Question 1

The 1981-1982 recession yielded an unemployment rate of ________.

Accepted Answer

A)  just less than 10 percent 
B)  10 percent 
C)  just over 10 percent 
D)  20 percent 
A)  just less than 10 percent 
B)  10 percent 
C)  just over 10 percent 
D)  20 percent

Question 2

Describe the two main benefits of a credible nominal anchor.

Accepted Answer

First, a credible nominal anchor acts li

Question 3

The benefits of a credible nominal anchor include ________.

Accepted Answer

A)  acting like a behaviour rule 
B)  preventing the real business cycle from occurring 
C)  encouraging activist policy 
D)  preventing discretion based actions 
A)  acting like a behaviour rule 
B)  preventing the real business cycle from occurring 
C)  encouraging activist policy 
D)  preventing discretion based actions

Question 4

A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is ________.

Accepted Answer

A)  a Taylor rule 
B)  a discretionary policy 
C)  a policy rule advocated by monetarists 
D)  advocated by activists 
A)  a Taylor rule 
B)  a discretionary policy 
C)  a policy rule advocated by monetarists 
D)  advocated by activists

Question 5

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 6

Monetarists argue that the Bank of Canada should pursue ________.

Accepted Answer

A)  an interest-rate targeting strategy 
B)  an exchange-rate targeting strategy 
C)  a discretionary monetary policy 
D)  a constant growth rate rule 
A)  an interest-rate targeting strategy 
B)  an exchange-rate targeting strategy 
C)  a discretionary monetary policy 
D)  a constant growth rate rule

Question 7

If a negative aggregate demand shock occurs and monetary policy is not credible then ________.

Accepted Answer

A)  economic activity will decrease 
B)  the equilibrium interest rate will rise 
C)  there will be a corresponding autonomous increase in inflation 
D)  none of the above 
A)  economic activity will decrease 
B)  the equilibrium interest rate will rise 
C)  there will be a corresponding autonomous increase in inflation 
D)  none of the above

Question 8

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 9

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)  A and B only 
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)  A and B only

Question 10

An example of a positive aggregate demand shock is ________.

Accepted Answer

A)  carbon cap-and-trade program 
B)  productivity improving technological innovation 
C)  an increase in the price of oil 
D)  the shale gas revolution 
A)  carbon cap-and-trade program 
B)  productivity improving technological innovation 
C)  an increase in the price of oil 
D)  the shale gas revolution

Question 11

Monetarists contend that ________.

Accepted Answer

A)  the self-correcting mechanism works slowly because wages are inflexible 
B)  the aggregate supply curve does not move quickly to restore the economy to the natural rate of unemployment 
C)  active government policy is required to restore the economy to full employment when unemployment is high 
D)  the Bank of Canada should adopt and follow a money growth rule 
A)  the self-correcting mechanism works slowly because wages are inflexible 
B)  the aggregate supply curve does not move quickly to restore the economy to the natural rate of unemployment 
C)  active government policy is required to restore the economy to full employment when unemployment is high 
D)  the Bank of Canada should adopt and follow a money growth rule

Question 12

Describe how the Bolivian government managed its hyperinflation by introducing credibility.

Accepted Answer

In the first half of 1985, the Bolivian

Question 13

In the first half of 1985, Bolivia's inflation rate was approximately ________.

Accepted Answer

A)  200,000 percent 
B)  20000 percent 
C)  2000 percent 
D)  200 percent 
A)  200,000 percent 
B)  20000 percent 
C)  2000 percent 
D)  200 percent

Question 14

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 15

Prior to 1980, Canada's inflation rate ________.

Accepted Answer

A)  was growing at a slow and stable rate 
B)  was never considered to be difficult to control 
C)  reached double digits 
D)  was tied to the U.S. inflation rate 
A)  was growing at a slow and stable rate 
B)  was never considered to be difficult to control 
C)  reached double digits 
D)  was tied to the U.S. inflation rate

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

After the first two oil price shocks ________.

Accepted Answer

A)  the Canadian inflation rate increased sharply 
B)  the Bank of Canada reversed its monetary policy stance 
C)  there was no discernable impact on aggregate output 
D)  the Bank of Canada implemented a nominal credible anchor policy 
A)  the Canadian inflation rate increased sharply 
B)  the Bank of Canada reversed its monetary policy stance 
C)  there was no discernable impact on aggregate output 
D)  the Bank of Canada implemented a nominal credible anchor policy

Question 18

The Lucas critique highlighted the need for ________.

Accepted Answer

A)  better econometric models 
B)  new policy models that included rational expectations 
C)  fiscal policy 
D)  adaptive expectations 
A)  better econometric models 
B)  new policy models that included rational expectations 
C)  fiscal policy 
D)  adaptive expectations

Question 19

One of the drawbacks of rules based monetary policy is ________.

Accepted Answer

A)  the true model of the economy is unknown, so a single rule may not be appropriate 
B)  they are too complicated for the general public to understand 
C)  these types of programs are difficult to implement in practice 
D)  none of the above 
A)  the true model of the economy is unknown, so a single rule may not be appropriate 
B)  they are too complicated for the general public to understand 
C)  these types of programs are difficult to implement in practice 
D)  none of the above

Question 20

The Lucas critique indicates that ________.

Accepted Answer

A)  Keynesian criticisms of rational expectations models are well-founded 
B)  Keynesian criticisms of rational expectations models are not well-founded 
C)  expectations are important in determining the outcome of an activist policy 
D)  expectations are not important in determining the outcome of an activist policy 
A)  Keynesian criticisms of rational expectations models are well-founded 
B)  Keynesian criticisms of rational expectations models are not well-founded 
C)  expectations are important in determining the outcome of an activist policy 
D)  expectations are not important in determining the outcome of an activist policy

Exam 25: The Role of Expectations in Monetary Policy

The 1981-1982 recession yielded an unemployment rate of ________.

Describe the two main benefits of a credible nominal anchor.

The benefits of a credible nominal anchor include ________.

A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is ________.

Arguments for adopting a policy rule include ________.

Monetarists argue that the Bank of Canada should pursue ________.

If a negative aggregate demand shock occurs and monetary policy is not credible then ________.

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 ________.

An example of a positive aggregate demand shock is ________.

Monetarists contend that ________.

Describe how the Bolivian government managed its hyperinflation by introducing credibility.

In the first half of 1985, Bolivia's inflation rate was approximately ________.

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

Prior to 1980, Canada's inflation rate ________.

Arguments for discretionary policies include ________.

After the first two oil price shocks ________.

The Lucas critique highlighted the need for ________.

One of the drawbacks of rules based monetary policy is ________.

The Lucas critique indicates that ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour 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

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

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