Question 1

Operating with discretion in a monetary policy sense implies ________.

Accepted Answer

Operating with discretion in a monetary policy sense means making decisions based on current economic conditions and not committing to a predetermined course of action. This allows for flexibility in responding to unforeseen events or changes in the economic environment. A constant growth rate rule (B) and introducing a zero inflation rule (C) are more specific policy rules and would not fall under the category of discretion. Making decisions without regulatory oversight (D) would not be appropriate as regulatory oversight is important for maintaining transparency and accountability in monetary policy decisions.

Question 2

Milton Friedman and his followers are known as ________.

Accepted Answer

Milton Friedman and his followers advocate monetarism, which emphasizes the role of the money supply in the economy and advocates for central banks to control the money supply in order to stabilize economic activity.

Question 3

A rule that is advocated by the monetarists is the ________ rule.

Accepted Answer

The constant money growth rate, also known as the monetarist rule, advocates for a steady increase in the money supply to support economic growth while keeping inflation under control. This rule is based on the belief that the economy can be stabilized by managing the money supply, and it is often associated with the ideas of economist Milton Friedman.

Question 4

The opposite of a discretionary approach is a ________ approach.

Accepted Answer

A discretionary approach involves making decisions based on personal judgment and subjective factors, while a rules-based approach involves following predetermined criteria and established guidelines. Therefore, the opposite of a discretionary approach is a rules-based approach. The other choices (B) activist, (C) non-activist, and (D) Keynesian all relate to specific economic or political ideologies and do not necessarily represent the opposite of a discretionary approach.

Question 5

The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as ________.

Accepted Answer

The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as the Lucas critique. It was first proposed by economist Robert Lucas in 1976 and argues that economic policies can alter people's expectations and therefore affect economic behavior in unforeseen ways. This means that historical data on economic relationships may not accurately predict future outcomes after the policy change. The other options (A, C, D) are different economic theories and concepts that are not directly related to the Lucas critique.

Question 6

The best way to keep inflation under control is to ________.

Accepted Answer

The answer of The best way to keep inflation under...

Question 7

The time inconsistency problem means that policy makers are always tempted to pursue ________ policy in the short run.

Accepted Answer

The time inconsistency problem is a problem that arises when the policy makers make decisions that benefit the present rather than the future. They are often tempted to pursue expansionary policies such as increasing government spending and cutting taxes in the short-run to boost the economy, but these policies can lead to inflation and other economic problems in the long-run. Therefore, policy makers tend to pursue policies that are not consistent with their long-term goals.

Question 8

An example of a rule used in non-discretionary monetary policy is ________.

Accepted Answer

The Taylor rule is an example of a rule used in non-discretionary monetary policy. It prescribes a specific formula for setting the short-term interest rate based on inflation and output gap variables. The central bank must follow the formula, which reduces its discretion in setting policy.

Question 9

The time inconsistency problem with respect to policy conduct means ________.

Accepted Answer

The time inconsistency problem refers to the tendency of policymakers to deviate from long-term plans and objectives when short-term pressures arise. This is often seen in the field of monetary policy where policymakers may choose to deviate from predetermined rules or targets in order to address short-term concerns such as inflation or employment. Therefore, option A is the correct answer. Choices B, C, and D are not directly related to the time inconsistency problem.

Question 10

According to the Lucas critique, if past increases in the short-term interest rate have always been temporary, then ________.

Accepted Answer

The Lucas critique suggests that relationships observed in historical data (like the term-structure relationship between short-term and long-term interest rates) may not hold if policy or the economic environment changes, particularly because expectations adjust. However, if past increases in short-term rates were always temporary, historical data might show only a weak effect on long-term rates, as market participants might expect these increases to be reversed and not significantly alter their long-term interest rate expectations.

Question 11

The Lucas critique highlighted the need for ________.

Accepted Answer

The answer of The Lucas critique highlighted the need for...

Question 12

A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is ________.

Accepted Answer

This policy is known as monetarism and is advocated by monetarists. It focuses on the control of the money supply as the primary means of stabilizing the economy. The idea is that by keeping the money supply growing at a constant rate, inflation can be controlled, and economic stability can be achieved.

Question 13

The Lucas critique indicates that ________.

Accepted Answer

The Lucas critique suggests that expectations are important in determining the outcome of a discretionary policy. This means that policy actions can have unintended consequences if they do not take into account how individuals and markets will adjust their behavior based on their expectations of the policy. Therefore, policymakers should consider how their decisions will affect expectations in the economy.

Question 14

The rational expectations hypothesis implies that when macroeconomic policy changes, ________.

Accepted Answer

The rational expectations hypothesis assumes that people will form their expectations based on all available information, including current and past policies. Therefore, when macroeconomic policy changes, people will adjust their expectations accordingly. This means that the way expectations are formed may change, but it does not necessarily mean that the economy will become highly unstable, that people will be slow to catch on to the change, or that people will make systematic mistakes.

Question 15

Today, most economists ________.

Accepted Answer

The idea that expectations formation will change when the behavior of forecasted variables changes is widely accepted among economists. This is known as the Lucas critique, which argues that any change in policy may not have the intended effect if it does not take into account how people's expectations may change as a result.

Question 16

Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies, most economists agree that ________.

Accepted Answer

Most economists agree that stabilization policies implemented during the 1960s and 1970s proved more difficult to implement in practice than many economists had expected. This suggests that the policies were not as effective as originally anticipated, and may have contributed to destabilization rather than stability.

Question 17

Lucas argues that when policies change, expectations will change thereby ________.

Accepted Answer

Lucas argues that expectations play a significant role in determining the outcomes of economic policies. Therefore, when policies change, expectations will also change, leading to a shift in the relationships in econometric models. This implies that the effects of policy changes cannot be accurately predicted since their impact on expectations is uncertain.

Question 18

A rise in short-term interest rates that is believed to be only temporary ________.

Accepted Answer

A temporary rise in short-term interest rates is unlikely to have a significant impact on long-term interest rates as it is not seen as a long-term trend. Long-term interest rates are determined by other factors such as economic growth and inflation expectations.

Question 19

The Lucas critique is an attack on the usefulness of ________.

Accepted Answer

The Lucas critique challenges the ability of traditional econometric models to accurately predict the effects of specific policy measures on the economy. Specifically, it argues that individuals and firms will alter their behavior in response to policy changes, making it difficult to predict the outcomes of those changes solely based on past data. This has implications for policymakers who rely on these models to make decisions about economic policy.

Question 20

The interest rate thought to have the most important impact on aggregate demand is the ________.

Accepted Answer

The answer of The interest rate thought to have the...

Quiz 25: The Role of Expectations in Monetary Policy