Question 1

Economic forecasters use which of the following leading economic indicators:
i. term structure of interest rates
ii. new claims for unemployment insurance
iii. price of tea in China

Accepted Answer

Economic forecasters use leading indicators to predict future economic trends. The term structure of interest rates is a leading indicator that can signal a recession or economic growth. New claims for unemployment insurance is also a reliable indicator that can signal a downturn in the economy. On the other hand, the price of tea in China is not related to the U.S. economy and is not a reliable leading indicator. Therefore, the correct choice is D - i and ii.

Question 2

Assuming the simple Taylor rule for dictating the federal funds rate, when the actual federal funds rate deviates from the suggested rate, it can be explained by:

Accepted Answer

A richer version of the Taylor Rule can account for the deviation. The Taylor Rule is a simplified model and a richer version may include additional variables that affect the setting of the federal funds rate. Bad or poorly informed monetary or fiscal policy could lead to deviations, but the question only asks for an explanation of deviations, not the cause of them. Discretionary fiscal policy is not related to the setting of the federal funds rate in the Taylor Rule.

Question 3

A policy rule dictates that monetary policy is at the discretion of the president.

Accepted Answer

Monetary policy is not at the discretion of the president, but rather the Federal Reserve. The Fed operates independently of the executive branch.

Question 4

Most Fed watchers are convinced that the Fed is committed to:

Accepted Answer

The Fed's mandate is to promote maximum employment and stable prices. Stable prices are generally interpreted as low and stable inflation. Therefore, the Fed is committed to achieving and maintaining low and stable inflation, making choice C the best answer.

Question 5

Policy is conducted by discretion if policymakers:

Accepted Answer

Policy conducted by discretion refers to policymakers making decisions based on their own judgment and assessment of the situation rather than following predetermined rules or commitments. Therefore, option A is the best choice as it corresponds to making decisions based on the current state of the economy. Options B, D, and E involve commitments, while option C refers to maintaining a constant growth rate without making the decision public.

Question 6

The advantage of an explicit inflation target is that it:

Accepted Answer

An explicit inflation target helps anchor inflation expectations by providing a clear goal for the central bank's monetary policy. This can lead to greater predictability and stability in the economy, as businesses and consumers can plan for future prices and wages based on the expected rate of inflation. It does not necessarily allow banks to set interest rates, stabilize employment, or raise the marginal product of capital, nor does it completely eradicate discretionary monetary policy.

Question 7

Refer to the following figure when answering  
Figure 13.5: AS/AD Model 
-Consider Figure 13.5. If the Fed sets a higher inflation target, under rational expectations, the economy moves from point ________ to point ________.

Accepted Answer

Under rational expectations, if the Fed sets a higher inflation target, the economy would adjust instantly to the new expectations, moving from point a to point c.

Question 8

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, ________ with no economic benefit; this is called the ________ problem.

Accepted Answer

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, inflation tends to rise. This is because of the time inconsistency problem, where the short-term benefits of expansionary policy lead to inflationary pressures in the long-term.

Question 9

Under rational expectations, people use:

Accepted Answer

Rational expectations theory assumes that people make rational decisions based on all available information, including past trends, current data, and future expectations. Therefore, under rational expectations, people use all the information at their disposal to make their best forecasts of the coming rate of inflation.

Question 10

The reputations of ________, ________, and ________ have convinced observers that the Fed is committed to low and stable inflation.

Accepted Answer

Paul Volcker is credited with bringing inflation under control in the 1980s as the Federal Reserve Chairman, while Alan Greenspan and Ben Bernanke continued the focus on low and stable inflation during their tenures as Fed Chair. Therefore, the reputations of Volcker, Greenspan, and Bernanke have convinced observers that the Fed is committed to low and stable inflation.

Question 11

The simple monetary rule states that if the current rate of inflation is below the inflation target, interest rates should fall.

Accepted Answer

The simple monetary rule suggests that central banks should adjust interest rates to maintain price stability or keep inflation close to their target level. If inflation is below the target, then the central bank could lower interest rates to stimulate spending and economic growth. If inflation is above the target, then the central bank could raise interest rates to cool down the economy and lower inflation.

Question 12

During the ________, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule.

Accepted Answer

The answer of During the ________, the actual federal funds...

Question 13

Refer to the following figure when answering  
Figure 13.5: AS/AD Model 
-Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point ________ to point ________.

Accepted Answer

The answer of Refer to the following figure when answering...

Question 14

Since the 1990s, the country with the lowest rate of inflation has been:

Accepted Answer

Japan has had consistently low inflation rates since the 1990s due to a variety of economic factors, including low growth, deflationary pressure, and a strong yen. The other options (Russia, the United States, the United Kingdom, and Italy) have all experienced higher rates of inflation during this time period.

Question 15

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called:

Accepted Answer

The Lucas critique points out that any model that utilizes adaptive expectations will be misspecified because individuals' expectations of future economic variables are likely to change based on new information or changes in policy. Therefore, models that assume static expectations are subject to errors and may not accurately predict economic outcomes.

Question 16

In the presence of rational expectations, the central banks' willingness to battle inflation:

Accepted Answer

In the presence of rational expectations, the central bank's willingness to battle inflation will be factored in by individuals when forming their expectations of future inflation. Therefore, the central bank's credibility and reputation for effectively fighting inflation becomes a determinant of expected inflation.

Question 17

Which of the following countries does not adopt an explicit inflation target?

Accepted Answer

The answer of Which of the following countries does not...

Question 18

The ultimate goal of macroeconomic policy is:

Accepted Answer

The ultimate goal of macroeconomic policy is to achieve full employment, output at potential, and low, stable inflation. This is known as the "triple mandate" of macroeconomic policy. Full employment means that all available labor resources are being utilized, output at potential means that the economy is producing goods and services at its maximum sustainable level, and low, stable inflation means that the overall price level is not rapidly increasing, which promotes economic stability and predictability. Achieving these three objectives simultaneously is the ultimate goal of macroeconomic policy.

Question 19

The central bank often deviates from simple policy rules because:

Accepted Answer

Central banks have access to a significant amount of new and detailed data about the economy, which may cause them to deviate from simple policy rules.

Question 20

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of:

Accepted Answer

Time inconsistency occurs when policymakers' optimal policy today is different from their optimal policy in the future. This leads to a lack of credibility and trust from the public and can result in policy not being effective. By sticking to policy rules, policymakers can avoid time inconsistency and establish a credible and trustworthy policy framework.

Quiz 13: Stabilization Policy and the Asad Framework

Economic forecasters use which of the following leading economic indicators: i. term structure of interest rates ii. new claims for unemployment insurance iii. price of tea in China

Assuming the simple Taylor rule for dictating the federal funds rate, when the actual federal funds rate deviates from the suggested rate, it can be explained by:

A policy rule dictates that monetary policy is at the discretion of the president.

Most Fed watchers are convinced that the Fed is committed to:

Policy is conducted by discretion if policymakers:

The advantage of an explicit inflation target is that it:

Refer to the following figure when answering Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a higher inflation target, under rational expectations, the economy moves from point to point .

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, with no economic benefit; this is called the problem.

Under rational expectations, people use:

The reputations of , , and have convinced observers that the Fed is committed to low and stable inflation.

The simple monetary rule states that if the current rate of inflation is below the inflation target, interest rates should fall.

During the ________, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule.

Refer to the following figure when answering Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point to point .

Since the 1990s, the country with the lowest rate of inflation has been:

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called:

In the presence of rational expectations, the central banks' willingness to battle inflation:

Which of the following countries does not adopt an explicit inflation target?

The ultimate goal of macroeconomic policy is:

The central bank often deviates from simple policy rules because:

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of:

Quiz 13: Stabilization Policy and the Asad Framework

Economic forecasters use which of the following leading economic indicators: i. term structure of interest rates ii. new claims for unemployment insurance iii. price of tea in China

Assuming the simple Taylor rule for dictating the federal funds rate, when the actual federal funds rate deviates from the suggested rate, it can be explained by:

A policy rule dictates that monetary policy is at the discretion of the president.

Most Fed watchers are convinced that the Fed is committed to:

Policy is conducted by discretion if policymakers:

The advantage of an explicit inflation target is that it:

Refer to the following figure when answering Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a higher inflation target, under rational expectations, the economy moves from point ________ to point ________.

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, ________ with no economic benefit; this is called the ________ problem.

Under rational expectations, people use:

The reputations of ________, ________, and ________ have convinced observers that the Fed is committed to low and stable inflation.

The simple monetary rule states that if the current rate of inflation is below the inflation target, interest rates should fall.

During the ________, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule.

Refer to the following figure when answering Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point ________ to point ________.

Since the 1990s, the country with the lowest rate of inflation has been:

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called:

In the presence of rational expectations, the central banks' willingness to battle inflation:

Which of the following countries does not adopt an explicit inflation target?

The ultimate goal of macroeconomic policy is:

The central bank often deviates from simple policy rules because:

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of:

Refer to the following figure when answering Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a higher inflation target, under rational expectations, the economy moves from point to point .

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, with no economic benefit; this is called the problem.

The reputations of , , and have convinced observers that the Fed is committed to low and stable inflation.

Refer to the following figure when answering Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point to point .