inflation. An increase in the value of the domestic currency makes domestic goods more expensive relative to foreign goods, reducing competitiveness.

Question 5

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...

Question 6

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

Accepted Answer

Canada, New Zealand, and the United Kingdom follow an inflation targeting monetary policy. Inflation targeting involves setting a target for the annual inflation rate and then adjusting monetary policy to achieve it. This policy is designed to provide greater transparency and accountability in monetary policy, as well as to anchor inflation expectations and ensure a stable and predictable macroeconomic environment.

Question 7

The first country to adopt inflation targeting was

Accepted Answer

New Zealand was the first country to adopt inflation targeting in 1990.

Question 8

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

Accepted Answer

Both New Zealand and Canada saw their unemployment rates decline substantially after the adoption of inflation targeting. This is because inflation targeting typically involves using monetary policy to keep inflation at a low and stable level, which can help to create a more stable and predictable economic environment that is conducive to job creation and economic growth. While there may be some short-term adjustments that can lead to temporary increases in unemployment, the long-term trend has been positive for both countries.

Question 9

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

Accepted Answer

The correct element of inflation targeting is an "information-exclusionary approach," in which central banks use a variety of economic indicators, including but not limited to monetary aggregates, to make decisions about monetary policy.

Question 10

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

Declines in aggregate demand that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to loosen monetary policy without fearing a rise in inflation expectations. Therefore, the correct choice is Option B, where declining aggregate demand corresponds to loosening monetary policy.

Question 11

Having interest rate stability

Accepted Answer

Interest rate stability allows individuals and businesses to plan for the future with less uncertainty, as they can rely on stable borrowing costs. It does not necessarily guarantee full employment, and it is not typically a cause for demands to curtail the Fed's power or problems in financial markets.

Question 12

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

Accepted Answer

High employment and price level stability can conflict in the short run, as policies that increase employment may also increase demand and lead to inflationary pressures. Conversely, policies aimed at reducing inflation may lead to higher unemployment in the short run. The other choices do not necessarily conflict with each other in the short run.

Question 13

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 14

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 15

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...

Question 16

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 Federal Reserve System has been given a dual mandate, which includes maintaining maximum employment and stable prices. This means that the Fed is responsible for promoting both full employment and price stability, which are considered the two primary goals of the U.S. economy. This mandate was established by Congress in 1977 through an amendment to the Federal Reserve Act. Therefore, the correct answer is B, dual.

Question 17

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

Accepted Answer

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

Question 18

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, which means maintaining low and stable inflation over time. Both a dual mandate (which includes goals of price stability and maximum employment) and a hierarchical mandate (where maintaining price stability is the primary goal) can be acceptable as long as price stability remains the top priority in the long run to promote sustainable economic growth.

Question 19

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 not officially adopted a strict monetary or inflation targeting regime, but has instead followed a policy with an implicit nominal anchor, which is focused on maintaining a stable level of inflation and promoting maximum employment. This approach involves using a range of monetary policy tools, such as adjusting interest rates and implementing asset purchases or sales, to stabilize inflation expectations and promote economic growth, rather than focusing on a specific numerical target for inflation or money supply.

Question 20

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

Accepted Answer

Lack of transparency is not a disadvantage of inflation targeting, but rather a disadvantage of not having an explicit inflation target. Inflation targeting can increase transparency by making the central bank's goals and policies more visible and predictable.

Quiz 19: The Conduct of Monetary Policy: Strategy and Tactics