Deck 9: Policy preview

Question 1

When conducting expansionary monetary policy, central banks have to keep in mind that

A)there is a conflict between keeping inflation low and economic activity high
B)unemployment can be lowered in the short run but at the cost of higher prices in the long run
C)spending on durable consumption goods will probably not be significantly affected
D)all of the above
E)only A and B

Answer 1

only A and B

Question 2

An appropriate policy response by a central bank to an increase in the inflation rate is to

A)increase bank reserves
B)lower the federal funds rate
C)buy government bonds from the public
D)sell government bonds to the public
E)none of the above

Answer 2

sell government bonds to the public

Question 3

The U.S.Fed "sets" interest rates by

A)announcing a desired discount rate and then attempting to keep the federal funds rate two percentage points above it
B)announcing a desired monetary growth rate designed to keep inflation stable
C)buying or selling Treasury bills
D)announcing its intentions far in advance since transparency allows financial markets to adjust before any action is taken
E)trying to keep bank reserves stable

Answer 3

buying or selling Treasury bills

Question 4

Many economists believe that

A)most short-term stabilization of the economy should be done through monetary policy
B)fiscal policy has no short-run effect on either output or inflation
C)monetary policy affects inflation but not output, even in the short run
D)monetary policy can effectively increase GDP with little or no effect on inflation
E)none of the above is true

Question 5

Monetary policy is best conducted by

A)focusing on a sustainable goal rather than maintaining full employment at all times
B)decisive major policy changes rather than modest steps
C)changing policies frequently to keep financial markets guessing what will happen next
D)keeping the interest rate at the lowest sustainable level no matter what
E)none of the above

Question 6

If a central bank wants to avoid high inflation in an economic boom it can

A)try to lower investment spending though open market purchases
B)raise interest rates in an effort to affect aggregate supply
C)lower bank reserves by buying government bonds
D)decrease the level of potential GDP by permanently restricting money supply growth
E)none of the above

Question 7

Which of the following is NOT a result of monetary policy?

A)aggregate demand is affected, leading to a change in nominal GDP
B)the level of potential GDP will change
C)spending on investment and durable consumption goods is affected
D)the rates of unemployment and inflation are affected in the short run
E)real interest rates will remain unaffected in the long run

Question 8

The U.S.Federal Reserve's Open Market Committee (the FOMC)

A)meets regularly to decide on its monetary policy actions
B)formally makes decision by voting on monetary policy changes
C)sometimes reveals its intentions in advance to increase transparency
D)does not follow a clearly established policy rule
E)all of the above

Question 9

If a central bank is uncertain about whether an economic disturbance is temporary or permanent, it should

A)always wait until the full effect of the disturbance is felt before undertaking any policy changes
B)make frequent and modest policy changes and adjust policies whenever necessary to reach a sustainable goal
C)announce and then implement major policy changes right away to signal to financial markets that it will address the disturbance vigorously
D)announce a policy change and then wait for financial markets to react, which is often all that is needed to calm economic activity
E)do all of the above

Question 10

The U.S.Fed can most effectively achieve an established federal funds rate target by

A)leaking information about its future intentions to financial markets
B) maintaining a stable monetary growth rate
C) undertaking open market operations to influence bank reserves
D)adjusting monetary growth to maintain a stable inflation rate
E)selling Treasury bills whenever short-term interest rates increase

Question 11

Central banks generally conduct their monetary policy with two goals in mind: to keep economic activity high and to keep inflation low; however, they have to recognize that

A)there is an inherent conflict between these goals
B)monetary policy can affect economic activity only in the short run
C)they can control inflation fairly effectively but may not be able to influence GDP growth
D)a lower interest rate now may mean higher a inflation rate in the future
E)all of the above

Question 12

By lowering short-term interest rates, a central bank can stimulate economic activity

A)since it encourages more investment spending
B)since more durable consumption goods will be bought
C)but only in the short run
D)but it may lead to a higher price level
E)all of the above

Question 13

Which of the following is NOT a way in which a central bank can conduct its monetary policy?

A)by establishing target interest rates and then undertaking open market operations to maintain them
B)by buying and selling government bonds
C)by making small policy changes and readjusting policies as needed
D)by changing the rate of capital accumulation to influence aggregate supply
E)by changing interest rates to influence spending on durable goods and investment

Question 14

The federal funds rate is the interest rate that

A)banks charge their best corporate customers
B)banks have to pay when they get a loan from the Fed
C)banks have to pay when they get a loan from another bank
D)banks receive from the Fed for the reserves they hold as deposits at the Fed
E)the federal government pays on its three-month Treasury bills

Question 15

If it is clear that an economic disturbance is only transitory, a central bank's best policy response may be to

A)react moderately or not at all because a major policy change may itself be destabilizing
B)recommend fiscal policy changes, which will have less powerful effects than monetary policy changes
C)act quickly and vigorously so financial markets do not overreact
D)announce a policy change and then wait to see the reaction of financial markets before deciding whether or not to actually implement it
E)avoid a potential increase in inflation by asking banks to ration credit

Question 16

Which of the following is TRUE about the chair of the Board of Governors of the U.S.Federal Reserve?

A)Paul Volcker succeeded Alan Greenspan
B)Ben Bernanke succeeded Paul Volcker
C)Ben Bernanke served only four years as the chair
D)Janet Yellen is the first woman in the position of Fed's board chair
E)none of the above

Question 17

Which of the following is FALSE?

A)in the long run, a central bank can effectively limit inflation
B)in the long run, a central bank can do fairly little to stimulate real GDP
C)in the long run, monetary policy has no effect on nominal GDP
D)unless inflation is very high, stimulating the economy does more to enhance economic welfare than controlling inflation
E)a central bank can lower the inflation rate but only by allowing for a loss in real GDP, at least in the short run

Question 18

If the inflation rate starts to increase, a central bank most likely will

A)try to stimulate aggregate supply through open market purchases
B)change short-term interest rates though open market sales
C)increase short-term interest rates by buying government bonds
D)send signals to financial markets about upcoming open market purchases
E)ask banks to ration credit

Question 19

A central bank that wants to stabilize the economy in the short run should try to

A)establish a clear inflation target and stick to it no matter what
B)affect aggregate supply through open market operations
C)affect aggregate demand through open market operations
D)maintain a stable growth rate of money supply
E)concentrate only on long-run goals

Question 20

In the short run, a central bank can most easily stimulate economic activity by

A) selling government bonds to the public
B) raising interest rates to make investments more profitable
C) lowering the inflation rate though monetary restriction
D) influencing aggregate supply through monetary expansion
E) influencing aggregate demand and accepting a higher price level in the future

Question 21

When a central bank engages in inflation targeting

A)unemployment isn't affected since nominal interest rates are kept very low
B)interest rates are raised substantially as soon as the output gap increases
C)interest rate stability is an explicit policy goal
D)little weight is give to transparency
E)little or no weight is given to the output gap

Question 22

In the Taylor rule, if the output coefficient ? is set to zero, then the central bank

A)is mostly concerned with maintaining a low inflation rate
B)will lower interest rates whenever it goes above 2 percent
C)will aggressively increase interest rates as soon as inflation rises
D)engages in real GDP targeting
E)none of the above

Question 23

Assume that the inflation coefficient is negative in the Taylor rule, This implies that

A)there is an implicit monetary policy tradeoff between inflation and unemployment
B)the Fed will have to lower money supply whenever aggregate demand decreases
C)the Fed will not have to make adjustments in interest rates if output changes
D)the economy is likely to experience runaway inflation
E)all of the above

Question 24

When a central bank engages in inflation targeting, then

A)interest rate stability will automatically result
B)interest rates need to be raised as soon as the output gap starts to shrink
C)the Taylor rule can still be used as a guide as long as the output coefficient is set to zero
D)the Taylor rule can still be used as a guide as long as the output coefficient has a lot of weight
E)none of the above

Question 25

According to the Taylor rule, if the current inflation rate is 2.8%, output is 2% below the full-employment level, and the central bank's announced inflation target is 2%, at what level should the central bank set the nominal interest rate?

A)2)8%
B)4)2%
C)5)2%
D)5)8%
E)6)8%

Question 26

The Taylor rule suggests to a central bank

A)how to set interest rates in response to a change in economic activity
B)that interest rates should be raised by 1.5% if inflation goes 1% above its announced target
C)that interest rates should be raised by 0.5% if the GDP gap rises by 1%
D)that real interest rates should be increased to cool off the economy whenever inflation rises
E)all of the above

Question 27

Assume the Fed wants to stimulate economic activity through expansionary monetary policy.Which of the following is FALSE?

A)investment spending will increase
B)spending on durable goods will increase
C)aggregate demand will be stimulated
D)the expansionary effect will only be temporary
E)real money balances will increase as we move along the AD-curve from left to right

Question 28

Which of the following equations most accurately describes the Taylor rule?

A) πt = mt – yt + vt
B) mt = 0.04 + 2(ut – 0.052)
C) mt = πt + 0.5(πt – π*t) + 0.5(Yt –Y*t)
D) it = 2 + πt + 0.5(πt – π*t) + 0.5[100(Yt –Y*t)/Y*t]
E) it = 2 + 0.5[(πt – π*t)/πt] + 0.5[(Yt –Y*t)/Y*t]

Question 29

The Taylor rule implies that a central bank should adjust interest rates frequently

A)with particular emphasis on capital movements across borders
B)but only in response to changes in the inflation rate
C)but only in response to changes in the output gap
D)whenever output or inflation deviates from the desired levels
E)none of the above

Question 30

In the Taylor rule, if the output coefficient ? is set to zero, then the central bank

A)is mostly concerned with maintaining full employment
B)always sets interest rates 2% above its inflation target
C)will aggressively lower interest rates as soon as output declines
D)engages in strict inflation targeting
E)none of the above

Question 31

The Taylor rule

A)advocates lowering interest rates in response to a higher output level
B)advocates a strict monetary growth rate
C)advocates stable interest rates
D)helps a central bank in setting its target interest rates based on current economic conditions
E)is of little help in the short-term stabilization of the economy

Question 32

The rule that tells a central bank how to set interest rates in response to changes in economic activity is known as the

A)federal funds rule
B)interest rate rule
C)monetary growth rule
D)Taylor rule
E)Friedman rule

Question 33

The Taylor rule allows for strict inflation targeting as long as

A)the output coefficient is zero
B)the inflation coefficient is zero
C)the output coefficient is negative
D)the inflation coefficient is negative
E)none of the above

Question 34

According to the Taylor rule, if the central bank's announced inflation target is 2%, the current inflation rate is 2%, and output is 1% below the full-employment level, at what level should the central bank set the nominal interest rate?

A)1%
B)2%
C)3)5%
D)4%
E)5)5%

Question 35

If a central bank wants to make sure that its policy actions are successful in manipulating interest rates to stabilize the economy around its full-employment level it should

A)be prepared to make modest and frequent adjustments after receiving feedback on how its actions affect the economy
B)never announce its intentions, because financial markets will always overreact
C)frequently change its policies to keep financial markets guessing
D)react to excess inflation but not to economic booms
E)all of the above

Question 36

A central bank that follows the Taylor rule

A)will not react to economic disturbances until its full effects are felt
B)assumes there is no tradeoff between unemployment and inflation
C)keeps the growth rate of money supply constant
D)sets interest rates based on current economic conditions
E)will start selling government bonds as soon as interest rates start to rise

Question 37

If a central bank follows an activist monetary policy rule,

A)full employment can always be maintained with little or no inflation
B) financial markets always need advance notice of any policy change so the central bank does not lose its credibility
C)the focus is generally on expected future economic conditions while current economic conditions are ignored
D)the focus is generally on the long-run inflation rate with little concern about unemployment
E)none of the above

Question 38

Slowing economic activity by increasing interest rates will generally be successful since

A)investment spending will be reduced
B)spending on durable goods will be reduced
C)aggregate supply will decrease
D)all of the above
E)only A and B

Question 39

The Taylor rule

A)allows for strict inflation targeting as long as the output coefficient is zero
B)should only be followed if the economy is growing strongly
C)suggests changes in money growth in response to changes in the inflation rate
D)does not allow for strict inflation targeting
E)implies a strict monetary growth rule

Question 40

The Taylor rule

A)is an activist monetary policy rule
B)states that monetary growth should be decreased by 1% for every 1.5% increase in inflation
C)states that real interest rates should be increased by 0.5% for every 1% increase in inflation
D)both A and B
E)both A and C

Question 41

Assume the current inflation rate is 2.4% and output is at the full-employment level.If the central bank has set nominal interest rates at 5.6%, what is the central bank's inflation target if it follows the Taylor rule?

A)0%
B)1%
C)2%
D)3%
E)4%

Question 42

According to the Taylor rule, if the central bank announced a zero percent inflation target but the current inflation rate is 2% and output is at the full-employment level, at what level should the central bank set the nominal interest rate?

A)1%
B)2%
C)3%
D)4%
E)5%

Question 43

According to the Taylor rule, if the central bank announced a zero percent inflation target but the current inflation rate is 2% and output is 2% below the full-employment level, at what level should the central bank set the nominal interest rate?

A)1%
B)2%
C)3%
D)4%
E)5%

Question 44

Short-run monetary policy changes should

A)ignore any fiscal policy changes that the administration has implemented
B)allow for modest adjustments once feedback from previous changes is available
C)never be implemented if uncertainty exists about the exact effects on key variables
D)requires the central bank to stick to its announced policy target no matter what
E)none of the above

Question 45

According to the Taylor rule, if the current inflation rate is 3.2%, output is 1% above the full-employment level, and the central bank's announced inflation target is 2%, at what level should the central bank set the nominal interest rate?

A)2)2%
B)3)3%
C)4)4%
D)5)8%
E)6)3%

Question 46

Assume the central bank announced a 2% inflation target and has set the nominal interest rate at 5.0%.If actual inflation is 2.8%, by how much is output off the full-employment level?

A)-1.2%
B)-0.8%
C)-0.4%
D)+0.4%
E)+1.2%

Question 47

Assume the central bank's announced inflation target is 2%, output is 2% below the full-employment level, and the Taylor rule suggests that the central bank sets the nominal interest rate at 4.5%.What is most likely the current inflation rate?

A)3)0%
B)3)6%
C)4)0%
D)4)5%
E)6)0%

Question 48

If a central bank engages in inflation targeting, then

A)it will not change interest rates in response to output fluctuations
B)it will change interest rates aggressively as soon as inflation or output changes
C)it will lower interest rates aggressively as soon as inflation heats up
D)it will increase interest rates aggressively as soon as aggregate supply increases
E)none of the above

Question 49

In the Taylor rule, if the inflation coefficient ? is much larger than the output coefficient ?, then the central bank

A)is mostly concerned with maintaining full-employment
B)will raise interest rates more aggressively when output declines than when inflation heats up
C)will lower interest rates more aggressively when output declines than when inflation heats up
D)is engaging in strict inflation targeting
E)none of the above

Question 50

Assume a central bank announced a zero percent inflation target.If the current inflation rate is 2.4%, and output is at the full-employment level, at what level should the central bank set the nominal interest rate according to the Taylor rule?

A)1)2%
B)1)8%
C)2)4%
D)3)0%
E)3)6%