Question 1

If inflation falls from 11% to 5%, there is deflation.

Accepted Answer

Inflation falling from 11% to 5% is still indicating that prices are rising, just at a slower rate than before. Deflation refers to a sustained decrease in the general price level of goods and services.

Question 2

Why do most economists believe that it is important for a country's central bank to be independent of the rest of the country's central government?

Accepted Answer

The answer of Why do most economists believe that it...

Question 3

Fed Chairman Alan Greenspan managed to keep the rate of inflation low as the economy was growing at a brisk pace by setting and hitting low money supply growth rate targets.

Accepted Answer

Alan Greenspan did not primarily use money supply growth rate targets to manage the economy. Instead, he focused on adjusting the federal funds rate to influence economic conditions, including inflation and growth.

Question 4

How would you expect the Fed to respond to a negative supply shock in the economy?

Accepted Answer

The answer of How would you expect the Fed to...

Question 5

Suppose the current inflation rate and the expected inflation rate are both 3 percent. The current unemployment rate and the natural rate of unemployment are both 4 percent. Use a Phillips curve graph to show the effect on the economy of a severe supply shock. If the Federal Reserve keeps monetary policy unchanged, what will eventually happen to the unemployment rate? Show this on your Phillips curve graph.

Accepted Answer

The answer of Suppose the current inflation rate and the...

Question 6

When a central bank works makes joint decisions with the government's Treasury department,

Accepted Answer

The answer of When a central bank works makes joint...

Question 7

The FOMC no longer sets targets for M1 and M2 to meet its goals of price stability and high employment.

Accepted Answer

The FOMC no longer sets targets for M1 and M2 to meet its goals, instead focusing on a broader range of economic indicators to guide its monetary policy decisions.

Question 8

One problem with deflation is that it can raise the real value of debt.

Accepted Answer

In a deflationary environment, the general price level falls, which means that the purchasing power of money increases. This can make it more difficult for borrowers to repay their debts, since the amount they owe is fixed in nominal terms but has a higher real value due to the increased purchasing power of money. This can lead to defaults and bankruptcies, which can have negative effects on the overall economy.

Question 9

Article Summary
In a September 2013 speech to the Independent Bankers Association of Texas, Federal Reserve Bank of Dallas president Richard Fisher stated that the Fed's credibility was harmed when it announced the previous week that it would continue its large bond purchasing program. In June, Fed Chairman Ben Bernanke had stated that that the program could begin to be cut back later in the year, and several other Fed officials expressed being open to the announced timing of this policy. Bernanke's change in his announced timeline of the Fed's intentions regarding the bond purchasing program brought criticism that the Fed had misled investors. In his speech, Fisher stated "I disagreed with the decision of the committee and argued against it. Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question. I believe that is exactly what has occurred, though I take no pleasure in saying so." Fisher has been a long-time opponent of the Fed's bond purchasing program, claiming it is ineffective and may well lead to future inflation, and had been calling for the Fed to begin phasing out this program in September.
Source: "Fisher: Standing pat on policy hurt Fed's credibility," Reuters, September 23, 2013.
-Refer to the Article Summary. If the Federal Reserve's announcements about upcoming monetary policy decisions are not seen as credible, as Richard Fisher alludes to regarding the announcements about the bond purchasing program, which of the following would you expect to see?

Accepted Answer

If announcements about monetary policy decisions are not seen as credible, firms and workers will have difficulty accurately predicting future changes in inflation. This uncertainty can lead to instability in financial markets and potentially harm the overall economy.

Question 10

Why is the credibility of the Fed's policy announcements particularly important?

Accepted Answer

The answer of Why is the credibility of the Fed's...

Question 11

Two actions by the Fed during Alan Greenspan's term as chairman have been identified as possibly contributing to the financial crisis in 2008. Which of the following was one of those actions?

Accepted Answer

The decision to help save the hedge fund Long Term Capital Management in 1998 has been criticized as setting a precedent for future bailouts and contributing to moral hazard, which may have ultimately played a role in the 2008 financial crisis. The other actions listed do not have a direct link to the financial crisis.

Question 12

A study conducted by Alberto Alesina and Lawrence Summers concluded that countries with ________ had lower inflation rates than countries with ________.

Accepted Answer

The study conducted by Alberto Alesina and Lawrence Summers concluded that countries with highly independent central banks had lower inflation rates than countries with central banks that have little independence.

Question 13

Article Summary
In a September 2013 speech to the Independent Bankers Association of Texas, Federal Reserve Bank of Dallas president Richard Fisher stated that the Fed's credibility was harmed when it announced the previous week that it would continue its large bond purchasing program. In June, Fed Chairman Ben Bernanke had stated that that the program could begin to be cut back later in the year, and several other Fed officials expressed being open to the announced timing of this policy. Bernanke's change in his announced timeline of the Fed's intentions regarding the bond purchasing program brought criticism that the Fed had misled investors. In his speech, Fisher stated "I disagreed with the decision of the committee and argued against it. Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question. I believe that is exactly what has occurred, though I take no pleasure in saying so." Fisher has been a long-time opponent of the Fed's bond purchasing program, claiming it is ineffective and may well lead to future inflation, and had been calling for the Fed to begin phasing out this program in September.
Source: "Fisher: Standing pat on policy hurt Fed's credibility," Reuters, September 23, 2013.
-Refer to the Article Summary. Richard Fisher brought the Fed's credibility into question when it decided to continue with its bond purchasing program despite leading many to believe that the program would begin to be phased out. Prior to this, over the past two decades whenever a change in Fed policy had been announced, the change has ________ taken place, leading to ________ credibility.

Accepted Answer

The answer of Article Summary
In a September 2013 speech to...

Question 14

If the Federal Reserve wants to reduce inflation from 4 percent to 3 percent permanently, how can that goal be achieved, and what impact will that have on employment in the short run and the long run? Support your answer with a graph of the Phillips curve in the short run and the long run.

Accepted Answer

The answer of If the Federal Reserve wants to reduce...

Question 15

In face of a negative supply shock, the Fed may avoid a rise in unemployment only if it is willing to increase the rate of inflation.

Accepted Answer

If the Fed is not willing to increase the rate of inflation, it may need to allow for a rise in unemployment to combat the negative supply shock. By increasing the rate of inflation, the Fed can try to maintain full employment levels while also addressing the supply shock.

Question 16

Under Alan Greenspan, the Fed strived to hit its goals of price stability and high employment through

Accepted Answer

Under Alan Greenspan, the Fed strived to hit its goals of price stability and high employment through setting targets for the federal funds rate of interest.

Question 17

Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain.

Accepted Answer

The answer of Can the Federal Reserve achieve both low...

Quiz 28: Inflation, Unemployment, and Federal Reserve Policy