Question 1

The central bank of Elousia has an inflation target of 1.5%. In the current year, a shock has lowered the inflation rate to 1.0%. Following the shock, firms and households can expect an inflation rate of

Accepted Answer

Since the central bank of Elousia has an inflation target of 1.5%, it is likely to take actions to bring the inflation rate back to this target level following any deviations, including a shock that lowers the inflation rate to 1.0%.

Question 2

Which of the following is an accurate description of how the primary function of central banks has shifted over time?

Accepted Answer

Central banks initially served the purpose of financing government spending, especially in times of war or crisis. Over time, their primary goal has shifted towards maintaining price stability to ensure a stable economic environment.

Question 3

The academic literature on central bank independence shows

Accepted Answer

Mixed results with some studies showing a negative correlation between central bank independence and inflation and other studies showing a positive correlation.

Question 4

Prior to the 1980s, the Federal Reserve could use targets for M1 and M2 to conduct monetary policy because

Accepted Answer

Before the 1980s, the Federal Reserve used M1 and M2 targets for monetary policy effectively because there was a relatively stable relationship between these money supply measures and inflation, allowing for predictable impacts on the economy.

Question 5

The central bank of Substantia uses a price level target to conduct monetary policy. In the current year, a shock has lowered the inflation rate from 1.5% to 1.0%. Following the shock, firms and households can expect an inflation rate of

Accepted Answer

The answer of The central bank of Substantia uses a...

Question 6

One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags.

Accepted Answer

The Federal Reserve faces challenges in conducting monetary policy due to information and impact lags. Information lags occur because it takes time to collect economic data, while impact lags refer to the delay between implementing a policy and observing its effects on the economy.

Question 7

One thing on which both the political right and the political left in the United States agree regarding the Federal Reserve is that its

Accepted Answer

The answer of One thing on which both the political...

Question 8

Joe has a $1,000 debt with no interest. He is a plumber and earns $50 per hour. The real burden of Joe's debt is

Accepted Answer

The real burden of Joe's debt in terms of his work is how many hours he needs to work to pay off the debt. Since he earns $50 per hour, $1,000 divided by $50 per hour equals 20 hours of work.

Question 9

When the price level falls, indebted persons will be __________  off because the real value of their debt will have __________.

Accepted Answer

When the price level falls, the real value of money increases, meaning that the real value of debt also increases. This makes indebted persons worse off because they effectively owe more in terms of purchasing power.

Question 10

One of the concerns about the Federal Reserve targeting high employment is that it might

Accepted Answer

Targeting high employment might lead the Federal Reserve to neglect its goal of maintaining stable prices, as focusing too much on employment could lead to less emphasis on controlling inflation.

Question 11

In the 2017 UN working paper entitled "On the Role of Central Banks in Enhancing Green Finance," the UN stated that central banks would have what kind of role in addressing environmental concerns?

Accepted Answer

Central banks are encouraged to develop sustainability targets and create new policy tools to meet those targets, integrating environmental concerns into their financial and regulatory frameworks.

Question 12

When the link between M1, M2, and inflation broke down in the 1980s, many economists argued that the best policy approach was to have an explicit inflation target. The biggest problem with an explicit inflation target is

Accepted Answer

The answer of When the link between M1, M2, and...

Question 13

Which of these is most often used in practice to maintain a relatively stable price level?

Accepted Answer

Inflation targeting is the most commonly used strategy among central banks to maintain a relatively stable price level. It involves setting and publicly announcing a target inflation rate and then using monetary policy tools to steer actual inflation towards that target. This approach allows for some flexibility in responding to economic changes while focusing on long-term price stability.

Question 14

Which of these is an advantage of inflation rate targeting?

Accepted Answer

Inflation rate targeting can help anchor inflationary expectations by providing a clear and transparent goal for monetary policy, which can stabilize prices and reduce uncertainty about future inflation.

Question 15

Which of the following arguments is not used to argue against the Fed attempting to keep interest and exchange rates stable?

Accepted Answer

Stable exchange rates are often argued to facilitate international trade by reducing uncertainty in international transactions, not to rarely lead to higher levels of global trade. This makes D the incorrect argument against the Fed's efforts to keep interest and exchange rates stable.

Question 16

A potential problem of a more politically controlled central bank is that

Accepted Answer

Politicians may prioritize short-term economic gains to win elections, potentially leading to long-term negative consequences such as inflation or economic instability.

Question 17

Monetary policy has the best chance of influencing the level of __________  unemployment.

Accepted Answer

Cyclical unemployment is directly related to the overall state of the economy and can be influenced by changes in monetary policy, which affects economic activity and demand for labor.

Question 18

Those who argue against the pursuit of the dual objectives of stable prices and high employment point to the __________ as evidence that the pursuit of dual objectives is misguided.

Accepted Answer

The inflation of the 1970s is often cited as evidence against the pursuit of dual objectives of stable prices and high employment because it demonstrated how policies aimed at reducing unemployment can lead to high inflation, challenging the feasibility of achieving both goals simultaneously.

Question 19

To get around the problems of information lag and impact lag, Alan Greenspan led the Fed in using which of these methods for a period of nearly 20 years, and with what results?

Accepted Answer

Alan Greenspan, during his tenure as the Chairman of the Federal Reserve, preferred an approach of implicit inflation targeting rather than explicit targets. This method involved adjusting monetary policy to manage inflation expectations without publicly announcing specific inflation targets. The result of this approach was relatively low inflation and modest recessions, indicating that the strategy was effective in maintaining economic stability during his leadership.

Question 20

Suppose the current real federal funds rate in the economy is 3.0%, the current inflation rate is 1.5%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is -2.0%. According to the Taylor Rule, the Federal Reserve's target federal funds rate should be

Accepted Answer

The Taylor Rule formula is: Target Rate = Neutral Rate + 0.5*(Inflation Gap) + 0.5*(Output Gap). Assuming a neutral rate of 2%, the calculation is: 2% + 0.5*(1.5%-2.0%) + 0.5*(-2.0%) = 3.25%.

Quiz 11: Monetary Policy Debates