Deck 25: Monetary Policy Theory

Question 1

In the new classical model,an unanticipated increase in the money supply causes ________.

A) the aggregate demand curve to shift to the right along a stationary aggregate supply curve
B) both the aggregate demand and supply curves to shift simultaneously to the right
C) the aggregate demand curve to shift to the right as the aggregate supply curve simultaneously shifts to the left
D) both the aggregate demand and supply curves to shift simultaneously to the left

Answer 1

A

Question 2

In the new classical model,an anticipated increase in the money stock will cause ________.

A) the price level and aggregate output to increase
B) aggregate output to increase
C) the price level to increase
D) no effect on either the price level or aggregate output

Answer 2

C

Question 3

If a rise in the expected price level results in an immediate and equal rise in wages and prices,then an expansionary monetary policy will cause ________.

A) the aggregate demand curve to shift to the right, and output to increase only if the policy is anticipated
B) the aggregate demand curve to shift to the right, and output to increase only if the policy is unanticipated
C) a decline in the price level
D) both B and C of the above

Answer 3

B

Question 4

The new classical model has the word classical associated with it because,when an increase in the money supply is anticipated,________.

A) aggregate output drops below the natural rate level
B) aggregate output rises above the natural rate level
C) aggregate output remains at the natural rate level
D) aggregate output increases in the short run, but not in the long run

Question 5

In the new classical model,an anticipated policy of a continually increasing money supply ________.

A) causes the aggregate demand curve to shift continually to the right
B) causes the aggregate demand curve to shift continually to the left
C) is shown as a movement along the aggregate demand curve
D) both b and C of the above

Question 6

According to the new classical model,________.

A) unanticipated policy has no effect
B) only anticipated policy can influence the business cycle
C) anticipated policy has no effect on the business cycle
D) both A and B of the above are true

Question 7

According to the new classical school of thought,a continually increasing money supply causes ________.

A) the aggregate demand curve to shift continually to the right, and the price level to increase continually
B) the aggregate supply curve to shift continually to the right, and the price level to increase continually
C) the long-run aggregate supply curve to shift continually to the right, and the price level to increase continually
D) both B and C of the above

Question 8

________ policies do not change aggregate real output or the unemployment in the ________ model.

A) Anticipated; new Keynesian
B) Unanticipated; new Keynesian
C) Anticipated; new classical
D) Unanticipated; new classical

Question 9

Steve the economist tells his students that one anticipated policy is just like any other-none has any effect on aggregate output.You can probably infer that he is a ________.

A) Keynesian economist
B) monetarist
C) proponent of activist policies
D) new classical economist

Question 10

In the new classical model,an unanticipated increase in the money supply will cause ________.

A) output to increase in the short run, but not in the long run
B) an increase in the price level
C) government budget deficits to increase
D) only A and B of the above

Question 11

In the new classical model,________.

A) all wages and prices are perfectly flexible with respect to expected changes in the price level
B) a fall in the expected price level results in an immediate and equal rise in wages and prices
C) only unanticipated policy can affect aggregate output and unemployment
D) Both A and C of the above

Question 12

In the new classical model,________.

A) wages and prices are sticky with respect to expected changes in the price level
B) unanticipated policy has no effect on aggregate output and unemployment
C) an anticipated increase in the money supply will increase aggregate output temporarily
D) only unanticipated policy can affect aggregate output and unemployment

Question 13

In the new classical model,________.

A) wages and prices are sticky with respect to expected changes in the price level
B) a rise in the expected price level results in an immediate and equal rise in wages and prices
C) an anticipated increase in the money supply will increase aggregate output temporarily
D) unanticipated policy has no effect on aggregate output and unemployment

Question 14

If all wages and prices are perfectly flexible with respect to expected changes in the price level,then an expansionary monetary policy will cause ________.

A) the aggregate demand curve to shift to the right, and output to increase only if the policy is anticipated
B) the aggregate demand curve to shift to the right, and output to increase only if the policy is unanticipated
C) an increase in the price level
D) both B and C of the above

Question 15

In the new classical model,________.

A) a rise in the expected price level results in an immediate and equal rise in wages and prices
B) anticipated policy has no effect on aggregate output and unemployment
C) unanticipated policy has no effect on aggregate output and unemployment
D) Only A and B of the above

Question 16

Non-activists believe that that expectations are ________ formed and that wages and prices are ________ with respect to the expected price level.

A) adaptively; completely flexible
B) adaptively; sticky
C) rationally; completely flexible
D) rationally; sticky

Question 17

In the new classical model,an anticipated policy of a continually increasing money supply causes ________.

A) the aggregate demand curve to shift right along a stationary aggregate supply curve, leading to continually increasing aggregate output and prices
B) the aggregate supply curve to shift left along a stationary aggregate demand curve, leading to continually contracting aggregate output and prices
C) the aggregate demand curve to shift continually to the right while simultaneously the aggregate supply curve shifts continually inward, leading to higher and higher price levels
D) the aggregate demand curve to shift continually to the left while simultaneously the aggregate supply curve shifts continually outward, leading to higher and higher price levels

Question 18

In the view of the new classical economists,an increase in the money supply will affect aggregate output and employment ________.

A) only if the increase in money supply is anticipated
B) only if the increase in money supply is expected
C) only if the increase in money supply is unanticipated
D) only if the increase in money supply is the result of an announced open market operation

Question 19

In the new classical model,an expansionary monetary policy causes ________.

A) the aggregate demand curve to shift to the right, and output to increase only if the policy is anticipated
B) the aggregate demand curve to shift to the right, and output to increase only if the policy is unanticipated
C) a decline in the price level
D) both B and C of the above

Question 20

An expansionary monetary policy will cause aggregate output to expand in the non-activist macroeconomic model ________.

A) if the policy is unanticipated
B) if the policy is anticipated
C) only after a long and variable lag, provided the policy is anticipated
D) never; output will never expand in the non-activist model when monetary policy is changed

Question 21

Figure 27-4
In the new classical model in Figure 27-4,an anticipated increase in aggregate demand that is less than expected ________.

A) moves the economy from point 1 to point 2 to point 3
B) moves the economy from point 1 to point 5 to point 3
C) moves the economy from point 1 to point 4 to point 3
D) moves the economy from point 1 to point 3

Question 22

Figure 27-3
In the new classical model in Figure 27-3,an anticipated contractionary monetary policy ________.

A) shifts the economy from point 1 to point 2 to point 3
B) shifts the economy from point 1 to point 4 to point 3
C) shifts the economy from point 1 to point 3
D) shifts the economy from point 3 to point 1

Question 23

In the new classical model,an expansionary monetary policy will lead to a decline in aggregate output if ________.

A) the increase in money supply is less than anticipated
B) the increase in money supply is greater than anticipated
C) the increase in money supply comes as a surprise
D) the Bank of Canada announces the policy decision prior to its implementation

Question 24

Figure 27-4
In the new classical model in Figure 27-4,the initial impact of an anticipated increase in aggregate demand that is less than expected ________.

A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y5, and increases the inflation rate from P1 to P5
C) decreases output from Yn to Y4, and increases the inflation rate from P1 to P4
D) does not change output and increases the inflation rate from P1 to P3

Question 25

Figure 27-3
In the new classical model in Figure 27-3,an unanticipated expansionary monetary policy ________.

A) shifts the economy from point 1 to point 2 to point 3
B) shifts the economy from point 1 to point 4 to point 3
C) shifts the economy from point 1 to point 3
D) shifts the economy from point 3 to point 1

Question 26

Figure 27-3
In the new classical model in Figure 27-3,an anticipated expansionary monetary policy ________.

A) shifts the economy from point 1 to point 2 to point 3
B) shifts the economy from point 1 to point 4 to point 3
C) shifts the economy from point 1 to point 3
D) shifts the economy from point 3 to point 1

Question 27

Figure 27-3
In the new classical model in Figure 27-3,the long-run effect of an unanticipated monetary expansion ________.

A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y4, and the inflation rate from P3 to P4
C) does not change output and increases the inflation rate from P1 to P3
D) does not change output and decreases the inflation rate from P3 to P1

Question 28

Demonstrate graphically and explain the short-run and long-run effects of an unanticipated monetary expansion in the new classical model.

Question 29

An important feature of the new classical model is that an expansionary policy,such as an increase in the rate of money growth,can lead to a decline in aggregate output ________.

A) if the public expects an even more expansionary policy than the one that is actually implemented
B) if the policy comes as a surprise
C) if the public expects a less expansionary policy than the one that is actually implemented
D) if the policy is anticipated

Question 30

Figure 27-4
In the new classical model in Figure 27-4,the long-run effects of an anticipated increase in aggregate demand that is less than expected ________.

A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y5, and increases the inflation rate from P1 to P5
C) does not change output and increases the inflation rate from P1 to P3
D) does not affect the levels of real output or inflation

Question 31

The policy ineffectiveness proposition ________.

A) asserts that anticipated changes in monetary policy cannot affect real aggregate output
B) does not rule out output effects from policy surprises
C) implies that an anticipated contractionary monetary policy cannot reduce the rate of inflation
D) Both A and B of the above

Question 32

Figure 27-3
In the new classical model in Figure 27-3,the initial impact of an unanticipated monetary expansion ________.

A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y4, and the inflation rate from P3 to P4
C) does not change output and increases the inflation rate from P1 to P3
D) does not change output and decreases the inflation rate from P3 to P1

Question 33

Figure 27-3
In the new classical model in Figure 27-3,the long-run effect of an unanticipated monetary contraction ________.

A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y4, and the inflation rate from P3 to P4
C) does not change output and increases the inflation rate from P1 to P3
D) does not change output and decreases the inflation rate from P3 to P1

Question 34

Figure 27-3
In the new classical model in Figure 27-3,the initial impact of an unanticipated monetary contraction ________.

A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y4, and the inflation rate from P3 to P4
C) does not change output and increases the inflation rate from P1 to P3
D) does not change output and decreases the inflation rate from P3 to P1

Question 35

Figure 27-3
In the new classical model in Figure 27-3,an anticipated monetary expansion ________.

A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y4, and the inflation rate from P3 to P4
C) does not change output and increases the inflation rate from P1 to P3
D) does not change output and decreases the inflation rate from P3 to P1

Question 36

Figure 27-3
In the new classical model in Figure 27-3,an unanticipated contractionary monetary policy ________.

A) shifts the economy from point 1 to point 2 to point 3
B) shifts the economy from point 1 to point 4 to point 3
C) shifts the economy from point 1 to point 3
D) shifts the economy from point 3 to point 4 to point 1

Question 37

Figure 27-3
In the new classical model in Figure 27-3,an anticipated monetary contraction ________.

A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y4, and the inflation rate from P3 to P4
C) does not change output and increases the inflation rate from P1 to P3
D) does not change output and decreases the inflation rate from P3 to P1

Question 38

The notion that anticipated monetary policy has no effect on the real aggregate output is commonly called the ________.

A) Lucas critique
B) policy ineffectiveness proposition
C) natural rate hypothesis
D) new Keynesian proposition

Question 39

The policy ineffectiveness proposition ________.

A) asserts that anticipated changes in monetary policy cannot affect real aggregate output
B) rules out output effects from policy surprises
C) implies that an anticipated contractionary monetary policy cannot reduce the rate of inflation
D) implies that an anticipated expansionary monetary policy will not cause the price level to rise

Question 40

Demonstrate graphically and explain the short-run and long-run effects of an anticipated monetary expansion in the new classical model.

Question 41

The recognition lag is ________.

A) the time it takes for policy makers to obtain data indicating what is happening in the economy
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy
C) the time it takes to pass legislation to implement a particular policy
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy
E) the time it takes for the policy actually to have an impact on the economy

Question 42

The time it takes to pass legislation to implement a particular policy is called ________.

A) the data lag
B) the recognition lag
C) the legislative lag
D) the implementation lag
E) the effectiveness lag

Question 43

Nonactivists of the policies believe that ________.

A) wages and prices are very flexible
B) the self-correcting mechanism is very rapid
C) government action is unnecessary
D) all of the above

Question 44

Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.

A) supply; less
B) supply; more
C) demand; less
D) demand; more

Question 45

The time it takes for the policy actually to have an impact on the economy is called ________.

A) the data lag
B) the recognition lag
C) the legislative lag
D) the implementation lag
E) the effectiveness lag

Question 46

The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called ________.

A) the data lag
B) the recognition lag
C) the legislative lag
D) the implementation lag
E) the effectiveness lag

Question 47

The effectiveness lag is ________.

A) the time it takes for policy makers to obtain data indicating what is happening in the economy
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy
C) the time it takes to pass legislation to implement a particular policy
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy
E) the time it takes for the policy actually to have an impact on the economy

Question 48

If aggregate output is below the natural rate level,activists of policies would recommend that the government ________.

A) do nothing
B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right
C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right
D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left

Question 49

The economist who proposed that,"Inflation is always and everywhere a monetary phenomenon" was ________.

A) John Maynard Keynes
B) John R Hicks
C) Milton Friedman
D) Franco Modigliani

Question 50

The legislative lag represents ________.

A) the time it takes for policy makers to obtain data indicating what is happening in the economy
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy
C) the time it takes to pass legislation to implement a particular policy
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy
E) the time it takes for the policy actually to have an impact on the economy

Question 51

Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon."

A) monetary
B) political
C) policy
D) budgetary

Question 52

The data lag is ________.

A) the time it takes for policy makers to obtain data indicating what is happening in the economy
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy
C) the time it takes to pass legislation to implement a particular policy
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy
E) the time it takes for the policy actually to have an impact on the economy

Question 53

If aggregate output is below the natural rate level,nonactivists of policies would recommend that the government ________.

A) do nothing
B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right
C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right
D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left

Question 54

The time it takes for policy makers to obtain data indicating what is happening in the economy is called ________.

A) the data lag
B) the recognition lag
C) the legislative lag
D) the implementation lag
E) the effectiveness lag

Question 55

In the new classical model,show graphically and explain how an expected monetary expansion that is less than expected reduces real output in the short run.What is the long-run result?

Question 56

The time it takes for policy makers to change policy instruments once they have decided on the new policy is called ________.

A) the data lag
B) the recognition lag
C) the legislative lag
D) the implementation lag
E) the effectiveness lag

Question 57

The implementation lag is ________.

A) the time it takes for policy makers to obtain data indicating what is happening in the economy
B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy
C) the time it takes to pass legislation to implement a particular policy
D) the time it takes for policy makers to change policy instruments once they have decided on the new policy
E) the time it takes for the policy actually to have an impact on the economy

Question 58

The nonactivists who opposed the recent fiscal stimulus package argue that ________.

A) fiscal stimulus would take too long to work because of long implementation lags
B) fiscal stimulus might kick in after the economy had already recovered
C) fiscal stimulus could lead to increased volatility in inflation and economic activity
D) all of the above
E) none of the above

Question 59

Activists of the policies believe that ________.

A) the self-correcting mechanism through wage and price adjustment is very slow
B) wages and prices are sticky
C) the government needs to pursue active policy to eliminate high unemployment when it develops
D) all of the above

Question 60

The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand,thereby strengthening the case for ________.

A) supply-side policy
B) nonactivists
C) activists
D) demand-management policy

Question 61

The combination of a successful wage push by workers and the government's commitment to high employment leads to ________.

A) demand-pull inflation
B) supply-side inflation
C) supply-shock inflation
D) cost-push inflation

Question 62

Because policies in Canada were too expansionary from 1965 through 1973,Canada suffered ________.

A) demand-pull inflation
B) cost-push inflation, as workers sought higher wages in order to keep up with inflation
C) both demand-pull and cost-push inflation
D) neither demand-pull nor cost-push inflation

Question 63

Which of the following is most likely to lead to inflationary monetary policy?

A) Declining oil prices
B) Resolution of conflict in the Middle East
C) The enactment of a free-trade agreement with Mexico
D) Rising unemployment

Question 64

If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages,then workers will not fear higher unemployment and their wage demands will result in ________.

A) demand-pull inflation
B) hyperinflation
C) deflation
D) cost-push inflation

Question 65

If workers do not believe that policymakers are serious about fighting inflation,they are most likely to push for higher wages,which will ________ aggregate ________ and lead to unemployment or inflation or both,everything else held constant.

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

Question 66

Which of the following is most likely to lead to inflationary monetary policy?

A) Declining oil prices
B) Resolution of conflict in the Middle East
C) The enactment of a free-trade agreement with Mexico
D) Rising government budget deficits

Question 67

Why a cost-push inflation is a monetary phenomenon? Use the appropriate graph to support your answer.

Question 68

If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment,this can set the stage for a higher rate of money growth and ________.

A) cost-push inflation
B) demand-pull inflation
C) cost-pull inflation
D) demand-push inflation

Question 69

Demand-pull inflation can result when ________.

A) policymakers set an unemployment target that is too high
B) a persistent budget deficit is financed by selling bonds to the public
C) a persistent budget deficit is financed by selling bonds to the central bank
D) workers get numerous wage increases

Question 70

Evidence that examines whether one variable has an effect on another by simply looking directly at the relationship between the two variables is ________.

A) reduced-form evidence
B) organizational-model evidence
C) direct-model evidence
D) structural-model evidence

Question 71

To say that inflation is a monetary phenomenon seems to beg the question: ________.

A) Why does inflationary monetary policy occur?
B) Why do politicians seek reelection?
C) Why is the Fed independent?
D) Why does the US Treasury print so much money?

Question 72

At first cut,the simple solution to fighting inflation is ________.

A) reducing the growth rate of the money supply
B) limiting the number of terms that politicians can serve in elective office
C) returning the economy to barter by prohibiting the use of fiat money
D) to impose price controls on businesses that attempt to raise prices

Question 73

Evidence that is based on a variable having its effect on another variable through channels rather than a direct effect is known as ________.

A) indirect-model evidence
B) organizational-model evidence
C) reduced-form evidence
D) structural-model evidence

Question 74

A ________ model is one that describes how ________.

A) structural; the economy works
B) structural; prices change
C) simple; the economy works
D) analytical; prices change

Question 75

Theoretically,one can distinguish a demand-pull inflation from a cost-push inflation by comparing ________.

A) how fast prices rise relative to wages
B) the unemployment rate with its natural rate level
C) when prices rise relative to wages
D) government debt to real GDP

Question 76

Which of the following is least likely to lead to inflationary monetary policy?

A) Rising unemployment
B) Expanding federal budget deficits
C) Declining oil prices
D) Conflict in the Middle East

Question 77

"How do we prevent the inflationary fire from igniting again and stop the roller coaster ride in the inflation rate of the last 40 years?" Milton Friedman's famous proposition suggests the simple solution: ________.

A) reduce the number of terms that politicians are allowed to serve
B) reduce the growth rate of the money supply
C) reduce the marginal tax rate on low-income wage earners
D) increase the marginal tax rates on businesses that hike prices in excess of 5 percent per year

Question 78

Explain and show graphically why continuous monetary growth is needed to generate inflation.Describe how the inflation process is generated.

Question 79

Milton Friedman's proposition that inflation is always and everywhere a monetary phenomenon holds only if ________.

A) government budget deficits do not rise continually
B) the unemployment rate does not rise continually
C) the inflation rate rises continually
D) Canada does not experience more than one negative supply shock per decade

Question 80

Milton Friedman's proposition concerning the cause of inflation implies a simple solution to the inflation problem: ________.

A) reduce government budget deficits
B) limit the ability of fiscal policymakers to bring pressure to bear on the monetary authority
C) limit the number of terms that politicians are allowed to serve
D) reduce the growth rate of the money supply