Deck 17: Monetary Policy: Goals and Tradeoffs

Question 1

The time it takes from when a policy is enacted to when it affects the economy is known as the______ lag.

A)implementation
B)recognition
C)effectiveness
D)decision

Answer 1

effectiveness

Question 2

A decrease in the money supply is an example of a(n)_____ policy.

A)countercyclical
B)procyclical
C)contractionary
D)expansionary

Answer 2

contractionary

Question 3

The Fed uses_____ monetary policy to cause the economy to grow faster in the short run.A(n)_____ In the money supply is an example of such a policy.

A)expansionary; decrease
B)expansionary; increase
C)contractionary; increase
D)contractionary; decrease

Answer 3

expansionary; increase

Question 4

The lag between when a change in policy is decided and when it is put into action is referred to as the _____lag.

A)implementation
B)recognition
C)effectiveness
D)decision

Question 5

Monetary policy can affect the level of output

A)only in the short run.
B)only in the long run.
C)in both the short run and long run.
D)in neither the short run nor the long run.

Question 6

In the U.S., data on potential output come from

A)estimates made by the Congressional Budget Office.
B)data calculated by the Bureau of Trade.
C)estimates generated by the National Bureau of Economic Research.
D)forecasts from the United Nations Development Program.

Question 7

In case of business cycles, if output rises above the trend line

A)unemployment and inflation both rise.
B)unemployment and inflation both fall.
C)unemployment rises and inflation falls.
D)unemployment falls and inflation rises.

Question 8

When the Fed adopts a contractionary monetary policy, the interest rate at which the Fed lends to other banks will be expected to _____and the money supply in the economy would be expected to _____.

A)decrease; decrease
B)decrease; increase
C)increase; decrease
D)increase; increase

Question 9

In comparison to when monetary policy is not contractionary, under a contractionary monetary policy, the unemployment rate is____ and the inflation rate is____ over time.

A)higher; higher
B)higher; lower
C)lower; lower
D)lower; higher

Question 10

The lag that arises because it takes time for policymakers to choose a course of action is referred to as the _____lag.

A)implementation
B)recognition
C)effectiveness
D)decision

Question 11

The lag that arises because policymakers may not immediately get up-to-date statistics on economic variables is known as the_____ lag.

A)implementation
B)recognition
C)data
D)decision

Question 12

The longest economic expansion in U.S.history occurred from

A)1929 to 1939.
B)1956 to 1966.
C)1970 to 1980.
D)1991 to 2001.

Question 13

The Fed uses____ monetary policy to cause the economy to grow slower in the short run.A(n)_____ In the money supply is an example of such a policy.

A)expansionary; a decrease
B)expansionary; an increase
C)contractionary; an increase
D)contractionary; a decrease

Question 14

The lag that arises because the random nature of economic data may make it difficult for policy makers to fully understand the state of the economy is referred to as the_____ lag.

A)implementation
B)recognition
C)effectiveness
D)decision

Question 15

The unemployment rate when the economy is producing output equal to its potential is known as

A)the rate of disguised unemployment.
B)the potential rate of unemployment.
C)the natural rate of unemployment.
D)equilibrium rate of unemployment.

Question 16

The amount of output that would be produced by an economy if resources were being utilized at a high rate that is sustainable in the long run is referred to as the

A)potential output.
B)natural output.
C)Walrasian output.
D)partial-equilibrium output.

Question 17

In case of business cycles, if output falls below the trend line

A)unemployment and inflation both rise.
B)unemployment and inflation both fall.
C)unemployment rises and inflation falls.
D)unemployment falls and inflation rises.

Question 18

When the Fed uses its policy tools to smooth out the business cycle, the policy is referred to as a(n)

A)stabilization policy.
B)Pareto-efficient policy.
C)contractionary policy.
D)expansionary policy.

Question 19

In comparison to when monetary policy is not expansionary, under an expansionary monetary policy, the unemployment rate is ____and the inflation rate is_____ over time.

A)higher; higher
B)higher; lower
C)lower; lower
D)lower; higher

Question 20

An increase in the money supply is an example of a(n)_____ policy.

A)countercyclical
B)procyclical
C)contractionary
D)expansionary

Question 21

Which of the following statements is true?

A)Both expansionary and contractionary monetary policy has the drawback of increasing unemployment.
B)Both expansionary and contractionary monetary policy has the drawback of increasing inflation.
C)Expansionary monetary policy has the drawback of increasing unemployment, while contractionary monetary policy has the drawback of increasing inflation.
D)Expansionary monetary policy has the drawback of increasing inflation, while contractionary monetary policy has the drawback of increasing unemployment.

Question 22

If actual output is denoted y and potential output is denoted y*, the output gap is

A)[(y − y*)/ y*] × 100.
B)[(y − y*)/ y] × 100.
C)[(y* − y)/ y*] × 100.
D)[(y* − y)/ y] × 100.

Question 23

Okun's Law relates

A)the unemployment gap and the inflation rate.
B)the unemployment gap and the inflation gap.
C)the inflation gap and the output gap.
D)the unemployment gap and the output gap.

Question 24

A graph plotting the real value of a mortgage payment over time when the inflation rate is positive and the mortgage is a standard nominal-rate loan illustrates the

A)present-value formula.
B)securitization issue.
C)real-interest rate conundrum.
D)mortgage-tilt problem.

Question 25

The cost that firms incur to change prices is referred to as

A)​menu costs.
B)​inflation tax.
C)​pseudo costs.
D)​transaction costs.

Question 26

Which of the following is NOT a cost of anticipated inflation but arises only if inflation is unanticipated?

A)Inflation interacts with the tax system to hurt savings and investment in physical capital.
B)Inflation represents an implicit tax on holding money.
C)Firms face menu costs of changing prices.
D)Higher inflation leads to greater uncertainty about the future inflation rate.

Question 27

Since 1960, in which of the following years was the output gap highest in the U.S.?

A)1970.
B)1975.
C)1982.
D)2001.

Question 28

Which of the following statements is true of the U.S.economy?

A)In the second half of the 1960s, the output gap was mostly negative while in the first half of the 1990s, the output gap was mostly positive.
B)In the second half of the 1960s, the output gap was mostly positive while in the first half of the 1990s, the output gap was mostly negative.
C)In the second half of the 1960s and the first half of the 1990s, the output gap was mostly negative.
D)In the second half of the 1960s and the first half of the 1990s, the output gap was mostly positive.

Question 29

If potential output is $22.7 trillion and the output gap is 12.8%, then actual output is

A)14.2 trillion.
B)16 trillion.
C)19.8 trillion.
D)20.6 trillion.

Question 30

If the natural rate of unemployment is 5.2 percent and the unemployment rate is 5.5 percent, then the unemployment gap is

A)−5.8 percent.
B)−0.3 percent.
C)+0.3 percent.
D)+5.8 percent.

Question 31

Typically, the ideal inflation rate is taken to be

A)increasing over time.
B)decreasing over time.
C)positive and constant over time.
D)zero percent.

Question 32

​If the actual inflation rate in an economy is 6% and the ideal inflation rate is 4%, the inflation gap in the economy is

A)​­2%.
B)​­4%.
C)​2%.
D)​6%.

Question 33

In an economy, the actual inflation rate is increasing while the ideal inflation rate is constant.In such a case, the inflation gap in the economy will

A)increase over time.
B)decrease over time.
C)stay the same.
D)initially decrease then increase.

Question 34

If the mortgage-tilt problem does not exist in an economy, it implies that the_____ rate in the economy is zero percent.

A)inflation
B)unemployment
C)interest
D)average tax

Question 35

The ideal inflation rate is also referred to as the

A)steady state inflation rate.
B)NAIRU.
C)inflation target.
D)minimal inflation rate.

Question 36

If actual output is $11.7 trillion and potential output is $12.8 trillion, then the output gap is approximately

A)+9.4 percent.
B)+8.6 percent.
C)−8.6 percent.
D)−9.4 percent.

Question 37

​In case of positive inflation rates,

A)​both borrowers and lenders of fund lose out.
B)​​both borrowers and lenders of fund gain.
C)​lenders of funds gain, while borrowers lose out.
D)​borrowers of funds gain, while lenders lose out.

Question 38

The unemployment rate minus the natural rate of unemployment is known as the

A)nominal rate of unemployment.
B)ideal unemployment rate.
C)unemployment gap.
D)non-accelerating inflation rate of unemployment (NAIRU).

Question 39

​In the U.S., the output gap is equal to

A)​­1 time the unemployment gap.
B)​­2 times the unemployment gap.
C)1 time the unemployment gap.
D)2 times the unemployment gap.

Question 40

If the natural rate of unemployment is 5.2 percent and the unemployment gap is -0.8 percent, then the unemployment rate must be

A)0.8 percent.
B)1.6 percent.
C)3.2 percent.
D)4.4 percent.

Question 41

Describe the three major costs of unanticipated inflation and give an example of each.

Question 42

An equation that sums the squared output gap to the squared inflation gap, with a weight that determines the tradeoff between them is referred to as the

A)Fed's objective function.
B)cost of disinflation.
C)Sharpe ratio.
D)Phillips equation.

Question 43

The Phillips curve, modified with the addition of expected inflation into the analysis, is known as

A)the expectations-augmented Phillips curve.
B)the long-run Phillips curve.
C)the inflation-surprise theory.
D)the Phillips-curve non-accelerating inflation theory of unemployment.

Question 44

What are the five major costs of anticipated inflation?

Question 45

​If the ideal inflation rate in an economy is 3% and the inflation gap is 8%, the actual inflation rate in the economy must be

A)3%.
B)5%.
C)8%.
D)11%.

Question 46

The equation for the Phillips curve in an economy is ? = ?^e ? 0.5(U ? 5),
If the inflation rate is 2 percent and the expected inflation rate is 4 percent, the unemployment rate in the economy must be

A)3.0 percent.
B)4.5 percent.
C)8.0 percent.
D)9.0 percent.

Question 47

An equation that summarizes the total cost to the economy when output differs from potential and inflation rate differs from the ideal inflation rate is referred to as the

A)cost of disinflation.
B)Fed's objective function.
C)Sharpe ratio.
D)Phillips curve.

Question 48

The Fed's loss function is another name for the Fed's

A)expense ratio.
B)objective function.
C)inflation gap.
D)output gap.

Question 49

If the equation for the Phillips curve is ? = ?^e ? 0.5(U ? 5),
Then the natural rate of unemployment is

A)10 percent.
B)5 percent.
C)2.5 percent.
D)0.5 percent.

Question 50

Why is it difficult for policymakers to set policy based on the value of the unemployment rate relative to the natural rate of unemployment?

Question 51

Why is there an effectiveness lag for monetary policy?

Question 52

The equation for the Phillips curve in an economy is ? = ?^e ? 0.5(U ? 5),
If the inflation rate is 4 percent and the unemployment rate is 6 percent, then the expected inflation rate in the economy must be

A)2.5 percent.
B)4.0 percent.
C)4.5 percent.
D)5.0 percent.

Question 53

The tradeoff in the data between unemployment and inflation is represented by the

A)Taylor rule.
B)Say's law.
C)Okun's law.
D)Phillips curve.

Question 54

Describe the lags in the policymaking process and how they might lead to instability.

Question 55

The inflation surprise is defined as

A)the sum of the natural rate of unemployment and the ideal inflation rate.
B)the difference between the actual inflation rate and the expected inflation rate.
C)the expected inflation rate in an economy multiplied by the population of the economy.
D)the non-accelerating inflation rate of unemployment (NAIRU).

Question 56

​The misery index is the sum of the

A)unemployment rate and the output gap.
B)unemployment gap and the output gap.
C)​​​unemployment gap and the inflation gap.
D)unemployment rate and the inflation rate.