Question 1

Most Fed watchers are convinced that the Fed is committed to:

Accepted Answer

The Fed has a dual mandate of promoting maximum employment and price stability. One way of achieving price stability is through low and stable inflation. Therefore, the Fed is committed to maintaining low and stable inflation.

Question 2

Which of the following countries did NOT adopt an explicit inflation target?

Accepted Answer

The answer of Which of the following countries did NOT...

Question 3

Under rational expectations, people use ________ to make their best forecasts of the coming rate of inflation.

Accepted Answer

Rational expectations theory assumes that individuals use all the available information to make their best forecasts. Therefore, people under rational expectations will use all the information at their disposal to make their forecasts of the coming rate of inflation. They will not rely solely on past rates of inflation or announcements by the Fed, but rather consider all relevant economic data, such as unemployment rates, GDP growth, and fiscal policy.

Question 4

Since the 1990s, the country with the lowest rate of inflation has been:

Accepted Answer

Japan has had consistently low inflation rates since the 1990s, often experiencing deflation instead. This is due to a variety of factors, including an aging population, slow economic growth, and monetary policies designed to combat deflation. Russia, the United States, the United Kingdom, and Italy have all experienced higher inflation rates during this time period.

Question 5

Refer to the following figure when answering the following questions.
Figure 13.5: AS/AD Model 
-Consider Figure 13.5. If the Fed sets a higher inflation target, under rational expectations, the economy moves from point ________ to point ________.

Accepted Answer

Under rational expectations, if the Fed sets a higher inflation target, the economy would adjust instantly to the new expectations, moving from point a to point c.

Question 6

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, ________ rise(s) with no economic benefit; this is called the ________ problem.

Accepted Answer

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, inflation rises with no economic benefit. This is called the time inconsistency problem.

Question 7

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of:

Accepted Answer

Time inconsistency refers to the problem that arises when a policymaker promises to pursue a certain course of action, but then changes course when circumstances change. This can lead to a lack of credibility and undermine the effectiveness of policy. By sticking to policy rules, policymakers can help to overcome this problem and build credibility with markets and the public.

Question 8

Economic forecasters use which of the following leading economic indicators:
i. Term structure of interest rates
ii. New claims for unemployment insurance
iii. Price of tea in China

Accepted Answer

Economic forecasters use the term structure of interest rates and new claims for unemployment insurance as leading economic indicators, as they provide insight into the direction of the economy. The price of tea in China is not a relevant leading economic indicator.

Question 9

The central bank often deviates from simple policy rules because:

Accepted Answer

The central bank often deviates from simple policy rules because they have new and more detailed information. Simple policy rules do not always take into account all the complex factors that the central bank needs to consider in setting monetary policy, and the central bank may have access to new data that may require a deviation from a simple rule.

Question 10

The current chairman of the Federal Reserve is ________.

Accepted Answer

Janet Yellen is currently the chairman of the Federal Reserve. Ben Bernanke served as the chairman before her, but he is no longer in that position. Paul Krugman is not the chairman of the Federal Reserve, but rather a Nobel Prize-winning economist. Hank Paulson was the Secretary of the Treasury under President George W. Bush. Narayana Rao Kocherlakota is an economist who has served as President of the Federal Reserve Bank of Minneapolis, but he is not the chairman of the Federal Reserve.

Question 11

Assuming the simple Taylor rule for dictating the federal funds rate, when the actual federal funds rate deviates from the suggested rate, it can be explained by:

Accepted Answer

When the actual federal funds rate deviates from the suggested rate based on the simple Taylor rule, it can be explained by the use of a richer version of the Taylor rule, which includes additional variables beyond inflation and output gap. This can lead to a more accurate suggested rate and justify deviations from the simple rule. Other options like bad monetary or fiscal policy, or poorly informed policy-making do not necessarily explain the deviations.

Question 12

The reputations of ________, ________, and ________ have convinced observers that the Fed is committed to low and stable inflation.

Accepted Answer

Paul Volcker, Alan Greenspan, and Janet Yellen are all former chairs of the Federal Reserve who are known for their dedication to maintaining low and stable inflation.

Question 13

In the presence of rational expectations, the central banks' willingness to battle inflation:

Accepted Answer

In the presence of rational expectations, the central banks' willingness to battle inflation affects the expectations of future inflation. Therefore, it becomes a determinant of expected inflation.

Question 14

Refer to the following figure when answering the following questions.
Figure 13.5: AS/AD Model 
-Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point ________ to point ________.

Accepted Answer

Under rational expectations, if the Fed sets a lower inflation target, the economy moves from point c to point a instantly because economic agents adjust their expectations immediately, leading to an immediate shift in the economy.

Question 15

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called:

Accepted Answer

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called the Lucas critique. This is because adaptive expectations assume that agents base their expectations on past observations, but if the model changes policy, then agents' expectations will no longer be accurate based on past data, leading the model to be misspecified.

Question 16

If the simple Taylor rule models the "ideal" federal funds rate, the ________ displayed a monetary policy that was too loose.

Accepted Answer

The Taylor rule suggests that the ideal federal funds rate is determined by inflation and output gaps. During the 1970s, there were high levels of inflation due to the oil crisis and loose monetary policies, which led to an expanding money supply and rising prices. This resulted in the need for a higher federal funds rate, indicating that monetary policy was too loose during this time period.

Question 17

During the ________, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule.

Accepted Answer

The answer of During the ________, the actual federal funds...

Question 18

Policy is conducted by discretion if policymakers:

Accepted Answer

Policy conducted by discretion means policymakers use their judgment to determine what policy action to take based on their assessment of the current economic situation. This could involve changing interest rates, adjusting government spending, or other policy actions based on their own determination of what is necessary at the time.

Question 19

The advantage of an explicit inflation target is that it:

Accepted Answer

An explicit inflation target helps anchor inflation expectations, which can help reduce uncertainty and improve financial planning for investors and consumers alike. This can also create a more stable macroeconomic environment, leading to potential benefits for employment and economic growth. However, it does not necessarily allow banks to set interest rates or eliminate discretionary monetary policy.

Question 20

The ultimate goal of macroeconomic policy is:

Accepted Answer

The ultimate goal of macroeconomic policy is to achieve full employment, output at potential, and low, stable inflation. This means that the economy is operating at its highest level of production and employment, while also maintaining a stable level of prices. Zero inflation or unemployment may not be feasible or desirable as it could lead to other economic problems. Low interest rates can be a tool to achieve the ultimate goal, but they are not the ultimate goal itself.

Quiz 13: Stabilization Policy and the Asad Framework

Most Fed watchers are convinced that the Fed is committed to:

Which of the following countries did NOT adopt an explicit inflation target?

Under rational expectations, people use ________ to make their best forecasts of the coming rate of inflation.

Since the 1990s, the country with the lowest rate of inflation has been:

Refer to the following figure when answering the following questions. Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a higher inflation target, under rational expectations, the economy moves from point to point .

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, rise(s) with no economic benefit; this is called the problem.

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of:

Economic forecasters use which of the following leading economic indicators: i. Term structure of interest rates ii. New claims for unemployment insurance iii. Price of tea in China

The central bank often deviates from simple policy rules because:

The current chairman of the Federal Reserve is ________.

Assuming the simple Taylor rule for dictating the federal funds rate, when the actual federal funds rate deviates from the suggested rate, it can be explained by:

The reputations of , , and have convinced observers that the Fed is committed to low and stable inflation.

In the presence of rational expectations, the central banks' willingness to battle inflation:

Refer to the following figure when answering the following questions. Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point to point .

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called:

If the simple Taylor rule models the "ideal" federal funds rate, the ________ displayed a monetary policy that was too loose.

During the ________, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule.

Policy is conducted by discretion if policymakers:

The advantage of an explicit inflation target is that it:

The ultimate goal of macroeconomic policy is:

Quiz 13: Stabilization Policy and the Asad Framework

Most Fed watchers are convinced that the Fed is committed to:

Which of the following countries did NOT adopt an explicit inflation target?

Under rational expectations, people use ________ to make their best forecasts of the coming rate of inflation.

Since the 1990s, the country with the lowest rate of inflation has been:

Refer to the following figure when answering the following questions. Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a higher inflation target, under rational expectations, the economy moves from point ________ to point ________.

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, ________ rise(s) with no economic benefit; this is called the ________ problem.

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of:

Economic forecasters use which of the following leading economic indicators: i. Term structure of interest rates ii. New claims for unemployment insurance iii. Price of tea in China

The central bank often deviates from simple policy rules because:

The current chairman of the Federal Reserve is ________.

Assuming the simple Taylor rule for dictating the federal funds rate, when the actual federal funds rate deviates from the suggested rate, it can be explained by:

The reputations of ________, ________, and ________ have convinced observers that the Fed is committed to low and stable inflation.

In the presence of rational expectations, the central banks' willingness to battle inflation:

Refer to the following figure when answering the following questions. Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point ________ to point ________.

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called:

If the simple Taylor rule models the "ideal" federal funds rate, the ________ displayed a monetary policy that was too loose.

During the ________, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule.

Policy is conducted by discretion if policymakers:

The advantage of an explicit inflation target is that it:

The ultimate goal of macroeconomic policy is:

Refer to the following figure when answering the following questions. Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a higher inflation target, under rational expectations, the economy moves from point to point .

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, rise(s) with no economic benefit; this is called the problem.

The reputations of , , and have convinced observers that the Fed is committed to low and stable inflation.

Refer to the following figure when answering the following questions. Figure 13.5: AS/AD Model -Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point to point .