Question 1

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 2

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.

Question 3

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 4

Suppose that there is a positive 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) 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 rise. 
C) over time inflation will fall back down to the inflation target. 
D) all of the above. 
E) both A and B.

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

Potential weaknesses of nominal GDP targeting include

Accepted Answer

A) 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. 
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 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. 
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 7

Approaches to establishing central bank credibility include

Accepted Answer

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

Question 8

A credible nominal anchor

Accepted Answer

A) can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy. 
B) can help to anchor inflation expectations,which leads to smaller fluctuations in inflation. 
C) is required for a policy rule. 
D) all of the above. 
E) both A and B. 
A) can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy. 
B) can help to anchor inflation expectations,which leads to smaller fluctuations in inflation. 
C) is required for a policy rule. 
D) all of the above. 
E) both A and B.

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 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.

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

Lucas argues that when policies change,expectations will change thereby

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

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

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

Potential weaknesses of nominal GDP targeting include

Approaches to establishing central bank credibility include

A credible nominal anchor

Arguments for discretionary policies include

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

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

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

Filters

Exam 24: The Role of Expectations in Monetary Policy

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

Lucas argues that when policies change,expectations will change thereby

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

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

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

Potential weaknesses of nominal GDP targeting include

Approaches to establishing central bank credibility include

A credible nominal anchor

Arguments for discretionary policies include

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

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

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

Filters