Deck 11: Monetary Policy Debates

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

A)1.0%.
B)1.5%.
C)2.0%.
D)2.5%.

Answer 1

B

Question 2

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

A)An initial function of financing government spending; current primary goal of price stability.
B)An initial function of stabilizing the economy; current primary goal of preventing asset bubbles.
C)An initial goal of controlling inflation; current primary goal of achieving economic growth.
D)An initial function as "lender of last resort;" current primary goal of regulating financial markets.

Answer 2

A

Question 3

The academic literature on central bank independence shows

A)a strong negative correlation between independence and inflation.
B)mixed results with some studies showing a negative correlation between central bank independence and inflation and other studies showing a positive correlation.
C)a strong positive correlation between independence and inflation.
D)absolutely no relationship between independence and inflation.

Answer 3

B

Question 4

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

A)inflation was well under control.
B)there was a fairly good link between M1, M2, and inflation.
C)business cycles were fairly predictable.
D)M1 and M2 were easy to measure and report.

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

A)1.0%.
B)1.5%.
C)2.0%.
D)2.5%.

Question 6

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

A)information and impact
B)excess reserve and money supply
C)meeting and analysis
D)information and analysis

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

A)chairperson should be an elected position.
B)primary focus should be on price stability.
C)regulatory authority should be strengthened.
D)independence should be limited.

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

A)$1,000.
B)$50 per hour.
C)20 hours of work.
D)not enough information to tell.

Question 9

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

A)worse; increased
B)better; increased
C)worse; decreased
D)better; decreased

Question 10

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

A)sacrifice its focus on regulation.
B)lose sight of its responsibility as a lender of last resort.
C)neglect the goal of stable prices.
D)become subject to greater influence by the executive branch of government.

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?

A)Central banks would need to enforce regulations at commercial banks regarding environmental goals.
B)Central banks would need to develop sustainability targets as their new primary goal.
C)Central banks would need to develop sustainability targets and create new policy tools to meet those targets.
D)Central banks would need to develop sustainability targets and governments would create new policy tools to meet those targets.

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

A)that it requires perfect foresight on the part of the Federal Reserve because of the lagged impact of monetary policy instruments.
B)determining what that target should be.
C)that it puts too much emphasis on stable prices over other possible goals for monetary policy.
D)determining which measure of inflation to use.

Question 13

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

A)Price level targeting
B)Inflation targeting
C)A combination of price level targeting and inflation targeting
D)Price level targeting and high employment goals

Question 14

Which of these is an advantage of inflation rate targeting?

A)Inflation rates are easy to measure and forecast.
B)There is almost no lag in inflation rate data.
C)It allows the Federal Reserve an optimal amount of flexibility in conducting monetary policy.
D)It reduces inflationary expectations.

Question 15

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

A)Maintaining stable interest rates in the face of a fluctuating demand for money is not really within the capabilities of the Fed.
B)Keeping interest rates fixed for too long can actually lead to a financial crisis.
C)Stable exchange rates between nations that are very different may be problematic in the long run.
D)Stable exchange rates can rarely be expected to lead to higher levels of global trade.

Question 16

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

A)politicians may want to pursue monetary policies that are bad in the short run but good in the long run.
B)politicians may want to pursue monetary policies that are good in the short run but bad in the long run.
C)politicians may take too long to decide on the direction of monetary policy.
D)conducting both monetary policy and fiscal policy as part of the political process may produce inconsistent results.

Question 17

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

A)cyclical
B)frictional
C)structural
D)seasonal

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.

A)Great Depression
B)inflation of the 1970s
C)inflation of the 1990s
D)Great Recession

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?

A)Greenspan used explicit inflation targeting and met many inflation goals; inflation stayed relatively low and recessions were modest.
B)Greenspan used implicit inflation targeting to stop inflation before it began; inflation stayed relatively low and recessions were modest.
C)Greenspan used implicit inflation targeting to stop inflation before it began; inflation was relatively high, nonetheless.
D)Greenspan used explicit inflation targeting but met few inflation goals; inflation was relatively high.

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

A)3.75%.
B)2.5%.
C)2.75%.
D)3.25%.

Question 21

Having to deal with the political process slows the conduct of monetary policy.

Question 22

The Mankiw Rule works well to fit the data for US monetary policy during the 1990s, but it doesn't work as well starting in the first decade of the twenty-first century.

Question 23

Suppose the current real federal funds rate in the economy is 1.5%, the current inflation rate is 3.0%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is 1.0%. The Taylor Rule would suggest that the Federal Reserve's target federal funds rate should be

A)0.0%.
B)lower than the current federal funds rate.
C)about the same as the current federal funds rate.
D)much higher than the current federal funds rate.

Question 24

Responding to asset bubbles makes it plain that monetary policy must be made in a world full of

A)media scrutiny and political interference.
B)political pressure and uncertainty.
C)uncertainty and unpredictable market behaviors.
D)instant media scrutiny and the cyclical appearance of asset bubbles.

Question 25

According to Nobel Prize-winning economist Joseph Stiglitz, US monetary policy was largely understood before the Great Recession to be based on several generally accepted ideas, including the idea that there is no such thing as an asset bubble. Which of these did history show according to Stiglitz?

A)There was a brief period of Tulipmania in Holland and an eighteenth-century Mississippi Bubble in France, but no more recent examples
B)There was a stock market bubble in the United States in the 1920s, there was a Japanese asset bubble in the 1980s, and most recently, there was the dot-com asset bubble in the United States in the late 1990s.
C)The only true asset bubble, by any meaningful definition, was the stock market bubble of the 1920s.
D)The only true asset bubble, by any meaningful definition, was the Tulipmania that gripped Holland in the seventeenth century.

Question 26

A proposed alternative to the Taylor Rule is the Mankiw Rule, which uses what factors to determine what the federal funds rate should be?

A)the consumer price index core inflation rate over the past 5 years
B)the consumer price index core inflation rate over the previous 12 months
C)the consumer price index core inflation rate over the previous 12 months and the seasonally adjusted unemployment rate
D)the consumer price index core inflation rate over the past 5 years and the seasonally adjusted unemployment rate

Question 27

Describe the various types of unemployment. Which is most amenable to influence from monetary policy?

Question 28

Some would argue that it is better to "clean up" the economic fallout after an asset bubble breaks than to interfere with markets beforehand. The economist Joseph Stiglitz argues that this is ill-advised because

A)financial markets will behave irrationally.
B)uncertainty makes such attempts impossible.
C)the attempt to do so immediately following the Great Recession was insufficient to the task.
D)the Federal Reserve lacks the necessary tools.

Question 29

Illustrate why deflation can be a serious economic problem.

Question 30

The first significant risk in addressing climate change involves the costs associated with taking actions to reduce carbon emissions and other forms of pollution. Insurers also face financial risk as affected households and businesses that suffer climate-related losses seek compensation. What are some policy tools that central banks might use to mitigate these risks?

Question 31

A rational market is one in which all participants use all of the available information to make predictions about the future and market participants learn from and adjust to their mistakes.

Question 32

Suppose the current real federal funds rate in the economy is 2.0%, the current inflation rate is 1.0%, 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

A)4.0%.
B)4.5%.
C)5.0%.
D)5.5%.

Question 33

In application, the use of the Taylor Rule produces a variety of results, due to different measures of inflation, GDP level, and differing weights placed on the output and inflation gaps.

Question 34

Economist Joseph Stiglitz has argued that, at the time of the Great Recession, the conduct of monetary policy in the United States focused on six generally accepted principles, including which of these as one of the more important?

A)Price stability is a necessary and almost sufficient condition for economic stability
B)Of the twin evils of unemployment and inflation, inflation is the more important on which to focus
C)Inflation is always and everywhere a monetary phenomenon
D)Asset bubbles are a rare occurrence in market economies

Question 35

In the Taylor Rule formulation for setting a federal funds target rate, a negative output gap means that the

A)output in the economy is below the economy's potential output.
B)output in the economy is above the economy's potential output.
C)economy is operating at its full employment level.
D)economy is operating above its full employment level.