Question 1

A clear-cut "rules versus discretion" debate is no longer possible because those economists advocating rules for ________, such as ________, must leave the Fed with plenty of discretionary power.
A) policy instruments, the money supply
B) policy instruments, the inflation rate
C) target variables, the money supply
D) target variables, the inflation rate

Accepted Answer

Advocates of rules for target variables, such as the inflation rate, must leave the Fed with some discretionary power to respond to unforeseen events or changes in economic conditions. Therefore, a clear-cut "rules versus discretion" debate is no longer possible.

Question 2

The longest lag monetary policy suffers is the ________ lag.
A) data
B) recognition
C) legislative
D) transmission
E) effectiveness

Accepted Answer

The answer of The longest lag monetary policy suffers is...

Question 3

With lags in monetary policy, an effective expansionary policy must be initiated many months ________ the start of the economic downturn it is intended to moderate, and this requires ________ economic forecasts.
A) before, generating accurate
B) before, ignoring
C) after, generating accurate
D) after, ignoring

Accepted Answer

An effective expansionary policy must be initiated before the start of the economic downturn it is intended to moderate. The lag in monetary policy means that an expansionary policy takes time to have an impact, so it must be initiated many months before the downturn. In order to do this effectively, accurate economic forecasts are necessary. Therefore, choice A (before, generating accurate) is the best answer.

Question 4

Suppose that the central bank operates under a money supply growth rule, but with changes in the unemployment rate automatically adjusting the money growth target. This is called a ________ rule.
A) CGRR
B) discretionary
C) feedback
D) nominally-anchored

Accepted Answer

A feedback rule adjusts the policy target in response to changes in economic conditions, such as the unemployment rate in this case. It is distinct from a discretionary rule, where policymakers have more discretion in setting policy targets, and a nominally-anchored rule, where the policy target is based solely on a nominal anchor such as an inflation target. CGRR is not a commonly used term in monetary policy.

Question 5

Gordon's plots of the effectiveness lags of monetary policy over the periods 1961-1975, 1976-1990, and 1991-2007 show the effectiveness lags have become ________ and the overall response of GDP to monetary policy has ________.
A) shorter, decreased
B) shorter, increased
C) longer, decreased
D) longer, increased

Accepted Answer

Gordon's plots show that the effectiveness lags of monetary policy have become longer over time, and the overall response of GDP to monetary policy has decreased.

Question 6

The switch to flexible exchange rates in 1973 has made the effect of monetary policy on net exports a ________ important component of the monetary policy multiplier process, and thus has ________ the effectiveness lag.
A) more, lengthened
B) more, shortened
C) less, lengthened
D) less, shortened

Accepted Answer

The switch to flexible exchange rates in 1973 made the effect of monetary policy on net exports more important because changes in interest rates can influence the exchange rate, which can then affect exports and imports. This increased importance of net exports in the monetary policy multiplier process has lengthened the effectiveness lag because it takes time for changes in the exchange rate to affect net exports.

Question 7

"Monetarism" advocates a monetary policy
A) at the full discretion of the Fed.
B) that fixes the growth rate of money.
C) that fixes a constant short-term interest rate.
D) that fixes the growth rate of real GDP.
E) that fixes the unemployment rate.

Accepted Answer

Monetarism advocates for a monetary policy that fixes the growth rate of money in order to achieve long-term economic stability and growth. This is based on the idea that the overall health of the economy is determined by the amount of money in circulation, and that controlling the growth rate of money can help to control inflation and promote economic growth. Monetarism does not advocate for fixing short-term interest rates, real GDP, or the unemployment rate.

Question 8

What is the only policy instrument the Fed really can control directly and precisely?
A) short-term interest rates
B) the money supply
C) high-powered money
D) corporate tax rates

Accepted Answer

The Federal Reserve directly and precisely controls high-powered money, also known as the monetary base, which includes currency in circulation and reserves held at the Fed. This control is exercised through open market operations and other monetary policy tools.

Question 9

The Fed has the least degree of discretion and the least to do under a policy rule setting
A) the growth rate of money.
B) the growth rate of high-powered money.
C) the Federal funds rate.
D) nominal GDP.

Accepted Answer

The answer of The Fed has the least degree of...

Question 10

Economists who really do want to take discretion away from the Fed, by imposing rules on ________, face the problem of ________.
A) policy instruments, the Fed requiring discretion to adhere to the rule
B) policy instruments, slippages between instruments and target variables
C) target variables, the Fed requiring discretion on how to achieve the rule
D) target variables, slippages between instruments and target variables

Accepted Answer

If economists want to impose rules on policy instruments to take away the Fed's discretion, they face the problem of slippages between the chosen instruments and the desired target variables. This means that while rules can provide more predictability and reduce uncertainty, they can also be too rigid and unable to adapt to changing economic conditions, causing unintended consequences. Therefore, finding the right balance between rules and discretion is essential for effective monetary policy.

Question 11

The deregulation of thrift institutions in the 1970s and 1980s have made their deposits and thus their ability to finance mortgages ________ sensitive to movements in the market interest rate, thus ________ the monetary policy multiplier.
A) more, raising
B) more, lowering
C) less, raising
D) less, lowering

Accepted Answer

Deregulation made thrift institutions more sensitive to interest rate changes, which means they now have less ability to finance mortgages. This results in a lowering of the monetary policy multiplier.

Question 12

A believer in the need for a CGRR of the money supply policy must be ________ about the ability of the private economy to self-stabilize and ________ about the accuracy of discretionary stabilization policy.
A) optimistic, optimistic
B) optimistic, pessimistic
C) pessimistic, optimistic
D) pessimistic, pessimistic

Accepted Answer

A believer in a CGRR of the money supply policy assumes that discretionary stabilization policy can be inaccurate, leading to potentially harmful macroeconomic outcomes. Therefore, they would be pessimistic about the accuracy of discretionary stabilization policy. However, by supporting a CGRR policy, they are optimistic that the private economy can self-stabilize to some extent.

Question 13

Monetary policy has one clear advantage over fiscal policy by virtue of its very short
A) data lag.
B) data and recognition lags.
C) legislative and transmissions lags.
D) effectiveness lag.

Accepted Answer

The answer of Monetary policy has one clear advantage over...

Question 14

Data indicate that the economy's response to monetary policy became noticeably weaker and more stretched out during
A) 1961-75
B) 1976-90
C) 1991-2007
D) None of the above. The response has grown stronger and shorter.

Accepted Answer

The period from 1991 to 2007 is characterized by a noticeable weakening and elongation in the economy's response to monetary policy, partly due to structural changes in the economy and financial system, including globalization, technological advancements, and changes in financial regulation.

Question 15

Monetarists believe that there is a ________ link between money supply growth and target variables and that the public is ________ in movements in the money supply.
A) strong, interested
B) strong, disinterested
C) tenuous, interested
D) tenuous, disinterested

Accepted Answer

Monetarists argue that changes in the money supply have a direct and strong impact on the economy, affecting variables such as inflation, output, and employment. They also believe that the public is rational and pays close attention to changes in the money supply, adjusting their spending and investing behavior accordingly. Therefore, monetarists view the relationship between money supply growth and target variables as significant and relevant to economic analysis.

Question 16

The Canadian experience with inflation and unemployment in the early 1990s has this to say about policy rules:
A) a central bank independent of political pressure may thereby not be serving the public's politically-revealed preferences.
B) a central bank bowing to political pressure cannot get the inflation rate below the unemployment rate.
C) a constant-growth-rate-of-money rule cannot stabilize inflation if unemployment is allowed to vary substantially.
D) a constant-growth-rate-of-high-powered-money rule allows too much variation in the growth of the actual money supply to hold down inflation.

Accepted Answer

The answer of The Canadian experience with inflation and unemployment...

Question 17

The believer in policy ________ must be pessimistic about the ability of the private economy to self-stabilize and ________ about the accuracy of economic forecasting.
A) activism, pessimistic
B) activism, optimistic
C) rules, pessimistic
D) rules, optimistic

Accepted Answer

Believers in policy activism think the government must actively intervene to stabilize the economy, which implies skepticism about the private economy's self-stabilization but optimism regarding the government's ability to forecast economic conditions and effectively intervene.

Question 18

If the Fed were required to maintain an absolutely constant growth rate of high-powered money, then the growth rate of the money supply
A) would be zero.
B) would be constant at the growth rate of H.
C) would be constant but not necessarily at the growth rate of H.
D) would fluctuate along with the parameters in the money-creation formula.

Accepted Answer

The answer of If the Fed were required to maintain...

Question 19

Which of the following groups of economic forecasters have been able to forecast "turning points" when the economy turned up or down?
A) Forecasters as the Fed.
B) Forecasters in branches of the government other than the Fed.
C) Forecasters at private firms.
D) None of the above.
E) All of the above.

Accepted Answer

Economic turning points are notoriously difficult to predict, and historically, no group of forecasters, including those at the Fed, other government branches, or private firms, has consistently been able to accurately forecast these turning points.

Question 20

David and Christian Romer's estimate of monetary policy's current effectiveness lag, defined as the time necessary for a policy change to have one-half its ultimate effect on GDP, is approximately ________ months.
A) 2
B) 6
C) 10
D) 19
E) 24

Accepted Answer

According to David and Christian Romer's estimate, monetary policy's current effectiveness lag is approximately 19 months.

Quiz 14: Stabilization Policy in the Closed and Open Economy

A clear-cut "rules versus discretion" debate is no longer possible because those economists advocating rules for , such as , must leave the Fed with plenty of discretionary power.

The longest lag monetary policy suffers is the ________ lag.

With lags in monetary policy, an effective expansionary policy must be initiated many months the start of the economic downturn it is intended to moderate, and this requires economic forecasts.

Suppose that the central bank operates under a money supply growth rule, but with changes in the unemployment rate automatically adjusting the money growth target. This is called a ________ rule.

Gordon's plots of the effectiveness lags of monetary policy over the periods 1961-1975, 1976-1990, and 1991-2007 show the effectiveness lags have become and the overall response of GDP to monetary policy has .

The switch to flexible exchange rates in 1973 has made the effect of monetary policy on net exports a important component of the monetary policy multiplier process, and thus has the effectiveness lag.

"Monetarism" advocates a monetary policy

What is the only policy instrument the Fed really can control directly and precisely?

The Fed has the least degree of discretion and the least to do under a policy rule setting

Economists who really do want to take discretion away from the Fed, by imposing rules on , face the problem of .

The deregulation of thrift institutions in the 1970s and 1980s have made their deposits and thus their ability to finance mortgages sensitive to movements in the market interest rate, thus the monetary policy multiplier.

A believer in the need for a CGRR of the money supply policy must be about the ability of the private economy to self-stabilize and about the accuracy of discretionary stabilization policy.

Monetary policy has one clear advantage over fiscal policy by virtue of its very short

Data indicate that the economy's response to monetary policy became noticeably weaker and more stretched out during

Monetarists believe that there is a link between money supply growth and target variables and that the public is in movements in the money supply.

The Canadian experience with inflation and unemployment in the early 1990s has this to say about policy rules:

The believer in policy must be pessimistic about the ability of the private economy to self-stabilize and about the accuracy of economic forecasting.

If the Fed were required to maintain an absolutely constant growth rate of high-powered money, then the growth rate of the money supply

Which of the following groups of economic forecasters have been able to forecast "turning points" when the economy turned up or down?

David and Christian Romer's estimate of monetary policy's current effectiveness lag, defined as the time necessary for a policy change to have one-half its ultimate effect on GDP, is approximately ________ months.