Question 1

Lucas argues that when policies change,expectations will change thereby

Accepted Answer

A) changing the relationships in econometric models. 
B) causing the government to abandon its discretionary stance. 
C) forcing the Fed to keep its deliberations secret. 
D) making it easier to predict the effects of policy changes. 
A) changing the relationships in econometric models. 
B) causing the government to abandon its discretionary stance. 
C) forcing the Fed to keep its deliberations secret. 
D) making it easier to predict the effects of policy changes. A

Question 2

Approaches to establishing central bank credibility include

Accepted Answer

A) continued success at keeping inflation under control. 
B) central bank independence. 
C) appointment of a more conservative central banker. 
D) all of the above. 
A) continued success at keeping inflation under control. 
B) central bank independence. 
C) appointment of a more conservative central banker. 
D) all of the above. D

Question 3

The U.S.government can play an important role in establishing the credibility of anti-inflation policy by

Accepted Answer

A) demonstrating fiscal responsibility. 
B) monitoring the Fed. 
C) conducting fiscal policy. 
D) all of the above. 
A) demonstrating fiscal responsibility. 
B) monitoring the Fed. 
C) conducting fiscal policy. 
D) all of the above. A

Question 4

The rational expectations hypothesis implies that when macroeconomic policy changes,

Accepted Answer

A) the economy will become highly unstable. 
B) the way expectations are formed will change. 
C) people will be slow to catch on to the change. 
D) people will make systematic mistakes. 
A) the economy will become highly unstable. 
B) the way expectations are formed will change. 
C) people will be slow to catch on to the change. 
D) people will make systematic mistakes.

Question 5

Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then

Accepted Answer

A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will not shift. 
C) over time inflation will fall back down to the inflation target. 
D) all of the above. 
E) both A and B. 
A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will not shift. 
C) over time inflation will fall back down to the inflation target. 
D) all of the above. 
E) both A and B.

Question 6

The Lucas critique indicates that

Accepted Answer

A) advocates of discretionary policies' criticisms of rational expectations models are well-founded. 
B) advocates of discretionary policies' criticisms of rational expectations models are not well-founded. 
C) expectations are important in determining the outcome of a discretionary policy. 
D) expectations are not important in determining the outcome of a discretionary policy. 
A) advocates of discretionary policies' criticisms of rational expectations models are well-founded. 
B) advocates of discretionary policies' criticisms of rational expectations models are not well-founded. 
C) expectations are important in determining the outcome of a discretionary policy. 
D) expectations are not important in determining the outcome of a discretionary policy.

Question 7

Approaches to establishing central bank credibility include

Accepted Answer

A) inflation targeting. 
B) exchange rate targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above. 
A) inflation targeting. 
B) exchange rate targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above.

Question 8

According to the Lucas critique,if past increases in the short-term interest rate have always been temporary,then

Accepted Answer

A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate. 
B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate. 
C) one cannot predict the term-structure relationship as it depends on expectations. 
D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed. 
A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate. 
B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate. 
C) one cannot predict the term-structure relationship as it depends on expectations. 
D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed.

Question 9

Arguments for discretionary policies include

Accepted Answer

A) policy rules can be too rigid because they cannot foresee every contingency. 
B) the time-inconsistency problem can lead to poor economic outcomes. 
C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
D) all of the above. 
A) policy rules can be too rigid because they cannot foresee every contingency. 
B) the time-inconsistency problem can lead to poor economic outcomes. 
C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
D) all of the above.

Question 10

________ imposes a conceptual structure and inherent discipline on policy makers,but without eliminating all flexibility.

Accepted Answer

A) Constrained discretion 
B) A policy rule 
C) A discretionary policy 
D) The Taylor rule 
A) Constrained discretion 
B) A policy rule 
C) A discretionary policy 
D) The Taylor rule

Question 11

The interest rate thought to have the most important impact on aggregate demand is the

Accepted Answer

A) short-term interest rate. 
B) T-bill rate. 
C) rate on 90-day CDs. 
D) long-term interest rate. 
A) short-term interest rate. 
B) T-bill rate. 
C) rate on 90-day CDs. 
D) long-term interest rate.

Question 12

Arguments for adopting a policy rule include

Accepted Answer

A) the time-inconsistency problem can lead to poor economic outcomes. 
B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
C) policy makers and politicians cannot be trusted. 
D) all of the above. 
A) the time-inconsistency problem can lead to poor economic outcomes. 
B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
C) policy makers and politicians cannot be trusted. 
D) all of the above.

Question 13

Arguments for adopting a policy rule include

Accepted Answer

A) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. 
B) discretion enables policy makers to change policy settings when an economy undergoes structural changes. 
C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
D) all of the above. 
A) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. 
B) discretion enables policy makers to change policy settings when an economy undergoes structural changes. 
C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. 
D) all of the above.

Question 14

Ending the "Great Inflation" era in the 1970's is an example of

Accepted Answer

A) inflation targeting. 
B) exchange rate targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above. 
A) inflation targeting. 
B) exchange rate targeting. 
C) central bank independence. 
D) appointment of a more conservative central banker. 
E) all of the above.

Question 15

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.But if the commitment is not credible,then

Accepted Answer

A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will rise. 
C) economic contraction will be worse. 
D) all of the above. 
E) both B and C. 
A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will rise. 
C) economic contraction will be worse. 
D) all of the above. 
E) both B and C.

Question 16

Arguments for discretionary policies include

Accepted Answer

A) policy rules can be too rigid because they cannot foresee every contingency. 
B) policy rules do not easily incorporate the use of judgment. 
C) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. 
D) discretion enables policy makers to change policy settings when an economy undergoes structural changes. 
E) all of the above. 
A) policy rules can be too rigid because they cannot foresee every contingency. 
B) policy rules do not easily incorporate the use of judgment. 
C) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. 
D) discretion enables policy makers to change policy settings when an economy undergoes structural changes. 
E) all of the above.

Question 17

Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target.

Accepted Answer

A) If the commitment is credible,the public's expected inflation will remain unchanged. 
B) Credible policy produces better outcomes on both inflation and output in the short run. 
C) Policies that are not credible produce worse economic contraction. 
D) all of the above. 
E) both A and C. 
A) If the commitment is credible,the public's expected inflation will remain unchanged. 
B) Credible policy produces better outcomes on both inflation and output in the short run. 
C) Policies that are not credible produce worse economic contraction. 
D) all of the above. 
E) both A and C.

Question 18

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then

Accepted Answer

A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will rise. 
C) over time inflation will fall. 
D) all of the above. 
E) both A and C. 
A) the public's expected inflation will remain unchanged. 
B) the short-run aggregate supply curve will rise. 
C) over time inflation will fall. 
D) all of the above. 
E) both A and C.

Question 19

A rise in short-term interest rates that is believed to be only temporary

Accepted Answer

A) is likely to have a significant effect on long-term interest rates. 
B) will have a bigger impact on long-term interest rates than if the rise in short-term rates had been permanent. 
C) is likely to have only a small impact on long-term interest rates. 
D) cannot possibly affect long-term interest rates. 
A) is likely to have a significant effect on long-term interest rates. 
B) will have a bigger impact on long-term interest rates than if the rise in short-term rates had been permanent. 
C) is likely to have only a small impact on long-term interest rates. 
D) cannot possibly affect long-term interest rates.

Question 20

The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as

Accepted Answer

A) the monetarist revolution. 
B) the Lucas critique. 
C) public choice theory. 
D) new Keynesian theory. 
A) the monetarist revolution. 
B) the Lucas critique. 
C) public choice theory. 
D) new Keynesian theory.

Exam 24: The Role of Expectations in Monetary Policy

Lucas argues that when policies change,expectations will change thereby

Approaches to establishing central bank credibility include

The U.S.government can play an important role in establishing the credibility of anti-inflation policy by

The rational expectations hypothesis implies that when macroeconomic policy changes,

Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then

The Lucas critique indicates that

Approaches to establishing central bank credibility include

According to the Lucas critique,if past increases in the short-term interest rate have always been temporary,then

Arguments for discretionary policies include

________ imposes a conceptual structure and inherent discipline on policy makers,but without eliminating all flexibility.

The interest rate thought to have the most important impact on aggregate demand is the

Arguments for adopting a policy rule include

Arguments for adopting a policy rule include

Ending the "Great Inflation" era in the 1970's is an example of

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.But if the commitment is not credible,then

Arguments for discretionary policies include

Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target.

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target.If the commitment is credible,then

A rise in short-term interest rates that is believed to be only temporary

The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

The ISLM Model

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