Question 1

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 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) 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 3

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 4

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 5

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 6

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 7

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 8

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 9

________ 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 10

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 11

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.

Exam 24: The Role of Expectations in Monetary Policy

Approaches to establishing central bank credibility include

Potential weaknesses of nominal GDP targeting include

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

The Lucas critique indicates that

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

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

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

Arguments for adopting a policy rule include

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

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

The rational expectations hypothesis implies that when macroeconomic policy changes

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

Web 1:financial Crises in Emerging Market Economies

Web 2:the Islm Model

Web 3:nonbank Finance

Web 4:financial Derivatives

Web 5:conflicts of Interest in the Financial Services Industry

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