Question 1

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. C

Question 2

Potential weaknesses of nominal GDP targeting include

Accepted Answer

A) it requires accurate estimates of potential GDP growth,which are not easy to achieve. 
B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
C) it is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank. 
D) both A and C. 
A) it requires accurate estimates of potential GDP growth,which are not easy to achieve. 
B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
C) it is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank. 
D) both A and C. D

Question 3

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. E

Question 4

Approaches to establishing central bank credibility include

Accepted Answer

A) continued success at keeping inflation under control. 
B) inflation targeting. 
C) exchange rate targeting. 
D) all of the above. 
A) continued success at keeping inflation under control. 
B) inflation targeting. 
C) exchange rate targeting. 
D) all of the above.

Question 5

The Lucas critique is an attack on the usefulness of

Accepted Answer

A) conventional econometric models as forecasting tools. 
B) conventional econometric models as indicators of the potential impacts on the economy of particular policies. 
C) rational expectations models of macroeconomic activity. 
D) the relationship between the quantity theory of money and aggregate demand. 
A) conventional econometric models as forecasting tools. 
B) conventional econometric models as indicators of the potential impacts on the economy of particular policies. 
C) rational expectations models of macroeconomic activity. 
D) the relationship between the quantity theory of money and aggregate demand.

Question 6

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 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

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 9

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.

Question 10

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 11

Ending the "Great Inflation" era in the 1970s 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 12

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 13

Potential weaknesses of nominal GDP targeting include

Accepted Answer

A) it requires accurate estimates of potential GDP growth,which are not easy to achieve. 
B) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. 
C) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
D) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. 
A) it requires accurate estimates of potential GDP growth,which are not easy to achieve. 
B) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. 
C) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
D) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP.

Question 14

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 15

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.

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

Potential advantages of nominal GDP targeting include

Accepted Answer

A) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. 
B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
C) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. 
D) all of the above. 
A) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. 
B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. 
C) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. 
D) all of the above.

Question 18

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 19

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 20

Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies,most economists agree that

Accepted Answer

A) stabilization policies proved more difficult in practice than many economists had expected. 
B) stabilization policies proved not to be inflationary. 
C) the nondiscretionary policymakers were right in believing that the private economy is inherently stable. 
D) the discretionary policymakers were right in believing that the private economy is inherently stable. 
A) stabilization policies proved more difficult in practice than many economists had expected. 
B) stabilization policies proved not to be inflationary. 
C) the nondiscretionary policymakers were right in believing that the private economy is inherently stable. 
D) the discretionary policymakers were right in believing that the private economy is inherently stable.

Exam 24: The Role of Expectations in Monetary Policy

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

Potential weaknesses of nominal GDP targeting include

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

Approaches to establishing central bank credibility include

The Lucas critique is an attack on the usefulness of

Arguments for adopting a policy rule include

Approaches to establishing central bank credibility include

Arguments for adopting a policy rule include

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

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

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

The rational expectations hypothesis implies that when macroeconomic policy changes

Potential weaknesses of nominal GDP targeting include

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

Approaches to establishing central bank credibility include

Arguments for discretionary policies include

Potential advantages of nominal GDP targeting include

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

The Lucas critique indicates that

Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies,most economists agree that

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of 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

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

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

Financial Crises in Emerging Market Economies

The ISLM Model

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